WASHINGTON, DC – MARCH 15: President Joe Biden makes remarks on the $ 1.9 at the White House … [+]
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Talk about the game against the guy: President Biden’s American Rescue Plan (ARP) tax cuts are among the largest one-year tax cuts in modern US history. The bill passed by Congress last week would cut taxes by nearly $ 500 billion in fiscal 2021 alone, according to the Congressional Joint Tax Committee. This corresponds to about 2.25 percent of the gross domestic product (GDP).
As part of the economy, the tax cuts in Biden are 70 percent higher than the tax cuts in any single year of the Tax Cut and Employment Act (TCJA) of 2017, a tax cut that President Trump has falsely and repeatedly touted as the largest ever. The ARP tax cuts are larger than they were in the first year of President Reagan’s 1981 Economic Recovery Tax Act (ERTA).
The only tax cuts that were larger annually were those in 1945 and 2010 – also proposed by Democratic presidents. Most of my historical sales comparisons are based on a paper from then Treasury Secretary Jerry Tempalski.
Only a year
No doubt these historical assessments become complicated. Some insist that many of the ARP tax cuts are not tax cuts at all, but government remittance payments that happen to be managed through tax law.
And there is the question of timing. For example, most of the roughly $ 500 billion ARP tax cuts only last a year, with nearly all of the revenue effects spread across fiscal years 2021 and 2022. In contrast, the TCJA had more stamina. It’s designed to cut taxes by about $ 1.5 trillion over a 10-year period (eight years for each tax cut that is slated to expire in 2025).
Reagan’s 1981 tax cuts would have been larger than Biden’s on average for the year as a percentage of GDP, except that Congress in 1982 and 1983 compensated many of them with tax increases.
But aside from arguing over some of the historic tax cuts, it’s instructive to think about what Biden and the Congressional Democrats did. The party, which advocates stereotypical tax hikes, has instead approved a massive tax cut aimed primarily at low- and middle-income households. And all without a single vote from the Republicans, who are usually closely linked to tax cuts.
Tax implications
And the fiscal impact will be significant. Before the last round of tax cuts, the federal government only collected around 16.3 percent of GDP in taxes in 2020, which is one of the lowest proportions since the 1970s. Tax cuts in the ARP will come down to around 14 percent, a level not seen since 1950.
More importantly, the Democrats made no secret of their enthusiasm for making many of the temporary tax changes in the ARP permanent. Not the payments for economic impact, of course. Assuming widespread vaccines really break the back of the pandemic, we’ve probably seen the last of these for a while.
Expanding the Child Tax Credit, EITC (EITC) Tax Credit, Child and Dependent Care Tax Credit (CDCTC), and larger tax subsidies for those who purchase insurance on the Affordable Care Act health exchanges would collectively lower taxes More than $ 125 billion in fiscal 2022, according to JCT. As a result, an extension of these provisions would approach the 10-year size of the TCJA alone.
Historically huge
Of course, nothing is certain about the future. Congress may not be able to extend the more generous repayable loans, although history suggests it can. That could offset some tax cuts in March with future tax hikes – in fact, Biden wants to.
And economic reality often intervenes, even if tax law does not change. For example, the Joint Tax Committee estimated that TCJA would cut taxes by approximately $ 217 billion in fiscal 2021. As a result of the pandemic, that was almost certainly not the case, although we will never know what would have happened without COVID-19.
Some will certainly contest either Tempalskis or my numbers. The point remains, however: at the insistence of a Democratic President, a Democratic Congress passed a historically enormous, albeit temporary, tax cut. And if Biden and Congressional Democrats find their way, it may be some time yet.