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Stimulus Spikes and Tax Hikes

In April, President Biden delivered a clear message to wealthy Americans: “Your taxes will be raised.” As expected, business lobbyists and conservative politicians in the United States have voiced strong opposition to tax increases, claiming them to be unfair towards businesses and hard-working Americans. However, their rhetoric surrounding the possible changes in tax policy clouds crucial facts of the proposed legislation. The potential benefits of such legislation can be illuminated by the successes of the U.S. government’s pandemic-related stimulus, which has revealed the extent to which government spending can significantly reduce poverty. Biden’s proposals aim to provide the government with the necessary resources to systematically assist lower-class Americans.

Reminiscent of the history of taxation in America, Biden’s suggested tax policy would not raise taxes for America’s upper class to unusually high levels. In the years following World War II, corporations were accustomed to sharing half of their profits with the U.S. government. In recent decades, however, these rates have decreased significantly, which has disproportionately benefited wealthy shareholders and executives. Not only did Bush-era tax reforms take roughly $1.3 trillion in projected revenue out of the U.S. Treasury, but his laws also helped turn a federal budget surplus under President Clinton into a burgeoning deficit. In the following years, many Republicans used this widening deficit to justify their calls for cuts to America’s social safety net, such as Medicare, Medicaid, and Social Security.

On September 23rd, an analysis published by White House economists revealed the staggering disparity between the tax rate average Americans face and the wealthiest pay in reality. The 400 most affluent households in the U.S.—with net worths ranging from $2.1 billion to $160 billion—pay an effective federal income tax rate of about 8% per year on average, per data from the Internal Revenue Service. Warren Buffet has pointed out how the U.S. tax code has disproportionately benefited high-net-worth individuals such as himself; the prominent investor and sixth wealthiest man in the world pays taxes at a significantly lower rate proportionate to his income than his secretary does on her salary.

Opposition to Biden’s tax proposals from pro-business groups holds little merit as history suggests that higher tax rates on the wealthy do not stifle economic growth. Instead, the proposed policies mainly increase the relative tax burden that the wealthiest Americans pay, rather than small- or medium-sized businesses. In fact, in the 1990s, when tax rates were as high as Biden’s current proposal, the economy thrived. Economic growth also proliferated in the years following World War II, when federal income tax rates exceeded 50%.

Source: NYT

Fast-forwarding to today, as Biden aims to shift towards a more equitable society, extra state funds are vital to implement his costly agenda, which entails an expansion of many government programs. While his plans are unlikely to significantly affect the quality of life for the upper class, those in dire need of the state’s assistance would likely experience noticeable improvements to their standard of living. To accomplish those goals, Biden seeks to unify congressional Democrats to support a $1.85 trillion bill to expand federal efforts that strengthen the social safety net and other government services by expanding educational access, lessening the burden of child care services, and reducing poverty. Biden’s preceding bill, the American Rescue Plan—enacted in early March 2021—issued a third round of pandemic relief to eligible individuals.

Near the end of 2020, when the American economic recovery seemed somewhat stagnant, government-provided pandemic aid arrived at a critical moment to prevent an economic disaster and possibly paved the way for a progressive rebound for the working class. Results of additional spending have already shown benefits to lower-class Americans; considerable increases in government aid such as pandemic-related stimulus programs—supported by Democrats and Republicans alike—cut poverty rates nearly in half from pre-pandemic levels and also to the lowest level on record. While poverty has mainly fallen among children, its contraction among various demographics is remarkably expansive as rates have dropped among Whites, Blacks, Latinos, and Asian Americans and residents of every age group and every state. According to Urban Institute, an economic think tank, child poverty rates in America declined sharply from 16% to 6% in the last three years.

Furthermore, an analysis by the Census Bureau on reduced hardships under the two latest rounds of stimulus aid—totaling around $2,000 per person—shows that they significantly improved the ability to afford food and fund household bills. A New York Times investigation also found that direct financial support to the poorest households also significantly lessened anxiety and depression. For instance, reports of food shortages and economic instability fell a striking 42% and 43% respectively among households with children from January through April of 2021. Among all families, frequent stress and depression also declined by more than 20%.

Low-income families often highlight the increased stress that economic uncertainty brings. At the start of 2021, when sluggish economic growth and rising layoffs threatened access to basic needs like food and shelter, nearly 73% of households with children reported feeling anxious at least several days a week. A study by the American Psychological Association points out that increased stress puts Americans at higher risk for various health hazards, significantly reducing life expectancy. From an economic view, the resulting increase in employee turnover, medical costs, and diminished productivity costs the U.S. about $300 billion every year. Fortunately, mental health has improved since early 2021 due to several reasons, including increased access to vaccines and socialization resulting from the reopening of businesses and schools. Still, stress has had a debilitating effect on low-income households in recent decades, and recipients of stimulus payments often describe them as emotional relief.

Yet, analysts have long debated the merits of direct cash stimulus compared to targeted assistance, such as housing subsidies or food stamps. Stimulus checks are flexibly used depending on the recipient’s needs, which can vary significantly given that the stimulus allocated as much to households with yearly incomes above $100,000 as they did to those that make under $30,000. Thus, to no surprise, an economic tracker observed a vast chasm between post-stimulus spending habits of Americans at different income levels eligible for the checks, with households making over $75,000 increasing their spending by 0.2% the week following the allocation of stimulus checks, compared to nearly an 8% rise for families making below $46,000. For higher-earning Americans, the economy suffered under the effects of Ricardian equivalence as they preferred to save or invest their cash under the presupposition of larger tax payments in the future to offset the government’s deficit. Consequently, the aforementioned data revealed that $200 billion of additional government expenditure only led to about $15 billion of additional consumer spending. Hence, narrowly targeting fiscal policy such as stimulus checks to serve lower- and middle-income households is likely to yield greater economic benefits.

Source: Opportunity Insights

As much as stimulus supporters have focused on the positive aspects of increased spending to lift the economy out of a crisis, the resulting debt is disturbing to future generations. The U.S. federal budget deficit reached $2.8 trillion for 2021, the second-largest on record, but an improvement from the prior year due to bolstered tax revenues from a pandemic-recovering economy. The Biden administration also faces the critical deadline in early December to raise the federal government’s statutory debt limit, for which Republicans and Democrats alike oppose how additional spending would be fiscally responsible. Still, Treasury Secretary Yellen (D) has argued that because of historically low interest rates, the U.S. could afford to take on additional debt to finance new infrastructure investments that would promote the nation’s “long-run fiscal and economic health.” However, given that the U.S. government does not have perpetual access to such low interest rates, higher taxes must be levied in the future to allow for a sustainable increase in spending to boost the economy when necessary.

Reflecting on the United States’ past and current efforts to increase taxes and spending to enhance government safety nets, data indicates that lower-income households have more to gain than wealthier Americans stand to lose from the sort of tax reform that the Biden administration hopes to enact. Findings from the earlier rounds of direct stimulus address the vast differences in economic gains regarding stimulus distribution to a wide range of Americans based on household income. A fairer tax system for Americans would foster a more equal society that benefits all.


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