In March, President Joe Biden released his American Jobs Plan (AJP), which proposes $2.3 trillion in new federal spending on various forms of public infrastructure, research and development, workforce training, affordable housing, and caregiving.
According to Biden, the proposals in the AJP will create millions of jobs, rebuild the country’s infrastructure, and position the United States to out-compete China.
The Penn Wharton Budget Model (PWBM) recently released its detailed analysis of the budgetary and economic effects of the AJP, and projects the plan includes $2.7 trillion in spending and $2.1 trillion in revenue dollars over the 10-year budget window from 2022-31.
At the same time, the proposal’s business tax provisions continue past the budget window, decreasing government debt by 6.4% and decreasing GDP by 0.8% in 2050, relative to current law.
According to the PWBM, the spending provisions of the AJP, in absence of any tax increases, would increase government debt by 4.72% and decrease GDP by 0.33% in 2050, as the crowding out of investment due to larger government deficits outweighs productivity boosts from the new public investments.
“The spending provisions include money for projects such as bridges and roads, as well as education and training, housing transfers, and increased access to long-term care,” says Marcos Dinerstein, economist for the PWBM. “Public investments in projects like bridges, roads, and education make workers more efficient, which has positive macroeconomic effects. Transfers such as housing and long-term care allowances tend to make people work less, since they get extra income from a nonwork source.”
In a scenario where these spending provisions are financed by issuing more debt, Dinerstein explains, this result is higher interest rates, which reduces investment by firms and would lead to lower job creation and a decrease in wages.
The tax provisions proposed in the AJP, in the absence of any new spending, would decrease government debt by 11.16% in 2050. Despite the reduction in public debt, Dinerstein says the AJP’s tax provisions discourage business investment and thus reduce GDP by 0.49% in 2050.
“On the tax side, the AJP mostly affects businesses and corporations,” says Dinerstein. “The plan stipulates an increase of the corporate tax rate to 28%, raises the tax on foreign profits, establishes a minimum tax on corporate book income, and eliminates tax preferences for fossil fuels. These changes increase the tax rate faced by business considerably, which reduces the amount of investment they are willing to do. This result happens, despite the fact that the extra revenue lowers the public debt, ameliorating the crowding out effect explained above. As a result of the lower investment, there would be less jobs created and lower wages.”
Considered together, the tax and spending provisions of the AJP would increase government debt by 1.7% by 2031 but decrease government debt by 6.4% by 2050. The AJP ends up decreasing GDP by 0.8% in 2050.
“The increase in public investment has a positive productivity effect on both workers and capital,” Dinerstein adds. “This effect, however, is offset by the negative impact of tax increases on investment. Lower investment coupled with new transfers to qualifying households lower the amount of hours worked by people in the first years. Wages are also impacted negatively due to lower investment.”
Ultimately, the PWBM predicts that the size of the economy would shrink as a result of these combined proposals.