President Joe Biden unveiled his first federal budget proposal as president for fiscal year 2022, which begins on October 1. His first budget is a whopper at just over $6 trillion. This is in addition to the $4 trillion he wants to spend on his pork-laden infrastructure rebuilding plan. He also announced his plan to raise income and capital gains taxes by a jaw-dropping $3.6 trillion over the next decade.
Biden’s First Federal Budget Request is for $6 Trillion
President Biden proposed a federal budget plan which would increase federal budget deficits by at least $1.3 trillion (and probably more each year for the next decade, pushing the nation’s debt burden from today’s record of $28.3 trillion to at least $41 trillion 10 years from now.
The blueprint released by the White House in June ties together three major spending proposals already announced by Biden: the $2.3 trillion American Jobs Plan, the $1.8 trillion American Families Plan and $1.5 trillion in discretionary spending for fiscal 2022.
Combined with mandatory spending programs, the 2022 budget would spend just over $6 trillion, about $300 billion more than current projections for the year, with much of the spending going toward education, healthcare, science research and infrastructure.
The question is: Do we really need it, what with the economy soaring at a rate above 6% in GDP so far this year? I say we do NOT! But President Biden and his administration disagree:
“The country had been weakened by decades of underinvestment in these areas, squeezed by budget caps,” acting Office of Management and Budget Director Shalanda Young said Friday.
In fiscal year 2022 alone, Biden’s budget projects a $1.8 trillion deficit, half of the record $3.6 trillion deficit expected for this pandemic year. In the following years, that would fall to a range of $1.3 trillion to $1.6 trillion, higher than all but a few years following the Great Recession.
The new budget calls for large tax increases on the wealthy and corporations which are designed to pay for most of (but not all) the cost of Biden’s proposals. I will discuss the specifics of Mr. Biden’s planned tax increases as we go along today.
The White House said the latest budget plan puts the country on a “responsible fiscal course” by investing in the economy now while interest rates are near historic lows. “Responsible,” you’ve got to be joking, right?
President Biden Proposes $6 Trillion Federal Budget for Fiscal 2022
The president wants Americans to believe it’s the right thing to do to run deficits of $1.3 trillion or more a year for the next 10 years to rebuild our infrastructure and improve on education and healthcare. On top of that, he wants us to believe the annual budget deficits will actually go down significantly in the next decade if we do this. Truth is, he has no idea! No one does.
Many of the projected budget deficits on the books were already baked into the baseline prior to the president’s latest proposals, and his critics say Biden’s budget should focus on finding a path to sustainability in the nearer-term rather than postpone it for a decade.
Congress has the final say on spending, taxes and policy proposals, and often diverges from a president’s budget request. “The President’s proposal is simply that – a proposal,” Senate Appropriations Committee Vice Chairman Richard Shelby (R-AL) said Friday, slamming what he called a blueprint for higher taxes, overzealous spending and an underfunded military.
“In the forthcoming weeks, Congress will exercise its Constitutional power of the purse in crafting an appropriations bills that, I hope, will appropriately prioritize our nation’s spending,” he said.
Republicans have offered an infrastructure spending plan at just under $1 trillion, while Biden has agreed to reduce his $4 trillion request by $500 billion. This still puts them light years apart, not to mention the fact that the GOP is broadly opposed to increasing taxes anywhere near paying for Biden’s infrastructure plan.
Even some moderate Democrats in the evenly divided Senate have also shown they are willing to flex their muscles to rein in plans they see as too expensive or too progressive, creating an obstacle to passing Mr. Biden’s plans through procedures that could bypass a GOP filibuster.
The bottom line is, it’s unlikely President Biden will get the $6 trillion federal budget he has requested. However, he is all but certain to get more than the $4.8 trillion President Trump requested this time last year. The federal budget is on autopilot to go up every year, no matter what. So, I would expect Congress to approve something just north of $5 trillion in the weeks ahead.
Biden Proposes $3.6 Trillion in New Tax Increases
Last Friday, President Biden also unveiled his plan for $3.6 trillion in tax increases for the nation’s wealthy and on big corporations to pay for his $4 trillion infrastructure and jobs bills. He shared the most detailed plans yet for paying for increased spending on climate change, reducing income inequality, social services programs, and more.
The proposals released will mean higher taxes on investment sales, income, the transfer of assets and will reverse former President Donald Trump’s sweeping tax cuts for the country’s upper income taxpayers.
President Trump’s Tax Cuts and Jobs Act which took effect in December 2017 was the most significant change in the U.S. tax code in three decades. The law lowered the corporate tax rate from 28% to 21% and lowered the top individual tax rate from 39.6% to 37%, while also reducing most of the lower tax brackets as well.
Most of the new Biden tax hikes, as proposed, will begin on January 1, 2022 when the top individual tax rate will climb back to 39.6%, with the new rates applying to income of just over $500,000 for married couples who file joint returns.
Taxes on capital gains would almost double under the Biden plan with the profits from selling an asset climbing from 20% to 39.6% for people earning over $1 million. But that may not be the end of the capital gains tax for many people because the income is also subject to a surtax of 3.8% which helps to pay for the Affordable Care Act.
This means that in some states, high-earning taxpayers may face capital gains tax rates of over 50%, the highest rate in 100 years. Worst of all, this capital gains tax hike would be retroactive to April 2021 to make sure taxpayers can’t avoid it.
Put differently, the capital gains tax increase, if approved, would be retroactive to April 2021 to prevent a deluge of assets from being sold before the increase becomes law.
Many Republicans are already denouncing Mr. Biden’s tax plans. Some moderate Democrats may also follow, especially those up for re-election next year. While polls show most voters want the rich to pay more in taxes, many also realize that higher taxes on corporations will only result in higher prices paid by consumers.
“This is truly tax and spend on steroids,” said Douglas Holtz-Eakin, the president of the American Action Forum and former chief economist of President George W. Bush’s Council of Economic Advisers. He pointed out that the proposed tax levels would be “higher than in any 10-year period in modern history.”
The U.S. Chamber of Commerce is also slamming the tax proposals:
“Perhaps the only thing besides a resurgence in the global pandemic that could reverse America’s economic recovery is the administration’s proposed tax increases on employers and investment,” said Neil Bradley, the Chamber’s chief policy officer. He added:
“The tax on capital gains would hit two-thirds of capital investment. The tax on corporations would hit 1.4 million small businesses and would impose on America’s largest businesses the highest tax rate in the industrialized world.”
Finally, as part of his new tax plan, President Biden says he will increase Internal Revenue Service funding by $80 billion, just ahead, to beef-up tax collections, in addition to the proposed tax increases discussed above.
The Biden administration believes enhanced tax enforcement by the IRS, coupled with new disclosure rules, could raise at least $700 billion over the next decade from wealthy people, privately-owned businesses and corporations. This means many more audits by the IRS are in our futures.
Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com.