Congress will spend the next several months negotiating over which of President Biden’s ambitious tax and spending plans it can pass. Biden probably won’t get everything he wants.
Biden has proposed roughly $4 trillion in new spending on infrastructure, green energy, education and social-welfare programs. He also wants to raise taxes on businesses and the wealthy to pay for much of it. If Biden can’t get everything he wants, which of his plans would provide the most bang for the buck?
The answer depends on how Congress would structure each program, which isn’t clear yet. But some types of federal spending are more “productive” than others, which means they generate a larger net gain in economic output. The Penn Wharton Budget Model recently analyzed the likely economic impact of Biden’s 2022 budget proposal, which allows some handicapping on which programs would generate the highest and lowest returns. Here’s an overview:
Education programs would probably generate the best return. Biden has two broad programs: universal pre-school for three- and four-year olds, and free or subsidized education for more low-income students. The benefits of universal pre-school would take longer to materialize, simply because those kids won’t enter the labor force for 15 to 20 years. But earlier education for kids strongly correlates with better school outcomes and higher earnings down the road. Helping more young adults graduate with degrees would produce quicker results. Biden doesn’t limit the age range for people qualifying for college aid, but the return would probably be higher if there were an age cutoff, since younger workers would work longer than older people claiming the benefit. Overall, Biden wants to spend around $430 billion on education subsidies over a decade.
Child care and paid-leave assistance would benefit the economy by allowing more parents to work. The return wouldn’t be huge, however, because the parents who would benefit most tend to be lower-income Americans who generate less economic output. Still, there are obvious social-welfare benefits to giving working parents a hand. Biden wants to spend $225 billion on subsidized child care and another $225 billion on mandatory paid leave for all workers, to care for family members or deal with emergencies at home.
Infrastructure would probably yield a small but still positive return on federal spending. Better roads, ports and other transportation facilities make the economy more efficient, benefiting everybody. But improving existing infrastructure in a developed nation probably doesn’t provide as much bang as building new systems, as the Wall Street Journal recently reported. And while new public works funding can bring a short-term boost in jobs and wages, the effect may not last. New spending on digital infrastructure, such as broadband access for the 44 million Americans who still lack it, might be an exception that can provide a better return than spending on traditional systems. Biden wants to spend nearly $1 trillion on traditional and digital infrastructure.
Clean energy is a tossup. Biden claims an aggressive effort to shift the U.S. economy away from fossil fuels toward renewables will give the nation a key edge in environmental technologies needed to address global warming. Renewables such as wind and solar, have in fact, come down in cost to the point that they are comparable to oil, gas and coal, or cheaper. But this would be an unprecedented transition with technical challenges and many unpredictable factors. Still, the need to address a warming planet may compel such changes, for ecological rather than economic reasons. Biden’s clean-energy plans call for at least $600 billion in new spending.
Transfer payments that shift money from one sector to another generally don’t produce an economic payback, even if they redistribute wealth in ways that make some people better off. Biden is calling for at least $800 billion in such transfers, including extended assistance for health insurance coverage, an expanded child tax credit and an expansion of the earned income tax credit for lower-income workers. For recipients, these are popular programs, and Democrats in Congress will push hard to pass them.
Better IRS enforcement would probably be money well spent. Biden wants an extra $80 billion to help the IRS hire more auditors, modernize its computer systems and better police tax evaders. The White House says this will generate $700 billion in additional tax revenue over a decade, or nearly a 900% return. That may be high, but even critics of the idea think this will generate more money than it costs.
Higher taxes on business and the wealthy could actually boost the economy, if the revenue generated is used the right way. Business and investor groups warn that these tax hikes, which could raise around $4 trillion in revenue over a decade, would raise the cost of capital and depress the economy. But that’s not what the Penn Wharton analysis finds. “Every group in our model likes those tax hikes except old, rich people,” says Richard Prisinzano, a former Treasury Department. official who oversaw the Penn Wharton analysis. “That’s quite a bit of revenue a long as you’re spending less than that on something that’s productive.”
Biden’s tax hikes include boosting the corporate rate from 21% to 28%, raising the top individual income tax rate from 37% to 39.6%, and taxing capital gains for the wealthy at the top income tax rate instead of the current 20% rate. He’d also eliminate a tax break that wipes out capital gains taxes on large estates when the principal dies. Those tax hikes would obviously make the rich a little less richer. But the Penn Wharton analysis finds that other tax breaks, such as the partial expensing of investments for business, would blunt the impact. It’s also possible that a higher capital gains rate on the wealthy would, unintuitively, lead to more investing: the higher cost of investing would reduce trading for the wealthy, which in turn might spur brokerages to lower fees for everybody, boosting investment lower down the chain.
Budget hawks typically want Washington to use new revenue to pay down the gigantic national debt, which now exceeds $28 trillion. Government borrowing crowds out private investment, so the less the government borrows, the more is available for private projects, which generally have a higher return. But paying down the debt is unpopular in Washington right now. Biden hasn’t proposed any debt reduction, and Republicans are barely mentioning it either. What makes economic sense isn’t always the preferred option, politically.
This article originally appeared on Yahoo! Finance.
