An Explainer on the American Families Plan’s Pay-fors (with Charts)

How the White House proposes we pay for massive investments in child care, education, paid family leave, and more.

Since taking office, President Joe Biden has pitched a suite of big economic plans. His most recent one, the American Families Plan, would cost about $1.8 trillion over the next decade. More specifically, the AFP would include $1 trillion in new investments and another $800 billion in tax cuts for chunks of the U.S. populace.

Naturally there’s debate about this piece of legislation, its price tag, and the fact that it’s the third huge economic package from White House this year. I will cut right to the chase and say we need something as ambitious as this to pass.

(This position should be no surprise, given this piece on our economy, this one on the minimum wage, and this one on SNAP… and this piece on climate change, this one on the American Rescue Plan, and this one on public banks.)

I’m more concerned with talks on how this plan is funded since there have been some bad faith arguments out there. Chiefly, right-leaning pundits and pols have latched onto this plan’s proposed tax changes. But they aren’t having an honest discussion about the exact details and instead are framing this as simply “any tax hike = bad, ergo this bad 2.”

To be clear, I’m frustrated with that framing and those who choose to use or repeat it. So let’s look at what the AFP includes and talk about how it would be funded in non-expert terms so you can explain why a government that supports its constituents is a good thing and I can rest easy.

The American Families Plan in 150 words

The AFP is focused on education, child care, and supports for families. (Wait, like the NAME of the plan!) Here are the details, in order of how they’re presented in the AFP fact sheet:

  • A total of $506 billion in education investments, like $200 billion for universal pre-K and $109 billion for free two-year community college.
  • $225 billion to help cover the cost of child care, improve child care services, and boost child care workers’ compensation.
  • $225 billion to create a national paid family and medical leave program.
  • $45 billion to expand access to nutrition, like through SNAP.
  • $2 billion to modernize our states’ unemployment insurance systems.
  • $200 billion to make the ACA expansion included in the previous stimulus package permanent.
  • Undetermined amounts toward expanding the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Tax Credit. (Estimating these would total around $600 billion.)

Note: HBCUs are historically black colleges and universities, TCUs are tribal colleges and universities, and MSIs are minority serving institutions.

The AFP Pay-fors

So the plan includes commonsense, why-don’t-we-already-have-these policies that would save us a ton of grief, fulfill our obligations to our communities, and are prevalent in other developer countries. While there are some bizarre (stupid) “dunks” on these policies by those on the right, the real sticking point in the debate involves how it would be funded. (The industry term for funding sources is “pay-fors.”)

The AFP’s pay-fors are tax-based and focused entirely on wealthy Americans. Here’s what the plan would do if enacted as proposed:

  • Increase income tax rate for the top tax bracket (the wealthiest U.S. taxpayers).
  • Close tax breaks and loopholes attached to capital gains.
  • Boost IRS funding to rein in tax evasion by the wealthy.

We’re going to look at each of these in a second, but you should notice something: None of these mean higher taxes for the majority of Americans.

Tax increase for the top income bracket

This pay-for is a simple one. The White House wants to rollback part of the changes made by the Tax Cut and Jobs Act of 2017 (TCJA).

At the time of its passage, the TCJA was promoted as a win for all Americans that would “pay for itself.”

It did not do that, but instead increased the deficit. It was also more heavily tailored to help wealthy Americans and corporations lower or more easily avoid paying taxes, and it included a provision that would undo the tax cuts for low- and medium-income taxpayers after a few years.

The 2017 tax cuts lowered the rate for the top income bracket from 39.6% to 37%. This bracket includes single filers making over $518,000 a year—less than 1% of all Americans. The AFP would reverse this tax cut.

I should note here that more recent reporting found the White House has broadened this a bit to include individuals making $452,700 and married couples earning more than $509,300. This would still be less than 1% of Americans.

Can’t decide if the current and proposed rates are too low or too high? Take a peak at how the income tax rate for the highest earners has changed over time:

An interactive and shareable version is available here.

This post isn’t meant to determine what the “correct rate” should be. Rather, I want to point out that the wealthiest Americans historically were taxed way more in the past than they are now. This was important in our national mobilization during crises like the Great Depression and both world wars. It’s a little absurd to argue this pay-for is unreasonable.

