Joe Biden has big plans for the US, but how do you pay for it all?
They fly around your ears, the colossal amounts of support for the American economy. First, there was a $900 billion corona aid package, which was passed in December 2020, during the twilight years of Donald Trump’s presidency. This was followed by another huge corona support package of 1,900 billion dollars, as one of the first acts of Joe Biden in February of this year.
This was followed by a package of 2,300 billion, mainly focused on infrastructure, to make the economy resilient for the future. And now, announced last week, there’s The American Families Plan, a $1,800 billion package aimed primarily at families: childcare, college fees, parental and sick leave are part of that.
Fix what has been neglected for years
It is not without reason that Biden is already cautiously joining the ranks of Democratic presidents who wanted to fundamentally change society – and make it more social. Franklin D. Roosevelt did just that in the 1930s with his New Deal, which turned the American night watchman state into a government that wanted to actively influence the economy. Lyndon Johnson set up a social safety net in the 1960s with his Great Society. And Biden seems to want to fix what has been neglected in recent decades: the infrastructure, environmental policies and above all, America’s famous social mobility. Because, just like the roads and bridges, it suffers from overdue maintenance.
But how do you pay for all that? The corona support packages are financed by issuing additional government bonds. The national debt of the United States is rising sharply due to the pandemic. In 2019, that debt amounted to 79.2 percent of gross domestic product, jumping to 100.1 percent in 2020, according to data from the Congressional Budget Office (CBO). This is an impartial agency that tracks and makes forecasts about government spending. The CBO sees the government debt ratio rising further, to more than 107 percent over ten years.
And that is the very narrow definition that the Americans themselves give to their national debt. According to the International Statistical Standard, the U.S. government debt will be 134 percent of GDP this year. That is more in the direction of France (142 percent) than Germany (85 percent).
Taxes politically difficult
Borrowing is relatively cheap: the interest rate is still low, at 1.6 percent for ten-year government bonds, and the settlement will follow much later. The levying of taxes is politically much more difficult. Biden’s two latest packages, those of 2,300 billion and 1,800 billion, must come from taxes. They are also, unlike the corona support, not spent immediately but spent over at least eight years. Or they are structural.
For financing, an increase in corporate tax from 21 percent to 28 percent is on the table. This is part of an American initiative to equalize that rate internationally – to counteract a loss of competitiveness and to prevent tax arbitrage from large companies.
In addition, the top rate of income tax, which applies to incomes above a million dollars, must be increased from 37 percent to 39.6 percent. That rate will also apply to property income – roughly doubling it. On paper, then – because there are plenty of ways to avoid the wealth tax. Strengthening the tax authorities, the Internal Revenue Service, should therefore make the levying of taxes more effective.
A heated discussion immediately erupted with the plans. Central to this is the question of whether a higher tax on corporate profits and capital income will not weaken the economy in the long run as quickly as the support plans promise to strengthen it. If the higher tax leads to less investment, this undermines the productivity of the economy in the long run, and thus the growth of prosperity.
The levy of more income tax and capital tax for the rich has another objection. Biden can argue that the increase affects only the half-million richest households — America’s 0.3 percent super-rich. Last week, Bloomberg calculated that America’s very rich became $195 billion richer during Biden’s first 100 days as president.
But while it may seem appealing at first glance to take money from the rich for leave, education and childcare, that misses the mark, the magazine wrote. Forbes last week. Social insurance like this gains greater support if it is raised by the people who sooner or later make use of it – as is the case in other Western countries. The middle class pays for it through taxes.
Echo of revolution against British
Here is an echo of the American Revolution of 1776. The slogan against the British then was, ‘no taxation without representation‘: we don’t pay taxes without being allowed to participate in the decision-making process. But the opposite also applies:no representation without taxation‘. Those who do not pay taxes do not feel connected to what is done with them.
Rates for high earners are historically very low, even after Biden’s hike. With the general public in mind, something can be added with impunity. In the early 1950s, the top income tax rate was still 60 percent. Raising taxes for the average American is political gunpowder.
Whatever the outcome of these tax discussions, Biden’s plans will certainly increase the role of the state in the economy. Figures from the CBO, in the accompanying chart, show that the level of federal government spending (i.e. excluding individual states) will rise in the coming years to that of the early 1980s — when President Reagan began cutting back the state. . The peaks in the chart around 2009 and 2020 due to the financial crisis and the pandemic.
US like Europe?
Will America look more like Europe under Biden? A little bit. In the eurozone, it is not uncommon for half of GDP to flow through the state. In France, just before the pandemic, this was 55.5 percent in 2019, 45.1 percent in Germany and 42 percent in the Netherlands. In the US, federal plus the states, it is 38.3 percent.
All bailouts during the pandemic, such as wage support or benefits, have naturally temporarily inflated the role of the state. But the OECD, the club of industrialized countries, assumes that it will slowly return to normal after that. The CBO’s projections suggest that America remains at a somewhat higher level than before.
That’s new: The US state has long been stripped under the conservative slogan ‘starve the beast‘. Tax cuts led to budget deficits, followed by spending cuts. And then there were new tax cuts, deficits and austerity, which cut government spending a little bit each time.
That era seems to be finally over. The beast of the state is no longer starving in the US. But, compared to Europe, it remains on a solid diet under Biden as well.