The Broad View
Biden’s big proposals may not be the first swells in a governmental sea change

President Joe Biden has been in office for only about four months, but he’s already shown a willingness to spearhead ambitious legislation. Even as his signature was drying on a $1.9 trillion coronavirus relief package, he was proposing two additional spending plans, each clocking in at around $2 trillion.

Supporters and detractors alike have compared his efforts to those of Presidents Lyndon Johnson and Franklin Roosevelt, citing their scope and reliance on federal government action. It’s one of the few things Democrats and Republicans in Washington agree on: Biden’s American Families Plan and American Jobs Plan aren’t playing small ball.

“We can sum them up in two words: They’re huge,” says Capital Group economist Darrell Spence.

But are Biden’s plans truly transformative? Do they live up to comparisons with the Great Society and the New Deal? And ― most important ― are they likely to become reality in anything approaching their current forms? Those are difficult questions.

“If these proposals were to pass today, they would be a fundamental shift in how governments support certain segments of society,” Spence says. “But they’re just ideas right now. It’s too early to know.”

The proposals are sweeping — but they’re currently just proposals.

What’s been unveiled so far is a combination of long-desired progressive ideas and infrastructure build-out. The American Families Plan would spend $1.8 trillion over 10 years to cover community college tuition, fund universal preschool, extend child tax refunds, establish national family and medical paid leave and more. The American Jobs Plan would earmark $2 trillion over a decade for a variety of infrastructure projects, including roadwork, energy grid upgrades, port and airport improvements, and building modernization, as well as supporting wages and employee rights for health care workers.

Each plan would finance itself by reversing some of the changes made in the Tax Cuts and Jobs Act of 2017. The American Jobs Plan would raise the corporate tax rate to 28% from 21%, while the American Families Plan would increase the highest personal income tax rate bracket to 39.6% from 37%, nearly double the highest long-term capital gains rate to 39.6% and eliminate “step-up” provisions for capital gains at death. The last proposal could significantly affect estate taxes for the wealthy.

Tax rates would go up in President Joe Biden’s proposals

Source: Capital Group.

“As is, these plans would represent a significant change in government participation in the economy,” Spence says.

However, “the real deal comes down to Congress. They’ve got to write these bills,” says Reagan Anderson, who specializes in government relations at Capital Group. “There are several committees in the House alone that can write instructions for the infrastructure bill.”

Political hurdles further complicate matters. Republican lawmakers have expressed no interest in tax increases or the portions of Biden’s proposals that don’t explicitly deal with roads and bridges. The counteroffer from GOP lawmakers is a $568 billion plan that would focus almost exclusively on the infrastructure portions of the American Jobs Plan.

Although Democrats control both sides of Congress, they have the thinnest of margins. The Senate is split 50–50, and united opposition from GOP senators means Democrats can’t afford to lose a single vote.

That has given leverage to more conservative Democrats, such as the “blue dog” caucus that includes Sens. Joe Manchin and Kyrsten Sinema, who have expressed concern at the scope of tax and spending increases.

The $10,000 SALT tax deduction cap is another potential snag. The limit on federal deductions for state and local taxes was added in President Donald Trump’s Tax Cuts and Jobs Act in 2017, and it’s had an outsize impact on states with high income tax rates on top earners, like New York and California. As a result, many Democratic lawmakers want it removed and have said they won’t vote for any infrastructure package that fails to address the SALT limit.

“That makes everything more complicated,” Anderson says. “For example, every percentage on the corporate tax rate is about $100 billion over 10 years. If they repeal the SALT cap, it would cost about $600 billion over 10 years. That’s 6 percentage points of the corporate tax rate. That’s almost the amount raised by going to 28%.”

While these proposals are large, they differ from COVID-19 relief packages in key ways. They seek “pay-fors” and would take place over years rather than months.

Two of the most striking features of the coronavirus relief actions were their sheer size and the speed with which they pumped cash into the economy. The CARES Act — Coronavirus Aid, Relief, and Economic Security Act — signed by Trump in March 2020 spent $2.2 trillion, largely through payouts to individual Americans, enhanced unemployment benefits and support for businesses and local governments. Biden’s $1.9 trillion coronavirus package also sent payments to individuals and provided grants to governments, while extending unemployment benefits and setting aside money to help schools reopen.

By contrast, both of Biden’s spending initiatives would take place over several years. They’re large, but neither would pack the electric jolt of the stimulus packages.

“The broader arithmetic suggests that, over the life of these proposals, they’d provide perhaps a quarter of a percent of annual GDP growth,” says Capital Group economist Jared Franz. “They’ll move the needle, but they won’t take us from 2% to 3% growth.”

Equally important, these proposals shift away from the no-holds-barred approach to deficit spending that marked the coronavirus efforts. Biden’s plans would seek to backfill significant portions of their costs by raising rates and closing loopholes.

Those changes would be primarily aimed at the highest-earning Americans. Biden has said that no taxpayer making less than $400,000 a year would pay more in taxes, with later reports adding that the ceiling for couples would be around $510,000.

“Most people were fine with debt financing the pandemic-related stimulus,” Franz says. “The U.S. economy was in the hospital, and we were just trying to keep it going until recovery. But we’re past that now, and there’s a material shift to paying for these programs.”

Regardless of the bills’ final form, tax increases are likely coming.

With debt-to-GDP ratios set to outstrip all historical analogues— including Roosevelt’s New Deal spending and America’s World War II efforts — in the next 10 years, there is concern that debt could become a sticking point in Washington.

Federal debt levels are projected to exceed even World War II levels.

Source: Strategas. Projection = Congressional Budget Office’s February 2021estimates and Strategas’s $1.9 trillion stimulus estimates. As of March 2021.

“There are indications that having a high debt makes you less able to react to big shocks, like a pandemic or recessions in the future,” Franz says. “There’s a realization that we may have limited our degrees of freedom. It’s notable that these proposals aren’t pure deficit spending. Congress is worried about the pay-fors.”

Additionally, though many lawmakers from purple districts have expressed unease with the scope of the tax proposals, Anderson says her work with legislators suggests that many of them have more room to approve higher rates than might be obvious at first blush.

“I’ve pushed back a bit when I’ve heard people say that moderates won’t support rate increases on individuals,” she says. “I think it’s an easier sell politically than some people think. Some of these lawmakers from purple states just aren’t worried about raising taxes on people making more than $400,000 a year. Their voters just aren’t from that constituency.”

However, the biggest changes in the package may be much more difficult to sell. Spence points out that Biden’s proposals could push top capital gains rates in California to more than 50%.

“Is there a philosophical line that we as a country don’t think we should cross?” he asks. “If the government gets more out of your investment than you, is that one of those lines, even if it applies to just a small sliver of taxpayers? If so, I think it would represent a big change in how the populace thinks the government should finance things.”

Learn more about
The Broad View
Monetary Policy
Regulation & Legislation

Related Insights

Related Insights