Biden’s ‘American Families Plan’ Is Far From a New Deal Economic Boon

Last month, President Biden unveiled his American Families Plan — the third multi-trillion-dollar omnibus spending package from the first four months of his administration.

Biden frames the $1.8 trillion in spending as “a once-in-a-generation investment in the foundations of middle-class prosperity — education, health care, and child care.” He presented precisely the same point regarding his American Jobs Plan, which he called “a once-in-a generation investment in America, unlike anything we’ve seen or done since we built the Interstate Highway System and the Space Race.”

To drive the point home, the White House recently published a website through which Americans can record a video and share how the bill would help their family.

Indeed, it is roughly “once-in-a-generation” that a Democratic President drastically expands the size of government — often to the detriment of long-term economic growth. 

President Franklin Delano Roosevelt’s “New Deal” addressed the Great Depression with massive social programs that increased the size and scope of the federal government in drastic ways. Likewise, President Lyndon Johnson’s “Great Society” spent trillions attempting to decrease poverty with even more federal welfare programs. 

The end results are expenditures such as Social Security, Medicare, and Medicaid, which take up nearly half of the federal budget in a normal year. Biden’s proposals would produce additional long-term government handout opportunities. As President Ronald Reagan once said, “the closest thing to eternal life on earth is a government program.”

The Penn Wharton Budget Model (PWBM) — a nonpartisan think tank at the University of Pennsylvania’s Wharton School that dissects the economic impacts of public policy proposals — has already concluded that the American Rescue Plan and the American Jobs Plan would have harmful long-term effects upon the economy. 

As it turns out, PWBM’s analysis of the American Families Plan proves that it would likewise dampen future economic growth.

Here’s why.

Tax hikes and credits

The American Families Plan amends the federal government’s tax intake structure in many ways — most notably, by increasing taxes on the wealthiest Americans.

Among the proposals are raising the top individual income tax rate from 37% to 39.6%, taxing unrealized capital gains above $1 million upon death, taxing long-term capital gains and qualified dividends at ordinary rates for individuals making more than $1 million, and applying the 3.8% Medicare tax to income above $400,000.

All of the new taxes would be enforced by $80 billion in new funding for the IRS. According to PWBM, the Biden administration would direct “the additional resources towards audits, IT modernization, the establishment of a new information reporting regime for financial institutions, and more.” $480 billion of the new $1.3 trillion in federal tax revenue would arise from the new IRS funding alone.

Meanwhile, the plan would extend the American Rescue Plan’s tax breaks — namely, by expanding the Child Tax Credit, Premium Tax Credit, Earned Income Tax Credit, and Child and Dependent Care Tax Credit.

In total, PWBM estimates that the tax hikes and credits would close the federal deficit — the amount of federal government spending that exceeds tax revenue — by $275 billion between 2022 and 2031 and by $1.4 trillion between 2022 and 2036.

However, any decreases in the deficit would be overwhelmingly outweighed by new expenditures.

Spending increases

Although the White House estimates that the American Families Plan would cost $1.8 trillion, PWBM states that “the proposal establishes permanent programs,” leading the analysis to assume “that the additional spending continues beyond the budget window.”

Between 2022 and 2031, the legislation would spend $426 billion on universal pre-kindergarten, $299 billion on tuition-free two-year community college, $66 billion on Pell Grants, $117 billion on other education projects, $493 billion on family and childcare initiatives, as well as the $80 billion for IRS funding. 

Between 2022 and 2036, the spending forecasts rise to $671 billion, $497 billion, $104 billion, $191 billion, $806 billion, and $176 billion respectively.

All in all, the new expenditures from the American Families Plan would total over $2.5 trillion by 2031 and over $3.8 trillion by 2036.

Government debt

Increases in the federal deficit progressively and inevitably lead to more national debt.

Considering both the spending and taxation provisions of the American Families Plan, PWBM expects to see increases in government debt of 2.16% by 2031, 3.54% by 2040, and 4.55% by 2050. 

Such massive increases in the national debt would have sizable consequences on American productivity.

Other economic metrics

By nearly every long-term economic indicator, the American Families Plan would slash economic growth while ballooning the size of the federal government — a far cry from the supposed “once-in-a-generation” investment into the future of the United States.

The gross domestic product (GDP) — the total value of final goods and services created by American land, labor, capital, and entrepreneurship — would drop 0.4% by 2050. As PWBM explains, the “effects from larger debt on the economy outweigh the productivity gains associated with the new spending programs.”

Along with the decrease in potential output comes a decline in the capital stock — the total amount of machinery, buildings, and other productive assets in the American economy — of nearly 1.2% by 2050. This change is the result of “the crowding-out effect that new debt has on private capital formation.” 

In other words, higher demand for federal debt financing causes investors to pour money into loans for the government rather than projects from the private sector. The latter is essential for fostering economic growth over time.

Although the average hourly wage would increase by 0.1%, PWBM’s analysis shows that a tax hike targeting the wealthy “discourages labor by high-productivity households.” Likewise, higher taxes on “capital gains and dividends facing the wealthiest Americans would lower their after-tax return on equity investment and therefore disincentive saving.” With lower national saving comes lower funds available for financing private ventures — another factor that helps to explain the lower economic productivity.

Falling short

The White House’s original outline of the American Families Plan promised that it would lay “the groundwork for innovation and inclusive economic growth for all Americans” and constitute “a critical investment in the strength and equity of our economy.”

However, following in the footsteps of the “New Deal,” the “Great Society,” and other social programs in modern history, President Biden’s American Families Plan would only produce some positive effects in the short-term at the expense of dampening the ability of the American economy to innovate and expand in the long-term.

The views expressed in this piece are the author’s own and do not necessarily represent those of The Daily Wire.

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