We’ll say this much for President Joe Biden‘s plan to make the “rich” pay their “fair share”: He’s not subtle about his intentions.
In a speech to a joint session of Congress last week, Biden pitched his “American Families Plan” (AFP). This $1.8 trillion initiative is his administration’s latest plan to boost what it calls “human infrastructure” priorities. According to the White House, the plan consists of about $1 trillion in investments and $800 billion in tax cuts for American families and workers.
In case you’re wondering, that $1.8 trillion is in addition to the $2.2 trillion Biden wants to spend on physical infrastructure in a plan he outlined last month called the “American Jobs Plan” (AJP). And of course, it doesn’t include the $1.9 trillion Congress already authorized in its latest COVID relief measure, which the president signed into law March 11.
Adding up the numbers, we’re talking some pretty serious spending here: nearly $6 trillion in all for 2021 alone, in addition to the spending Congress has already approved. A Congressional Budget Office estimate released February 11 estimated spending in fiscal 2021 would come to $5.76 trillion and projected a $2.26 trillion deficit.
With the COVID relief package now borrowed into existence, spending will come to about $7.7 trillion with a $4.4 trillion deficit. And if Congress enacts both the AJP and AFP into law, spending for the year will soar to nearly $12 trillion.
Needless to say, that’s some pretty serious red ink. But unlike the COVID relief package, the AJP and AFP will be partially paid for with tax hikes. And despite what you might hear from the White House, it won’t just be the “rich” who pay more.
Before we get into the nuts-and-bolts of the actual tax increases Biden has planned, we should first focus on what he wants to spend the money on.
First, the American Jobs Plan:
- $620 billion to upgrade transportation infrastructure, including $85 billion to modernize public transportation systems.
- $300 billion to reboot domestic manufacturing.
- $180 billion to upgrade “research infrastructure.”
- $174 billion to encourage Americans to buy electric vehicles and to electrify school buses and federal vehicles.
- $100 billion for “workforce development.”
- $100 billion to expand access to broadband internet.
- $80 billion to subsidize passenger rail service (Amtrak).
Next, the American Families Plan:
- $225 billion to make child care affordable, invest in high-quality care, and invest in the “child care workforce.”
- $225 billion to create a national comprehensive paid family and medical leave program.
- $200 billion for free universal pre-school for all three- and four-year-olds.
- $109 billion for two years of free community college.
- $80 billion for increased Pell Grants, awarded to students with financial need to help pay for college.
- $62 billion to increase completion and retention rates at community colleges and institutions that serve students “from our most disadvantaged communities.”
- $46 billion to support historically black, tribal, and other minority-serving colleges and universities.
The AFP also contains some $800 billion in tax cuts, which include:
- Paying most families with children a stipend of $3,600 per child for children under the age of six and $3,000 for children aged between 6 through 17. The measure is packaged as a “child tax credit” but a more accurate description would be a back-doored universal basic income.
- Permanently subsidize premiums paid for health insurance by lower income Americans.
- Granting lower income taxpayers a tax credit for spending on “qualified child care” for children under age 13.
It’s hard to argue that America doesn’t need improved infrastructure or that child care shouldn’t be affordable. And it would be nice if employers offered comprehensive paid family and medical leave programs. Plus, who wouldn’t like Uncle Sam to send them $300 per month to help pay for Junior’s diapers and baby formula?
The rub, of course, is how to pay for it all. And that, dear reader, is where you come into the picture. Biden’s team believes America can pay for the vast majority of this additional spending through tax hikes and by unleashing the IRS on high-income taxpayers. Specifically, Biden proposes:
- Raising taxes on corporations from 21% to 28%, as well as double the minimum tax on profits domestic corporations earn overseas – from 10.5% to 21%. His plan also would make it more difficult for foreign companies with US operations to save tax by shifting profits to lower-tax countries.
- Increasing the top individual income tax rate to 39.6% for taxpayers “within the top one percent.” According to the Pew Research Center, you’d need to have an annual income of nearly $539,000 to meet this threshold.
- Taxing income from long-term capital gains and certain dividends as ordinary income for taxpayers earning more than $1 million annually.
- Eliminating stepped-up basis at death for unrealized capital gains over $1 million ($2.5 million per couple when combined with current-law exemptions for real estate). Currently, the Tax Code provides that heirs don’t pay tax on unrealized capital gains on assets they inherit. Instead, the value of the assets is stepped up for income tax purposes to the value at the time the property was inherited. Special rules would apply to help those inheriting avoid family-owned businesses and farms avoid needing to sell the business or farm to pay the higher tax.
- Unleashing the IRS on American taxpayers. Biden wants to spend an extra $80 billion to help narrow the “tax gap,” which the IRS now estimates amounts to $441 billion annually. One of the most important initiatives in this regard is the IRS’s Global High-Wealth (GHW) program. According to the agency’s Internal Revenue Manual, these audits take a “holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control.”
What’s not to like about forcing the rich to pay their “fair share”? Our question is how much the rich need to pay in order for their tax burden to be fair. After all, the top 1% of taxpayers already pay nearly 40% of all income taxes. The percentage is even higher in high-tax states; about 50% in California, for instance.
But surely raising taxes on greedy corporations is a good idea, right? Not really, because capital is mobile. It can be deployed wherever the returns are greatest. In this case, the Biden plan is doubly bad. First, it would make it more difficult for domestic multinationals to compete abroad with foreign multinationals organized in countries with lower corporate tax rates. Second, it creates incentives for domestic corporations to sell themselves to foreign corporations and take advantage of lower tax rates in those countries the purchasing corporation originates.
In addition, corporations won’t simply stoically absorb their higher burdens. Instead, they’ll be shouldered by their employees, the vast majority of whom earn less than $539,000 annually. Workers won’t personally be sending bigger checks to Uncle Sam, but higher corporate taxes lower the incentives for corporations to expand production capacity or make other investments.
With higher taxes on their profits, corporations will be less likely to make such investments, thereby making their employees less productive and thus less valuable. The tax hikes thus unleash a vicious circle that not only puts downward pressure on wages and salaries but also discourages companies from hiring new employees.
We have nothing against Joe Biden and sincerely hope that he has a successful presidency. But we wager that our definition of “success” is far different from his. Success in our book means cutting bloated federal spending, keeping taxes low, and removing obstacles to entrepreneurial success.
Of course, we don’t expect any of these things from Biden. We’re much more likely to see higher spending, higher taxes, and more regulation. Make sure you’re prepared for them.
(Note: Mark recently prepared an exclusive guide to coping with Biden’s proposed tax hikes and increased IRS enforcement for members of the Nestmann Inner Circle Gold at this link. If you’re not already a member, click here to begin your risk-free membership.)