US: taxing times for the wealthy and corporates
On 28 April, President Biden is expected to unveil his latest spending plan. Called the American Families Plan (AFP) and focused on childcare policies and education, it is reportedly worth USD1.5 trn. New tax increases will likely form part of the plan and will hit wealthier individuals via higher capital gains taxes and a higher marginal top income tax rate. The AFP spending package comes on top of the USD2.3 trn American Jobs Plan, focused on infrastructure, that was unveiled on 31 March. This plan is due to be partly financed by higher corporate taxes. These new taxes were part of Biden’s election manifesto.
In theory, the Democrats could push the relevant legislation through Congress on their own given their 51–50 majority in the Senate, although it is not certain whether they would win all 51 Democratic votes. In any case, having to sift through a deluge of spending plans, Congress may need some time to go through the details of Biden’s new proposals, so action looks unlikely before August. In our view, October / November is more realistic.
While many tweaks are likely between Biden’s initial plans and the final version likely to be passed by Congress, US taxes do look like going up. Biden’s push to curb wealth inequality (a crucial campaign motto of his in 2020) means that the wealthy and corporations will be the first in line to experience tax rises.
Despite the tax hikes, we believe that Biden’s spending plans should provide a net boost to economic growth—although this boost is likely to be moderate given that the spending is to be spread over several years and is supply-side oriented. The biggest bang for the buck is undoubtedly provided by the American Rescue Plan voted in March, which aims to provide a direct boost to activity via federal cheques and increased unemployment benefits. The ARP partly explains our solid growth forecast for 2021: we expect the US economy to grow by 6.5% this year, with GDP growth likely to be particularly strong in Q2, when we expect a 10.0% quarter-on-quarter seasonally adjusted annual rate.
We expect GDP growth to moderate in 2022 (to about 3%) due to the evaporation of fiscal support and lingering cautiousness among consumers about spending their crisis-era savings. These factors could be more crucial than Biden’s spending plans on infrastructure and education, in our view.