President Biden’s administration rolled out its $1.8 trillion American Families Plan on Wednesday ahead of his first address to Congress. The plan is Mr. Biden’s third in a series of proposals to overhaul the American economy.
The first, the American Rescue Plan, was billed as an emergency pandemic aid bill that mostly focused on direct financial infusions to individuals and state and local governments along with funding for the vaccine rollout and other healthcare provisions. The second, presented as an infrastructure plan, hasn’t yet passed Congress, and deals with physical infrastructure, broadband and nontraditional infrastructure like elder care and electric vehicles.
The final of the three plans includes extending the expanded child tax credit first passed in the American Rescue Plan, provisions for tuition-free community college and prekindergarten, and more. Mr. Biden proposes funding it through taxes on the wealthiest and highest-income Americans. Here are some answers to common questions about the proposal.
What’s happening with the child tax credit?
The proposal would extend the beefed-up child tax credit that Democrats included in the American Rescue Plan that passed in March. That plan raised the $2,000 per-child CTC to $3,000, set the credit at $3,600 for parents of children under age 6 and made parents of 17-year-olds eligible. It also made the credit fully refundable, so low-income households would get the full benefit, no matter how little they earn. For a household with a 4-year-old and 7-year-old that doesn’t earn enough to pay income taxes, the plan would boost their maximum child tax credit to $6,600 from $2,800. The March law also ordered the Internal Revenue Service to start making periodic payments of the credit, which should start this summer.
But the March package only funded the expanded CTC for one year. This proposal would fund the larger credit through 2025, and would make it permanently refundable. But the Biden administration appears to have resisted many Democrats’ demands to make the larger credit permanent, instead risking the possibility that it could revert to the lower level after 2025.
What about child care?
To lower the cost of child care, the American Families Plan would guarantee that low- and middle-income families pay no more than 7% of their income on child care for children under 5 years old. According to the administration, this would save the average family $14,800 a year on child-care expenses. The mechanism for paying for this is unclear—the Biden plan just says that families will have their costs covered according to that formula.
The amount families pay would be based on a sliding scale, from low-income families whose costs would be fully covered to families earning 1.5 times their state median income, who will pay no more than 7% of their income.
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Additionally, the plan calls for permanently extending an expanded tax credit for child care included in the March stimulus that allows parents to get a benefit worth up to 50% of child-care costs, depending on income.
Separate from the child-care program, children who qualify for free or reduced school breakfast and lunches—around 30 million nationwide—would also now qualify to receive them during the summer, a permanent expansion of a program that was included in the stimulus package but that applies only to this summer.
How will it change preschool?
The administration wants to add four more years of free schooling for all Americans, two on the youngest end in the form of universal prekindergarten for three- and four-year-olds, and two after high school in the form of tuition-free community college.
The preschool program would apply to families of all income levels and would cost $200 billion over 10 years, though according to the administration it would “prioritize high-need areas.” The plan promises teacher training, wages of at least $15 an hour for all employees, and compensation similar to that of kindergarten teachers for educators with comparable qualifications.
What’s in the plan for higher education?
The husband of a community college professor, Mr. Biden proposes to spend $109 billion to provide tuition-free community college degrees (typically associate degrees) available to all Americans, including so-called undocumented “Dreamers” who came to the U.S. as children. The plan estimates that if all states and territories participate, up to 5.5 million students could enroll and pay nothing.
Mr. Biden would also increase Pell Grants, whose value relative to the cost of college has plummeted in recent decades. The maximum Pell Grant for the 2021-22 school year is currently set at $6,495, and Mr. Biden would increase that by $1,400. The administration calls this a down-payment on the ultimate goal of doubling the maximum grant amount.
How does the new paid leave program work?
The Biden plan’s paid leave program would take a full decade to fully implement, and would cost $225 billion over that period. It starts slowly, ensuring workers get three days of bereavement leave a year. By the 10th year of the program, it will have scaled up to guarantee 12 weeks of paid parental, family and personal illness leave.
