The White House and Republican National Committee are each touting different economic analyses that reach far different conclusions about the budget and economic impact of President Joe Biden’s American Families Plan.
One analysis from Penn Wharton Budget Model – which is being promoted by the RNC – directly contradicts Biden’s claims that the plan “doesn’t add a single penny to our deficit” and that it is “estimated to grow the economy another trillion dollars.”
In its May 5 analysis, PWBM estimates that over 10 years, the plan would spend $1.2 trillion more than it takes in in new revenue, and would increase government debt by almost 5% by 2050. It also predicts the plan would decrease GDP by 0.34% over 10 years, and by nearly 0.4% by 2050.
Another analysis of the American Families Plan from Moody’s Analytics – which the White House has been sending around — provides some cover for the president’s claims, but only in the event that the plan is passed in conjunction with the American Jobs Plan. (The president is calling the two plans together his “Build Back Better” agenda.)
If both proposals were passed, Moody’s estimated they would pay for themselves in 15 years and would raise real GDP by nearly $1 trillion. But the American Jobs Plan does most of the heavy lifting in that equation.
In its May 3 report, Moody’s concludes the American Families Plan would add $218 billion to the country’s deficits over 10 years. One of the authors of the report said it might take 19 years for the AFP to break even on its own. While the Moody’s analysis does conclude that the plan would grow the economy, even if passed without the American Jobs Plan, it alone would increase the real GDP by about a tenth as much as Biden claimed.
The American Families Plan
The American Families Plan would provide two years of free community college and two years of preschool to any individual or family that wanted them, as well as access to affordable child care and paid leave, among other things. In all, the Biden administration estimates those investments and tax credits will cost $1.8 trillion over 10 years.
Biden proposes to fund all that through a series of tax increases on high-income Americans, including: raising the top individual income tax rate from 37% to 39.6%; taxing unrealized capital gains above $1 million at death; taxing long-term capital gains at ordinary income rates for individuals making more than $1 million; taxing carried interest at ordinary rates; extending the limitation of business losses for noncorporate taxpayers; and adjusting the threshold for the 3.8% Medicare tax to all income above $400,000.
Biden’s American Families Plan comes on the heels of his $2.7 trillion American Jobs Plan, an infrastructure bill (using the Democrats’ broad definition of infrastructure), which is paid for mostly through higher corporate taxes. Neither the American Jobs Plan nor the American Families Plan has yet been introduced as legislation in Congress.
In a speech on the American Families Plan on May 3, Biden called it “a once-in-a-generation investment in our families, in our children.”
He also made two assurances: that the cost of the plan is offset by revenue, and that it will grow the economy.
“And here’s what the American Families Plan doesn’t do: It doesn’t add a single penny to our deficit,” Biden said. “It’s paid for by making sure corporate America and the wealthiest 1% just pay their fair share.”
Later, he added, “I won’t go into all the other statistics, but the plan is estimated to grow the economy another trillion dollars. This will grow the economy. Everybody would be better off.”
We reached out to the White House press office for backup, but we did not get a response. It is possible the White House was referring to the Moody’s analysis, released the same day the president spoke, and which the White House press office has promoted in emails.
Moody’s Analysis
Moody’s concluded that while the American Families Plan’s “near-term impacts are small, it provides meaningful longer-term economic benefits by increasing labor force participation and the educational attainment of the population.”
One of the authors of the report, Bernard Yaros, an assistant director and economist at Moody’s Analytics, told us via email the American Families Plan would add to deficits through 2025, but then begin to lower them once the expanded child tax credit expires. (Some Democrats have said they want to make the child tax credit permanent.)
According to the Moody’s analysis (see Table 1), the plan would add about $326 billion to the nation’s deficits in those first four years. Starting in 2026 and beyond, Moody’s forecasts the plan would then begin to lower deficits a bit each year. Nonetheless, in the 10-year window Moody’s considered, the plan would add about $218 billion in deficits.
“When combined with the American Jobs Plan, the AFP would be fully paid for by higher taxes in approximately 15 years,” Yaros told us. But without the American Jobs Plan, he said, that break-even point would take longer.
“Our analysis was only limited to the current decade,” Yaros said. “However, if we assume the AFP continues to reduce annual budget deficits by $22.3 billion beyond 2031, the AFP would pay for itself in approximately 19 years. This is a crude estimate, but it clearly suggests that without the American Jobs Plan, the AFP would take longer to fully pay for itself.”
