Unprecedented Government Expansion
Dear Rich Lifer,
At the end of May, President Joe Biden revealed a record-breaking $6 trillion 2022 budget, which would greatly expand the role of the federal government in the economy and American lives.
The largest chunk of the spending would go toward infrastructure, public health, and education and includes tax increases on corporations and the wealthy.
There’s a lot to break down about the budget proposal.
So today, we’ve put together an overview of exactly what the administration’s hoping to do…
And what it will mean for your taxes and the economy.
An Overview of Spending
The 72-page budget proposal includes a historic amount of spending. Here are some highlights:
Infrastructure is one of the biggest price tags in the budget, coming in at a proposed $4.5 trillion of spending over the next decade.
In just the next year, this would include $17 billion for improvements such as repairs to roads, bridges and airports, $4.5 billion to replace lead water pipes across the country, and $13 billion to expand high-speed broadband.
There is also a large emphasis on education and family spending, with $3.5 billion dedicated to providing universal preschool and ensuring teachers a $15 minimum wage.
In 2022, the budget would also provide $8.8 billion on direct spending on families, including $6.7 billion for affordable child care and $750 million for paid leave. After 2022, these costs would continue to rise.
And the budget focuses on some of Biden’s most ambitious goals: tackling climate change, reducing income inequality and increasing America’s ability to compete with China technologically and economically.
Biden’s ambitious wishlist of spending has raised economic concerns about increasing debt and slower growth.
Debt and Deficit Worries
The current budget proposal represents the largest increase in federal spending since World War II.
Those opposed to the large amount of spending point to the levels of debt as a source of alarm. The president’s budget projects that the total debt held by the public would more than exceed the annual value of economic output, rising to 117% of the size of the economy in 2031.
Additionally, the administration projects a deficit of $1.84 trillion in fiscal 2022, equalling 7.8% of gross domestic product.
Administration officials are highlighting that interest payments on the debt as a share of economic output will remain below the historical average over the next decade, due to historically low interest rates that have declined in recent decades.
White House economists point out that negative real interest rates will continue all the way through the end of the 10-year budget window in 2031.
Shalanda Young, the acting director of the Office of Management and Budget, commented, “failing to make these investments at a time with such low interest costs would be a historic missed opportunity that would leave future generations worse off.”
Some experts, however, dispute the administration’s projections of low interest rates for years to come.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office, remarked:
Their proposals are taking an enormous amount of our fiscal space on the tax side and devoting it to expansion of the federal safety net, when the existing federal safety net is in tatters, and they’re using up the money we need to fix it.
Some economists believe the administration’s assumptions mean that Biden is signaling to the Fed that the central banks must keep interest rates irregularly low, even below the inflation rate, throughout Biden’s term.
Economic Growth Projections
The proposed budget also shines a light on the administration’s economic forecast for the coming years.
According to the budget, the White House predicts that the economy will continue to expand and grow 5.2% this year and 4.3% in 2022, before settling to grow 1.8% to 2% for the rest of the decade.
These projections have also resulted in criticism from those who worry that the Biden administration’s policies are setting the U.S. up for years of sluggish growth.
Conservatives call this spending a “sugar high” that will only benefit us today and will result in higher taxes and tighter monetary policy for future generations.
Advocates of the budget have responded to these critiques by noting that the spending will result in improvements for Americans for years to come.
Wendy Edelberg, director of the Hamilton Project at the Brookings Institution, a Washington think-tank, and a former CBO chief economist, pointed out:
Many of the proposals — infrastructure, investments in young children, higher education — would take years to show up as greater economic output. They would immediately improve our quality of life. But they would also pay economic dividends for many years beyond this decade.
This brings us to another main point of contention…
Biden will rely on corporate and high-income household tax increases to fund a large chunk of his budget.
The budget calls for a $2 trillion corporate tax hike, which would be achieved by raising the corporate income tax rate to 28%from 21% and imposing tougher measures to curb offshoring. The top corporate tax rate was 35% before the Trump-era tax cuts in 2017.
However, owners of closely-held businesses will still benefit from a 20% tax deduction that was enacted by Republicans in 2017. Biden campaigned on limiting this tax break, but the deduction remained according to the proposed budget.
Kevin Kuhlman, vice president of government relations at the National Federation of Independent Business, theorized, “There is a sensitivity to direct tax increases on small businesses and I think that’s one of the reasons it may not have been included.”
Regardless, any proposed tax increases have been a hard “no” for Republicans, meaning Democrats will likely have to rely on the process of reconciliation to get the changes passed. This would allow lawmakers to pass the budget with only a simple Senate majority, rather than the traditional 60 votes.
Stay tuned as lawmakers in Congress get their chance to iron out the budget proposal.
To a Richer Life,
The Rich Life Roadmap Team