Moderate Senators scaled the program back to $1.75 trillion, with new taxes on high income earners and stock buybacks among the proposals to pay for it.
The Democrats in Congress appear to be making progress on a federal spending plan. The Biden Administration had initially proposed a $3.5-trillion plan, but it has been reduced to $1.75 trillion, largely in response to reservations about some of the details of the plan from moderate Democratic Senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona.
Much of the final negotiation has focused on how to pay for the plan.1 A proposal to increase the corporate income tax rate was taken off the table. The news that higher corporate tax rates were not in the cards was well received by Wall Street.
Currently, the proposed legislation would provide universal preschool for all 3- and 4-year-olds and subsidies that cap what parents have to pay for childcare at 7% of their income, with funding for both programs for the next six years.2 There would also be a one-year extension of the Child Tax Credit and extended tax credit for the next 10 years for utility and residential clean energy, including electric vehicles. There would be an extension for the next four years of the Affordable Care Act subsidies that were introduced at the outset of the pandemic. Additionally, Medicare would be expanded to cover the cost of care associated with hearing needs. Exhibit 1 highlights some of the legislation’s major provisions.
House Speaker Nancy Pelosi has said she plans to proceed with a vote on the bill in the House. While his vote will be crucial to passage, Senator Manchin appears to be the one Democratic holdout in the Senate. He has said he will not decide whether to support the bill until the Congressional Budget Office issues its report on how much it will cost.
Exhibit 1: What’s in the new spending plan
|Policy||Cost ($ billions)|
|Child care and preschool||400|
|Child tax & earned income tax credit||200|
|Clean energy & climate investments||555|
|ACA credits, including in uncovered states||130|
|Higher ed. and workforce development investments||40|
|Racial equity & other investments||90|
Varied strategies to pay for spending plan
A number of proposals are now under consideration to finance the increased spending. These proposals include:
- A 15% minimum corporate tax that would be the global standard. The proposal is to tie the tax to the amount of revenue a company has, so they could not use deductions to reduce their tax obligation below that 15% threshold. To make this the global standard, the United States would work with other countries, and 136 have already agreed to impose the 15% minimum corporate tax rate.3 Establishing the new minimum is expected to raise $325 billion, and the global tax overhaul, which would decrease the incentives for U.S. companies to avoid taxes by establishing an offshore parent company, could raise another $350 billion.
- A surtax on those with high incomes. The proposal is to introduce a 5% surtax rate on individual income above $10 million. That rate would rise another 3% on income above $25 million.
- A tax on stock buybacks. This measure would impose a 1% tax on the amount companies spend on stock repurchase programs. It is expected to raise $125 billion.
- Increased IRS enforcement. With this initiative, the Internal Revenue Service would receive an extra $80 billion annually to invest in technology updates and to hire 87,000 more agents, financial investigators and auditors. Going after people who attempt to cheat the system by underreporting income is expected to raise an additional $400 billion in tax revenue over the next 10 years.4
More details on how the plan will be financed are highlighted in Exhibit 2, though, as explained below, some of those numbers have been disputed.
Exhibit 2: How Congress plans to pay for all this new spending
|Offsets – estimates, based on White House projections||$ billions|
|15% corporate minimum tax on large corporations||325|
|Stock buybacks tax||125|
|Corporate international reform to stop rewarding companies that ship jobs and profits overseas||350|
|AGI surcharge tax on the top 0.2% of earners||230|
|Close Medicare tax loophole for the wealthy||250|
|Limit business losses for the wealthy||170|
|Investments in IRS to close the tax gap||400|
|Prescription drugs: repeal rebate rule||145|
|Up to a total of:||1,995|
The Joint Committee on Taxation (JCT), a nonpartisan committee of the U.S. Congress, has said the House version of the spending bill Congress is now considering would only bring in $1.48 trillion in new tax revenue. That version includes $24.8 billion in new revenue for a fee on businesses that pollute.These estimates of new revenue fall short of the $1.75 trillion that Democrats want to spend on new social programs.5
The JCT estimate doesn’t include revenue from increasing Internal Revenue Service enforcement, which will be included in the Congressional Budget Office’s projections, which have not yet been issued. The JCT calculations also don’t include additional savings from a drug pricing deal that would allow the federal government to negotiate prescription prices.
Fiscally conservative Democrats have said they want to see analyses of the bill’s costs from both the JCT and the Congressional Budget Office before proceeding with a vote on the legislation.
Weaker than expected GDP growth
GDP growth for the third quarter came in in an annualized rate of 2%, much less than the 2.8% economists had expected.6 It was also well below the 4.5% and 6.7% growth rates seen in the first and second quarters of this year, respectively. Consumer spending also slowed, rising just 1.6% in the third quarter, after increase by 12% in the second quarter. The end of stimulus checks may have contributed to that decline. The pandemic is also continuing to have its impact, given the rise in cases the Delta variant brought.
The federal spending and infrastructure bills, which now seem more likely to pass than they did two weeks ago, could also provide needed stimulus for future growth.
In more positive news, jobless claims for the week ended October 23 fell to 281,000, their lowest level since the start of the pandemic.
Fed says it will remain patient on rate hikes
At the end of the November 2-3 Federal Open Market Committee meeting, Fed Chair Jerome Powell said the Fed will be patient about raising interest rates.7 At the same time, he announced that the central bank would begin tapering its asset-purchase program by $15 billion a month, starting in November.
The Fed emphasized, however, that it will not adhere to a preset course and will adjust the pace of curtailing its asset purchases in accordance with the performance of the economy. The Fed did acknowledge that inflation has been elevated, but it still believes the inflationary pressures stem from the current supply chain disruptions and the heightened consumer demand that had been suppressed during the early stages of the pandemic. The Fed expects the supply chain bottlenecks will end by the middle of next year and that inflation would begin to come down to its goal rate of 2%. Weakness in the job market was cited as a reason not to consider a rate hike now. Even with the commitment to patience, Chair Powell said swift action would be taken to address any further spikes in inflation if that became necessary.
In its post-meeting statement, the Fed also expressed confidence that the economy will continue improving, especially once the supply chain issues are resolved.
Jamie Dimon, CEO of JPMorgan Chase, is similarly optimistic. During a quarterly earnings call with analysts held in mid-October, the CEO suggested the worries about the supply-chain problems may have become overblown.8 "There's not one company I know that is not working aggressively to fix their supply chain issues,” he said. He doubted that anyone would be talking about supply chain issues a year from now and added that the current disruptions are simply “dampening,” but “not reversing a fairly good economy."