With large portions of wealth set for distribution, who will the resulting cash flow favor?
By Will Rojas
Joe Biden’s “Build Back Better” plan seeks to solve two preeminent issues: a flailing economy and climate change. To accomplish this, he plans on spending nearly $4 trillion over his first term to create green jobs and improve American infrastructure. Paying for this requires the more controversial part of Biden’s economic agenda, his tax plan, which seeks to make wealthy Americans and corporations “pay their fair share.”
Analyses by the Tax Foundation and Moody’s show Biden’s plan will produce a progressive wealth distribution and substantial economic growth. His tax plan includes major changes in payroll and individual income taxes, as well as a significant boost in child tax credits (CTC)—which would increase by $105.5 billion—and earned income tax credits (EITC). Payroll taxes, which will have an upper income cap of $137,700 when Biden takes office, would be extended to incomes above $400,000. The plan also calls for a cap on itemized deductions of up to 28% of value for individuals with an income above $400,000. However, the most notable change to income taxes is the requirement for capital gains to be taxed as ordinary income for those who earn over $1 million.
In total, the Tax Foundation projects Biden’s tax plan will raise $3.3 trillion in static terms—$2.8 trillion when accounting for the taxes’ negative effect on earnings—between 2021 and 2030. The largest contributor is the raise in the corporate tax rate from 21% to 28%, which is expected to bring in an additional $1.05 trillion in revenue. The next highest earners are the extension of payroll taxes to earnings above $400,000 ($819.9 billion), the taxing of capital gains on income over $1 million at 39.6% ($469.4 billion), and the doubling of the Global Intangible Low Tax Income (GILTI)—a tax on earnings that exceed a 10% return on a company’s invested foreign assets—and determining on a country-by-country basis whether to eliminate the tax exemption on earnings below a 10% return ($289.7 billion). There would also be a 15% minimum corporate tax on book income—the amount of income corporations publicly report on their financial statements to shareholders—which would raise an additional $202.7 billion.
However, these gains come with an economic downside. By themselves, the higher taxes are projected to decrease long-term GDP by 1.62% and remove 542,000 full-time jobs by 2030. They would also decrease real after-tax income across the board. The distribution of these losses, however, is fairly progressive. Because of the additional tax credits those up to the 90th percentile of incomes in the U.S. are actually expected to receive a higher overall income after implementation of the tax plan in the first year alone. Most significantly, it would raise income in the lower quintile of incomes by 10.8%. The middle class, often defined as the middle three quintiles, would see their income increase by 3.6%, 1.4%, and 0.6%, respectively, along rising income levels. However, this tax credit would end after 2021, and due to higher corporate taxes, all income quintiles are projected to decrease by 2030. Specifically, the lowest quintile’s income is projected to decrease by 0.2% and incomes are expected to decrease at an increasing rate as they rise to the upper quintile, where income decreases by 3.0% (and the income of those in the top 1% decreases by 7.7%). Middle class incomes decrease by 0.2%, 0.3%, and 0.5%, respectively, along rising income levels.
Despite the substantial losses to be expected from Biden’s tax plan, his overall economic agenda is projected to grow the economy. In September, Moody’s Analytics—a sister company of the prominent Wall Street bond credit rating agency Moody’s Investors Service—conducted a macroeconomic analysis of Biden’s economic policies. The study found that, if Biden is able to fully implement his policies, the U.S. economy will create 18.6 million new jobs, reach full employment, and increase annual middle-class household after-tax income by $4,800 during his first term. The plan, focused on incentivizing jobs in renewable energy and investing in physical and social infrastructure, will cost $7.3 trillion by 2030. It includes expenditures of $900 billion on transportation infrastructure, $700 billion on a “Made in America” initiative, which contains $400 billion allocated for the direct purchase of American-made goods and $300 billion for R&D funding in areas like 5G and artificial intelligence, and $490 billion towards putting America on a path to clean energy. This path includes an $85 billion expenditure towards conservation, remediation, and resilience which aims to create 250,000 jobs by plugging abandoned oil and natural gas wells and reclaiming abandoned coal, hardrock, and uranium mines. The plan also calls for an investment of $100 billion to improve public school facilities and another $100 billion towards the creation of affordable housing. The revenue raised through new taxes—projected by the Tax Foundation to be $2.8 trillion—falls short of covering increased expenditures. Moody’s budget analysis, which projects an increased tax revenue of $4.1 trillion by 2030, expects a $2 trillion increase in the federal deficit by the end of Biden’s first term and a $2.6 trillion increase by 2030. Due to this, the federal debt-to-GDP level is expected to rise to 120% by the end of his first term and 130% by 2030.
If Democrats are unable to secure the Senate, Biden will likely have to rely on executive orders to carry out his policies. Under this scenario, assuming Biden undoes Trump’s orders such as by returning immigration to the pre-Trump level of 1 million immigrants per year, the U.S. is expected to create 13.6 million jobs and real GDP is expected to grow by 3.2% per year during his term. This falls far short of the 18.6 million jobs and 4.2% annual real GDP growth projected during Biden’s first term with a fully Democratic Congress.
Biden’s plan for the economy, though expensive, is set to provide substantial economic growth over the next decade. Despite the plan’s $7.6 trillion price tag, paying for it will not place a significant burden on the middle class, and what will be taken away will in general be covered by a net increase in middle-class income. The progressive payment plan will, however, not be enough to cover increased expenses, and the U.S. will slide further into its mountain of debt. □
- Biden for President. (n.d.). THE BIDEN PLAN TO BUILD A MODERN, SUSTAINABLE INFRASTRUCTURE AND AN EQUITABLE CLEAN ENERGY FUTURE. https://joebiden.com/clean-energy/
- Kunz, S. (2020). Joe Biden [Graphic]. The Economist. https://www.economist.com/briefing/2020/10/03/joe-biden-would-not-remake-americas-economy
- Probasco, J. (2020, November 11). Biden’s Jobs and Infrastructure Plans. Investopedia. https://www.investopedia.com/biden-s-jobs-and-infrastructure-plan-5083635
- Watson, G., Li, H., & LaJoie, T. (2020, October 22). Details and Analysis of President-elect Joe Biden’s Tax Plan. Tax Foundation. https://taxfoundation.org/joe-biden-tax-plan-2020/
- Zandi, M., & Yaros, B. (2020, September 23). The Macroeconomic Consequences: Trump vs. Biden. Moody’s Analytics. https://www.moodysanalytics.com/-/media/article/2020/the-macroeconomic-consequences-trump-vs-biden.pdf