Capital Gains Tax Reform

Biden’s AFP would also make several changes to the way the federal government taxes capital gains. (Capital gains are the money made off selling some type of asset, like stocks or real estate.) This includes bumping the tax on long-term capital gains from the current 20% to 39.6% for those making over $1 million each year, “equalizing the rate” with the proposed income tax increase for those in the top tax bracket.

Additionally, the government would close the “stepped-up basis” loophole on inheritances. I’m a bit hazy on this, but in simplest terms if a person dies and passes on an asset to an heir who sells it, the capital gains tax on the profit would reflect the asset’s value when it was inherited, rather than when it was first acquired by the deceased. Here’s an example I’m borrowing from The Balance:

For instance, if you purchased a house in 1981 for $100,000 and kept it in excellent condition, it could now be worth nearly $300,000 based on inflation alone. If it has appreciated, it might have a fair market value of $350,000. If your child receives the property through your will and sells it for $400,000, there would be a profit of $300,000 if not adjusted for inflation or current market value. After the step-up in basis, there would have only been $50,000 made on the sale, significantly reducing the amount of profit, and therefore capital gains taxes.

This has helped wealthy Americans avoid paying taxes on some of their most valuable assets and sources of income. Biden’s plan would change this by enforce]ing the tax on capital gains worth $1 million with important exceptions. This would not affect assets donated to charity; heirs receiving farms or family-owned businesses would be exempt if they choose to operate/take over the inheritance.

Here’s the full list of proposed changes:

Altogether, these would make significant changes to how wealthy Americans are taxed. Although they pay higher tax rates on their wages, they are much more likely to have income from alternate sources (like capital gains and dividends) that aren’t taxed to the same degree. The proposed reforms would mean they pay something more similar to what their less wealthy neighbors pay, to some extent.

Boost to IRS Funding

I’m most interested in this pay-for, the proposed boost to IRS funding. As the Congressional Budget Office shared last July, the service has steadily declined in both funding and its number of employees over the last 10 years.

An interactive and shareable version is available here. A chart demonstrating IRS workforce numbers can be found here.

This isn’t because the IRS has grown more efficient and therefore requires fewer resources and people. Instead, it’s meant fewer examinations of tax filings and a shrinking amount of taxes that said should be paid.

An interactive and shareable version is available here.

Clearly this trend plays favorites. Wealthier Americans (plus corporations) have benefitted far more greatly from this than those with lower incomes, not just in the decreasing likelihood they’ll be examined by the IRS, but also the decreasing total amount of money the IRS has said they owe after audits.

An interactive and shareable version is available here.

To recap so far: IRS funding and manpower has significantly decreased. This has meant less enforcement and less money that the IRS said should be paid by audited taxpayers.

There’s one other big thing to add to this mess: the money owed but unpaid in taxes, a large number that has risen each year. It’s called the “tax gap,” and in 2019 alone that amount was estimated to be over $500 billion. Economics and finance experts Natasha Sarin and Larry Summers (that Larry Summers) believe that this unpaid amount would total $7.5 trillion between 2020 and 2029 if things continue this way.

That is a stupidly large sum of money, stupid because this is money that would otherwise be collected if the IRS was up to snuff. This point from the Brookings Institute’s William G. Gale and Aaron Krupkin really gets at why this status quo sucks: “Along with the obvious problem of the underfunding of the government, tax evasion raises fundamental questions about the fairness of the tax system.

With less attention from the IRS, tax evasion is much easier for those with the means to do it. That’s why the AFP includes an $80 billion budget boost to the IRS, which is significant when considering appropriations for the service totaled $140 billion from 2008 t0 2018. By empowering the service to better enforce the tax system on high earners, the Biden admin estimates $700 billion could be raised over a decade.

Even if the AFP is shelved, this specific proposal is such a no-brainer that Congress needs to do this anyway. There are more granular data on this problem to be considered, which you can find in the CBO’s report. The IRS’ 2019 data book is available here.

A lot to digest, but here’s the gist: The AFP would introduce several key tax reforms and changes that would simultaneously pay for badly needed public services and ensure the richest Americans would be taxed more fairly. This would mean we meet our obligations to each other and have a tax system that better addresses the frustrations of a growing American majority who believes the wealthy and corporations don’t pay what they should.

Thanks for reading! I’m in the process of revamping my site to include a policy dictionary/library page. What concepts would you want to see summarized in 300 words or less? Let me know.

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