What will Biden’s economic priorities be?

23 March 20242 months ago babelfish

Regardless of success in Congress, the budget proposal shows what the economic priorities of a second Biden administration will be. Analysis by Libby Cantrill, Head of Public Policy at Pimco

The budget proposal presented last Monday by President Joe Biden is unlikely to be approved by the current Congress, but it offers a clear vision of the priorities that could characterize a second Biden administration. The budget includes new spending on social programs for the middle class and increased taxes on the wealthy and businesses.

There's one thing a Biden 2.0 administration and a 2025 Congress would likely agree on next year, regardless of which party wins the legislature: the continuation of the middle-class tax cuts approved by Republicans under Tax Cuts and Jobs Act (TCJA) of 2017.

The rest of Biden's fiscal plan, like the broader 2025 budget, should be taken with a grain of salt. What President Biden will be able to pass in a possible second term will depend on the composition of Congress. Without large Democratic majorities in both houses of Congress, which seems highly unlikely, much of this plan will not pass.

However power is distributed in Washington, the problematic trajectory of deficits is likely to persist absent changes to taxes or mandatory spending on Medicare and Social Security, which we do not see as likely in the coming years. Instead, the market is likely to demand a premium for holding long-dated Treasuries, resulting in a steeper U.S. yield curve over time.

Realistic plans

What can we realistically expect from a second Biden term on taxes? Trump's personal tax cuts expiring at the end of 2025 – stemming from the TCJA – represent a tax increase of about $4 trillion over 10 years, if Congress fails to act (not to mention the backlash of such fiscal tightening), and therefore we expect that everyone in the White House and in Congress will feel compelled to act.

While Biden has declared that he will not raise taxes "by a single cent" on those earning less than $400,000 a year and that he will extend the TCJA and other tax cuts to this segment of the population, on the other hand he has declared that he will leave that many of the cuts for higher-income people will return to pre-2017 levels and that it will raise corporate taxes.

If implemented, President Biden's plan would also include:

Raise the corporate tax rate to 28% and raise the minimum tax for large corporations (which is currently 15% as part of the Inflation Reduction Act) to 21%.
Increase the buyback tax from 1% to 4%.
Impose a minimum wealth tax of 25% on those with assets exceeding $100 million.
Let the maximum tax rate for individuals return to 39.6%.
Let the estate tax exemption (currently $13.6 million) return to pre-TCJA levels (about $7 million, accounting for inflation).
Tax carried interest as ordinary income.
Tax capital gains at ordinary rates for those earning more than $1 million, up from the current 20% (plus the 3.8% Obamacare tax); increase the Obamacare tax (the so-called Net Income Tax) to 5% from 3.8% for those with an income above $400,000.
Extend the 2021 Child Tax Credit expansion (cost approximately $1.7 trillion over 10 years).
Make the Affordable Care Act premium tax credit permanent (cost approximately $400 billion).
Extend Trump tax cut brackets for those making less than $400,000.
Take no action on the state and local tax (SALT) credit limit: The $10,000 limit for the state and local tax deduction will expire at the end of 2025 if Congress doesn't touch it. While the deduction primarily benefits the wealthy (which some progressives oppose), its cap has impacted migration from states with high income taxes.
The approval of these measures will depend on the composition of Congress. While Democrats have a decent chance of flipping the House, now controlled by Republicans, the odds are that the Senate, now controlled by Democrats, will come under Republican control. Democrats are defending 23 of the 34 Senate seats this cycle, three of them in states won by Trump (Montana, Ohio, West Virginia) and eight in “purple” states or with competitive Republican candidates (Arizona, Nevada, Maryland, Michigan, Minnesota, Pennsylvania, Wisconsin and Virginia).

It's important to note that even if Biden were re-elected and Democrats somehow managed to gain majorities in both houses, we would still expect to compromise on many of Trump's expiring tax cuts, and raise taxes – even on the wealthy – it is much more difficult to do in practice than in theory. We predict that the wealth tax would still be at a standstill even under unified Washington control. Therefore, much of today's White House proposals are more of a political wish list than a political reality.

The table below shows possible scenarios for some of the key personal tax provisions set to expire at the end of 2025. Of course, this is all speculation at this point, and a lot can change between now and when Congress will start legislating on this (spring 2025?), but this shows that in most scenarios a compromise will have to be reached.

This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/priorita-economiche-nuova-amministrazione-biden/ on Sat, 23 Mar 2024 06:12:10 +0000.