Markets & Research
Biden’s big plans could be more ocean swell than sea change

President Joe Biden has been in office for only about six 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 around $2 trillion.

Supporters and detractors alike have compared his efforts to those of Presidents Lyndon Johnson and Franklin Roosevelt, citing the proposals’ scope and reliance on federal government action. It’s one of the few points on which Democrats and Republicans in Washington can agree: 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. “If these proposals were to pass today, they would be a fundamental shift in how governments support certain segments of society. But they’re just ideas right now.”

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 under President Joe Biden’s proposals

the chart shows potential increases to taxes outlined in President Joe Biden's spending proposals. The proposals included an increase in the highest tier of the federal income tax rate, from 37% to 39.6%; an increase in the corporate tax rate, from 21% to 28%; and an increase to the highest tier of the long-term capital gains rate, from 20% to 39.6%. Source:
Source: Capital Group.

However, the plans’ real scope will be determined by Congress, says Reagan Anderson, who specializes in government relations at Capital Group: “They’ve got to write these bills. There are several committees in the House alone that can write instructions for the infrastructure bill.”

That’s already been borne out in recent talks. Democrats and Republicans jockeyed over infrastructure proposals, with Republicans preferring to skip the tax increases and social welfare and Democrats insisting on larger packages. It appears both parties have been willing to compromise somewhat: By the end of June, a bipartisan group of 10 senators had crafted a $1.2 trillion road, bridge and technology package.

The White House has already said it plans to pursue its broader agenda regardless of whether this compromise proposal works out. That means the Democrats are still caught in the trap of the thin majority. Though Democrats control both sides of Congress, the Senate is split 50–50, and united opposition from GOP senators means Democrats can’t 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 the proposed tax and spending increases.

However, while these proposals are large, they’re not comparable to COVID-19 stimulus spending. They seek “pay-fors” and would spend at a relative trickle.

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 Coronavirus Aid, Relief, and Economic Security, or CARES, Act signed by former President 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 roll out 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 deficit spending that marked the coronavirus efforts. Biden’s plans would seek to backfill significant portions of their costs by raising tax 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; later reports said the ceiling for couples would be around $510,000.

Some of that philosophy is reflected in the compromise infrastructure package, which would forgo tax increases but better fund the Internal Revenue Service and tighten tax enforcement. The remainder of the cost would be covered by bond issuances, public-private partnerships and some repurposing of COVID-19 funds.

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 Congress.

Federal debt is projected to exceed even World War II levels

the chart shows that federal debt levels are projected to exceed even World War II levels. In terms of the U.S. federal debt-to-GDP ratio, World War II spending is the highest debt level in U.S. history, at over 100%. Modern debt levels are approaching 100% and are projected to surpass that level and all historical highs by 2030. Source: Strategas. Projection combines the Congressional Budget Office's February 2021 estimates and Strategas' $1.9 trillion stimulus estimates
Source: Strategas. The projection reflects the Congressional Budget Office’s February 2021 estimates 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.”

However, Biden’s proposals also come packaged with a philosophical question about taxation: These tax changes would push the top capital gains rates in California above 50%.

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

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