April 30, 2021 | 13:06
The American Families Plan
President Biden unveiled his $1.8 trillion American Families Plan to Congress this week, which proposes to greatly expand the social safety net. It focuses on child-care, education, and a paid-leave program for workers. The big education planks include a universal preschool program and two years of free community college tuition. As well, money is allocated toward reducing health insurance premiums for persons receiving coverage under the Affordable Care Act. New spending amounts to about $1 trillion over ten years, while tax breaks and credits for lower- and middle-income families will cost $0.8 trillion. The latter includes extending the recently-expanded child tax credit (which provides $250 to $300 monthly per child) past this year to 2025, as well as making it permanently fully refundable (meaning workers paying little or no tax would still receive it) and delivering it monthly (as opposed to waiting for an annual tax refund). The plan will also make permanent the expanded child-care tax credit and the earned-income tax credit for low-income childless workers.
The cost of the programs will largely be funded by the biggest increase in taxes on the wealthy in decades, expected to raise about $1.5 trillion over ten years. This includes raising the top income tax rate to 39.6% from 37% for persons making over $400,000 and lifting the capital gains and dividends tax rate to 39.6% from 20% for households earning more than $1 million (up to 43.4% when including existing investment taxes of 3.8%). The plan would also end a tax break for capital gains on inherited assets. However, persons earning less than $400,000 per year will not face a tax increase.
The President’s new proposals follow fast on the heels of the $2.65 trillion American Jobs Plan, which is centred on infrastructure, and recent passage of the $1.9 trillion American Rescue Plan Act. Total spending proposals from all three packages are more than $6 trillion over a decade, or one-quarter of annual GDP. Given little support from Republicans, getting the Jobs and Families proposals through Congress will likely require the reconciliation process, which could also be tricky. Neither package will provide anywhere near the economic punch of the recent two “rescue” bills, since support measures are spread over many years and are funded by raising taxes, notably for corporations (at a 28% rate instead of 21%). The White House claims that the two plans will be fully paid for over 15 years. Still, both plans should add moderately to the positive economic outlook in coming years. Additional spending and tax credits are likely to provide an economic lift that is not fully offset by higher taxes, given that the personal income tax measures will be borne by households with a lower propensity to spend extra income. This means that the inflation risks are also tilted higher due to both the economic lift and because some of the corporate tax increases will likely fall on consumers, of all income levels.