It will pay workers up to $4,000 a month, with a minimum of two-thirds of average weekly wages replaced. For low-wage workers that could be closer to 80% of their wages.
Does it change the unemployment insurance system?
Despite a push by Senate Finance Committee Chairman
(D., Ore.), the plan only briefly mentions unemployment insurance and says the administration wants to work with Congress to come up with a permanent solution that creates automatic triggers for more robust benefits based on economic conditions. Some Democrats were pushing for more generous and long-lasting jobless benefits on a permanent basis.
Would ordinary-income tax rates go up?
Yes, but only the top tax rate. It would rise to 39.6% from 37%. Currently, that applies to taxable income above $523,600 for individuals and $628,300 for married couples. It isn’t clear when these tax changes would take effect.
What about tax rates on dividends and long-term capital gains?
They would increase more sharply for households making more than $1 million, from today’s 23.8% to 43.4%, including a 3.8% tax on investment income. According to the administration, that would affect 0.3% of households, where investment income is concentrated.
Currently, there is a 3.8% tax on investment income and an equivalent set of taxes on wages and self-employment income. The administration, citing holes in the law, says it would apply those taxes consistently to income over $400,000.
That could mean applying a 3.8% tax to the active income earned in businesses such as S corporations and partnerships. Mr. Biden used a common technique involving S corporations to avoid the 3.8% tax on much of his speech and book income after he left the vice presidency.
Would there be structural changes to how capital gains are taxed at death?
Yes, important ones. Currently, people who own appreciated assets owe capital-gains taxes when they sell. If they die, that entire gain goes untouched by the income tax. Their heirs then pay capital-gains taxes only if and when they sell and only on the gain since the original owner’s death.
By contrast, the Biden plan would treat a bequest other than a charitable donation as a sale for tax purposes. So an individual who bought a business for $2 million and dies when it is worth $9 million would have a $7 million capital gain on his final tax return. The Biden plan would offer a $1 million per-person exemption to reduce that taxable gain to $6 million. The existing exclusions of up to $500,000 for the principal residence of a married couple would also remain.
Why are they making that change?
That change would prevent some gains from escaping the income tax entirely. And without that change, the rate increase on capital gains would actually lose money. That’s because with a higher capital-gains rate—likely anything above 28%—asset holders would become more likely to hold on to their unrealized gains and wait to pass them to heirs rather than sell them.
The potential tax at death would change that calculation because there would be no significant tax benefit from holding assets until death. The estate tax, which Mr. Biden proposed to increase during his 2020 campaign, wouldn’t change under this plan. That’s based on someone’s total net worth, not the value of their unrealized gains alone.
What about carried interest and real estate?
Mr. Biden would tax the carried-interest income of private-equity managers and others as ordinary income instead of capital gains, though the capital-gains changes would already address much of that gap. In addition, he would limit what are known as like-kind exchanges, in which real-estate investors defer capital-gains taxes when they swap properties. That benefit would be capped at $500,000, and that would change how many commercial real-estate transactions are done.
What tax increases aren’t included?
Mr. Biden already proposed corporate tax increases for his infrastructure plan so those aren’t part of this plan.
During the 2020 campaign, he proposed other changes for individuals that the administration hasn’t attached to a particular plan. Those include higher payroll taxes on people making more than $400,000, the repeal of the 20% deduction for pass-through business income for top earners and changes to the estate tax.
What is Biden doing with the IRS?
The administration would add $80 billion to the IRS budget over the next decade to beef up enforcement and increase audits of high-income people. It would also require banks to provide the government with more information about the inflows and outflows from bank accounts, which the IRS could use to determine who it audits.
The administration estimates those changes would increase revenue by a net $700 billion, or about 10% of the owed taxes that are expected to go uncollected over the next decade.
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Source: WSJ – US News