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Biden tax hikes for family plan would slow economic growth, new analysis finds

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Biden tax hikes for family plan would slow economic growth, new analysis finds

May 06, 04:46 PM May 06, 04:46 PM

President Joe Biden’s newest tax plan would slightly slow growth and might not raise enough revenue to cover its costs, according to an analysis by the Tax Foundation.

The Tax Foundation, a nonpartisan think tank that generally prefers lower taxes, released its report about the $1.8 trillion American Families Plan on Thursday. The tax plan is a component of the third major spending package pitched by the administration after the $1.9 trillion COVID-19 package and the $2.3 trillion infrastructure plan.

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If the tax provisions are implemented as proposed, it would result in a 0.4% reduction in long-run gross domestic product and a 0.6% drop in long-run gross national product, the think tank projected. The Tax Foundation also said that wages would decrease by 0.4%, and the American Families Plan would cut 64,000 jobs.

In terms of revenue, the think tank predicted that it would raise $661 billion over the next decade on a conventional basis. The Biden administration has said it plans for 10 years’ worth of spending new programs in the spending package to be paid over the course of 15 years.

The Tax Foundation didn’t model the amount of revenue that might be generated by the Biden plan’s tax enforcement provisions. The American Families Plan is seeking $80 billion to bolster the Internal Revenue Service and give it more authority to crack down on those who are evading taxes that they are already supposed to be paying.

The administration has anticipated that it can raise $700 billion over 10 years through enforcement alone, although that number plus the amount of revenue the think tank predicts the plan will raise still comes out to $1.36 trillion, short of the Biden administration’s projected $1.8 trillion cost of the plan.

“Our analysis does not account for the economic or revenue effects of the spending portions of the American Families Plan,” the report also points out. “It is valuable to consider the impact of the American Families Plan tax proposals to see the trade-offs of a particular way of financing the plan’s proposed spending.”

Erica York, an economist who worked on the report, told the Washington Examiner that she didn’t find the outcome of the report too surprising.

“Overall, I think it’s what we expected. We find less revenue will come from the capital gains proposal, in particular, than some expect,” she said.

She also noted that tax-enforcement revenue would be the single largest revenue-raising mechanism in the families plan but explained that the enforcement data wasn’t factored in because it is outside the scope of the think tank’s modeling abilities.

The Tax Foundation also projected that the plan would provide about $998 billion in expanded tax credits, which results in a net revenue loss of about $337 billion.

The Tax Foundation forecast differs from projections by Moody’s and the Penn Wharton Budget Model. Moody’s found that the gross revenue raised by the tax increases alone would be $829 billion, and PWBM pegged the figure at more than $1 trillion (compared to the Tax Foundation’s $661 billion). When tax credits and enforcement were factored in, the total revenue projected by Moody’s and PWBM is $275 billion and $863 billion, respectively.

The tax hikes that Biden proposes to pay for his plan include raising the top individual income tax rate to 39.6% and taxing capital gains for households making more than $1 million as ordinary income. Individuals making $1 million or more could end up being subject to a federal rate of up to 43.4% when an existing Obamacare surtax on investment income is included.

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The American Families Plan proposes free universal preschool for all 3- and 4-year-olds and two years of free community college. It also extends the current iteration of the child tax credit, which was set to expire this year, until 2025. The credit was expanded by Democrats earlier this year and increased the amount of money that families receive and, crucially, removed the work requirements to receive those funds.

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