Less than two months after signing the $1.9 trillion American Rescue Plan, President Biden announced two additional plans of comparable size. The American Jobs Plan focuses on physical infrastructure, and the American Families Plan concentrates on what some are calling human or social infrastructure. These plans also include tax increases on corporations and wealthy individuals. Together, the plans would redirect around $4 trillion, so let’s look at each plan in more detail and assess their potential implications for the economy and markets.
First, the American Jobs Plan calls for a $2.3 trillion investment in physical infrastructure (highways, bridges, broadband, and clean energy–among other things) over the next eight years. To fund this spending, the plan calls for increased taxes on corporations. Some of the specifics include:
- Raising the corporate tax rate from 21% to 28%
- Strengthening the global minimum tax on corporations
- Increasing IRS enforcement against corporations
The second plan, the American Families Plan, directs almost $2 trillion in spending toward human infrastructure (universal preschool, free community college, paid family & medical leave, and reduced health insurance premiums–among other things). To pay for this spending, the plan proposes tax reforms aimed at wealthy individuals, including:
- Raising the top income tax rate from 37% to 39.6%
- Ending preferential treatment of long-term capital gains for households making over $1 million
- Repealing the step-up in basis at death for gains over $1 million (with protections for family-owned businesses that are passed to heirs)
- Increasing IRS enforcement against wealthy Americans
If passed, these two proposals would significantly shape the next decade. However, it’s uncertain how much of Biden’s agenda will pass. Currently, the Biden administration is working with Republican senators to reach a bipartisan compromise on physical infrastructure, but so far, the two sides remain far apart. The main sources of contention are around the proposed scope and funding of the plan. Republicans favor a narrower, more traditional scope for infrastructure spending and don’t want to undo the 2017 reduction in corporate taxes to fund the plan.
Democrats are increasingly calling on the President to scrap bipartisan talks and pass the bills along party lines using budget reconciliation rules. However, several moderate democrats still favor working with Republicans to pass at least some of Biden’s agenda, and others have themselves balked at parts of Biden’s plans.
Even though it’s unclear which parts of Biden’s initial proposal Congress will approve, it’s likely that they will pass some form of infrastructure spending this summer. If we assume both plans pass as proposed, the U.S. economy could grow at 0.5% to 1.0% faster in each of the next couple of years, and inflation could also run a few tenths of a percent higher.i
Some fear that higher taxes would hurt the stock market, and although higher corporate and capital gains taxes would have a negative impact, increased government spending could act as a counterweight. It’s also important to remember that corporate and individual tax rates were significantly higher in the past, and periods of rising tax rates weren’t always associated with a weaker stock market.
Ultimately, fiscal policy is fluid, as evidenced by these proposed tax hikes which largely undo the 2017 tax cuts. Nonetheless, in recent years we’ve witnessed the growing influence of government spending programs. While we favor prudent fiscal policy, sound monetary policy, and private productivity over increased public deficit spending, we know that all government spending is not created equal. Some public investments, like those in infrastructure and education, could potentially boost long-term productivity and thus be worthwhile.
Over the coming weeks and months, it should become clearer what parts of Biden’s infrastructure plans will become a reality. We’ll continue to monitor developments and adjust portfolios as the economic outlook and market valuations change.
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i Wells Fargo