President Biden's Speech: Reform and Stimulus
This week President Biden delivers his first almost State of the Union address focusing on his first 100 days accomplishments and proposing his next steps. Going “Big” seems to be the overriding assessment of his proposals. A new, much larger role for government is a critical part of the changes to the American political landscape.
Link to video: " target="_blank">https://www.youtube.com/watch?v=rgLfDD9hbx8
Reform and Stimulus
$6 trillion proposed, $2 trillion passed, $4 trillion to go. Federal government policy has gone through cyclical changes since the creation of the United States. State rights vs federal supremacy have been a tension in the American government since our establishment. In addition, taxes have been an ongoing issue since the beginning. In fact, a tax revolt was one of the triggers for the American revolution.
Size and role of the Federal government and US tax policy
- 1929: Starting with the great depression in 1929, the Federal government as well as voters, embraced a much larger role for government with the New Deal and Social Security.
- WWII: The expanded federal role was necessary during WWII and continued after the end of the War with the Civil Rights Act, Voting Rights, and Medicare, and very high marginal tax rates. Ronald Regan ended that trend, accusing the government of being the problem. "Government is not the solution to our problem, government is the problem."
- Link to video to speech: https://www.reaganfoundation.org/ronald-reagan/reagan-quotes-speeches/inaugural-address-2/
- 1990s+: This continued through the Democratic President Bill Clinton who compromised with a Republican Congress around welfare reform and other fiscal issues including balancing the Federal budget. Even former President Obama had his fiscal ambitions reduced when the economy was cauterized by the financial meltdown by a Republican focus on limiting debt and deficits. Former President Trump cut government discretionary spending but lowered taxes even more resulting in record deficits and multiplying federal government debt.
- A Republican Congress overlapped increasing deficits and debts during the Trump administration.
- Current: President Biden is about to propose even more spending to address childhood poverty, income inequality, preschool education, access to education, and substantial investment in traditional infrastructure. All very serious, current challenges.
Proposal to pay for this reform
Biden proposes substantial tax increases that would extend beyond the life of the spending-almost twice as long. Tax increase proposals include increasing capital gains taxes for income over $1M and marginal tax rate increases for income higher than $400,000. Also, an increase in corporate tax rates, reduced in 2017 to 21% back up to 28%-previous to 2017 corporate tax rates capped at 35%.
Biden’s follow-up proposal, outlined this week, emphasizes support and financial help for families. In fact, it is named the American Family Plan. The challenges in passing the plan are enormous. If, by small chance, it passes it would probably be through the budget reconciliation process which means all it needs is 50 votes. But that vote total is in no way guaranteed.
Market Reaction
It is hard to assess the impact on markets. There is a fear that any increase in taxes will impact the economy and the stock market negatively. The $6 trillion spending package is causing concern about increased inflation and of course, the potential enormous increase in the deficit and debt. One fact is that almost 75% of stock ownership is in retirement plans where capital gains do not exist, so this does not result in reasons to pre-maturely sell shares in a retirement account. Capital gains apply on interest earned and sales of stock shares in taxable accounts - brokerage or bank savings - with earnings that generating 1099 taxable to the account owner.
A bigger impact would be on estate planning and the passing of generational wealth limitations or the elimination of the ‘step-up in cost basis’ on assets passed to heirs at death. These tax and spending changes will have an impact undoubtedly on the planning landscape for clients leaving a legacy. With legislative changes come “unintended consequences.” We will have to wait and see what happens and adjust accordingly.
We’re emerging from a second surge of the virus and an increasing number of Americans are on their way to being fully vaccinated. It’s hard to watch things unfold differently across the globe. Monique’s daughter’s preschool is fundraising for Covid-19 relief as the virus has taken hold in India. Classmates and members of the preschool community with family in India highlight the urgency.
This website is informational only and does not constitute investment advice or a solicitation. Investments and investment strategies recommended in this blog may not be suitable for all investors. SAS Financial Advisors, LLC and its members may hold positions in the securities mentioned within this newsletter.
