The vision sounds appealing: Provide more government help for working parents and underprivileged families, so they can participate more fully in the robust parts of the economy.
As the details trickle in, however, the difficulty of turning President Biden’s American Families Plan from political concept to passable legislation becomes more apparent. And new analysis by the Penn Wharton Budget Model casts doubt on whether Biden’s aggressive social-welfare reforms would produce the economic bang Biden claims.
The new Penn Wharton analysis finds that Biden’s families plan, if fully enacted, would cost hundreds of billions more than advertised and slightly depress GDP growth. Biden says his plans would cost $1.8 trillion during the next decade, but Penn Wharton thinks that will be more like $2.5 trillion, because Biden is underestimating the costs of universal pre-school for all three- and four-year olds, and of an expanded tax credit for families with kids. Higher spending would lead to higher federal deficits, which would crowd out a bit of private investment and push GDP 0.34% lower than it would be without any of the Biden measures.
The new analysis also gives some clues about which elements of the plan might yield the most bang for the buck, and perhaps become legislative priorities. One winner would be the sharp increase in funding for the IRS Biden has proposed. Biden wants an additional $80 billion in IRS funding over a decade, which would boost the tax-collecting agency’s budget by more than 50% per year. Biden claims more auditors and better technology would help it snag $700 billion in taxes that wealthy Americans legally owe but don’t pay. That would be nearly a 9-to-1 return on those additional dollars for the IRS.
Penn Wharton thinks a better funded IRS would only generate $480 billion in new revenue over a decade. That’s still a 6-to-1 return, and it’s more than any proposed tax hike in the families plan would generate. Biden’s plan to nearly double the capital gains tax rate on wealthy taxpayers would only generate $376 billion, and raising the top income tax rate from 37% to 29.6% would only bring in $111 billion. From a legislative perspective, that makes more IRS funding a no-brainer: It would bring in more revenue without raising any taxes, and it’s politically defensible because the government is only making people pay what they owe and are trying to hide from Uncle Sam.
Tax breaks for families
There are middle- and lower-income tax breaks in the families plan, and the most expensive of those would be an expanded child tax credit for families that begins to phase out at household incomes of $150,000. About 90% of families would be able to claim this tax credit, for an average annual benefit of nearly $4,400. But it would cost $439 billion over 10 years, according to Penn Wharton, and that’s assuming the more-generous credit expires at the end of 2025, as the Biden plan calls for. More likely—as Biden surely knows—is there would be intense pressure to make the credit permanent once it was in place for a few years. So the likely cost of this over a decade could approach $1 trillion.
There’s substantial evidence that enlarging the child tax credit would directly benefit millions of low-income kids, including many who would rise above poverty. And unlike most tax breaks, it benefits low-income families as much as those with higher incomes—even if they don’t pay taxes. So it shouldn’t be on the chopping block just because it’s expensive.
The next most expensive tax break in the families plan is an expansion of Affordable Care Act subsidies to help people buy health insurance, mostly for older Americans who don’t yet qualify for Medicare and have to buy individual plans. That would cost $378 billion during a decade. After that comes an expansion of the earned-income tax credit to childless workers, which would cost $125 billion.
Altogether, the tax breaks in the families plan would cost the government about $1 trillion, according to Penn Wharton. There would also be about $1 trillion in new spending on programs such as universal pre-school for all three- and four-year olds, two years of free community college for anyone, new child care subsidies, and paid leave on the government’s tab for people who don’t already get such a benefit. Biden claims his tax hikes would pay for his spending plans, but Wharton’s math turns out different: Spending and tax cuts would total $2.5 trillion, with only $1.3 trillion in new revenue to cover the cost.
That $1.2 trillion in deficit spending during the next decade would generate the small decline in GDP, since more federal borrowing crimps private borrowing likely to generate a higher rate of return relative to economic growth. Of course, Washington’s borrowing has skyrocketed during the coronavirus pandemic, and on an annualized basis, $120 billion in additional deficits might be a lot more palatable than it used to be.
Other analyses suggest the Biden plan would be more stimulative. Moody’s Analytics thinks the Biden families plan will pay for itself within 15 years, and it found that a separate Biden initiative, the American Jobs Plan, would produce higher GDP and more jobs than the economy would generate without it.
As Congress figures out how to package Biden’s broad proposals into legislation, there will be official analyses of the economic impact by the Congressional Budget Office and Congress’s Joint Committee on Taxation. Some parts of Biden plan will likely fall aside, as a handful of Democrats in the Senate object to the cost or focus. Biden will declare victory, whatever Congress ends up passing, and then we can spend the next several years figuring out if he’s right.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.