Yaros also defended Biden’s claim that “the plan is estimated to grow the economy another trillion dollars” — but again with the caveat that it is passed in conjunction with the American Jobs Plan.
“By the end of 2030, real GDP under the AJP and AFP would be $25.1 trillion, compared with $24.3 trillion if neither are enacted,” Yaros said. “This is a difference of $800 billion. However, keep in mind that this figure is in constant 2012 dollars (i.e. adjusted for inflation). In nominal terms (unadjusted for inflation), the difference would be a larger $1.1 trillion, so according to our findings, Biden is right that the AJP and AFP would add another trillion dollars to the economy.”
But Biden’s comments were focused on the American Families Plan, and he never mentioned that the $1 trillion increase to the economy was a combination of the two legislative efforts.
The Moody’s analysis indicates the American Families Plan — alone — would increase real GDP by $103 billion in (inflation-adjusted) constant 2012 dollars. That comes to $145 billion in nominal dollars, Yaros said. That’s a fraction of the $1 trillion that Biden said “the plan” was estimated to grow the economy.
Penn Wharton Budget Model Analysis
As we said, an analysis of the American Families Plan by the Penn Wharton Budget Model is less optimistic — which is why, not surprisingly, the Republican National Committee press office has been circulating this analysis.
For starters, the PWBM takes issue with the administration’s cost estimate for the American Families Plan. Rather than $1.8 trillion, PWBM puts the cost at $2.5 trillion.
There are several reasons for that higher estimate, PWBM experts explained in a call with the media on May 5. The PWBM put a higher price tag than the administration did on universal preschool ($426 billion as opposed to $200 billion) and two years of free community college ($299 billion as opposed to $109 billion). It assumed the federal government would pick up the entire cost of both programs, though a White House fact sheet suggests states will be asked to pay a portion of the cost. Regardless of whether the cost is split with states, the cost of the programs would be borne by taxpayers one way or the other, and would still have a macroeconomic effect, PWBM experts said.
The PWBM also projects less revenue from enhanced IRS tax collection enforcement ($480 billion over 10 years as opposed the White House’s and Moody’s estimate of $700 billion).
While spending $2.5 trillion over 10 years, PWBM estimates, the AFP would raise $1.3 trillion in new tax revenue over that period, a $1.2 trillion difference.
“By 2050, we estimate that the AFP would increase government debt by almost 5 percent and decrease GDP by 0.4 percent, as the effects from larger debt on the economy outweigh the productivity gains associated with the new spending programs,” the PWBM analysis states.
PWBM estimates wages would be 0.1% higher “due to the productivity boost from public investments. However, those productivity effects are not enough to offset the negative effect of higher government debt on GDP, which ends up 0.4 percent lower in 2050.”
In other words, the PWBM contradicts both of Biden’s assurances: that the AFP would not increase the deficit and would grow the economy.
“We are saying that is not true,” Richard Prisinzano, director of policy analysis at PWBM, said of Biden’s claims.
The White House may take issue with some of the estimates PWBM assigned to various provisions of the plan — which were presented in a White House fact sheet with few details and not an actual piece of proposed legislation. “But I think we in good faith have estimated it and our numbers just don’t add up the way that they’ve presented them,” Prisinzano said. “And, again, I’m pretty confident in our models.”
The lack of specifics in the White House fact sheets is why the Urban-Brookings Tax Policy Center has yet to undertake an economic analysis of the plan, Howard Gleckman, a senior fellow at the Tax Policy Center, told us via email.
“There is not enough detail for us to model Biden’s tax ideas,” Gleckman said. “I suspect we will wait until they release a more detailed budget and Treasury puts out a Green Book. At that point, we’ll likely do a full analysis of the plan.”
As for whether the plan will pay for itself, Gleckman cautioned that estimates may be difficult for economists to predict due to the long-term benefits of, say, preschool and community college.
“In the real world, some infrastructure spending has a pretty high ROI [return on investment] and some is just a waste of money,” Gleckman said. “The stuff in the family plan is harder to calculate. Will improved education result in more productive workers? It might, though the return likely would occur over a very long time.
“Will support for families with children or frail parents mean that adults in those households will spend more time at paid work and less time caregiving? Probably. Can anyone really calculate the return? I doubt it.”
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