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The Biden Spending, Tax Surge - Pictet Comment

Tom Burroughes

30 April 2021

Action on the Biden administration’s tax proposals – as described elsewhere in this news service – is unlikely until the fall, given that legislators need time to scrutinize the mass of suggestions, according to , the Geneva-based firm.

Wealth firms around the world are trying to make sense of the American Families Plan, involving $1.8 trillion of spending, following the $2.3 trillion American Jobs Plan and Biden’s $1.9 trillion American Rescue Plan. 

Already, senior figures, such as former US Treasury Secretary Larry Summers, have raised worries about the inflation dangers of pouring trillions of dollars into a country that is already recovering from the pandemic as vaccines are issued. Although some economists have downplayed risks of 1970s-style double-digit inflation, Summers reportedly fears that decades of low price pressures could make Washington policymakers complacent.

Another concern is that tax hikes on HNW individuals to pay part of the bill will hurt entrepreneurship without raising sufficient revenue to fill the gaps. Much depends on whether revenues start rolling in before the full impact of spending shows up in budget arithmetic. 

Pictet’s senior US economist, Thomas Costerg, said: “New tax increases will likely hit wealthier individuals via higher capital gains taxes and a higher marginal top income tax rate. 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,” he said.  

“The American Families Plan (AFP) spending package comes on top of the $2.3 trillion American Jobs Plan, focused on infrastructure that was unveiled on March 31. This plan is due to be partly financed by higher corporate taxes. 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 be affected by tax rises,” Costerg continued. 

“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,” he said. 

Costerg added that the ARP partly explains his firm’s forecast that US GDP will grow by 6.5 per cent in 2021, with GDP growth likely to be particularly strong in Q2.

However, he added that GDP growth will moderate in 2022 to a rate of about 3 per cent as the impact of fiscal expansion fades, partly because consumers will be cautious about digging into their crisis-era savings.