With the American Rescue Plan signed into legislation, another wave of COVID-19 relief and economic stimulus is about to hit to the economy.
The program provides funding for:
- Vaccination efforts
- Funding for school reopening
- Extended unemployment benefits
- Aid for those struggling to pay rent or access food
- Raising the Child Tax Credit and Earned Income Tax Credit
- Childcare assistance and a reduction in insurance premiums for qualifying workers
The program also provides help for public transportation and municipalities. Eligible filers will receive either an electronic payment or check/debit card with relief funds—the amount received is dependent on household size and income.
What Does This Mean for the Economy?
In the short-term, this is a significant injection of dollars—both towards consumers and towards efforts that could hasten the pace of reopening. Some observers (including Stembrook) have expressed concern about the level of government debt after the combined 2020 and 2021 economic stimulus efforts.
Current debt-to-GDP (or gross domestic product, a measure of economic output) is about 100%, which is very high. Of course, the impact of the pandemic has also been extreme. Unemployment remains above 10% when including workers who have grown discouraged with their job search or who are underemployed, and we have seen a large number of people exiting the workforce.
In other words, there is an argument that stimulus which fosters reopening can help to gear the economy back into a stronger place.
Going forward, we think it makes sense to look at the trajectory of federal deficits. To that end, the White House is reportedly planning follow-on legislation to the ARP that could help pay for relief efforts to date.
Possible Tax Proposals Coming Soon
If passed, the follow-on plan would generate the first major hike in federal taxes since 1993. Most of the proposals reflect President Biden’s 2020 campaign positions, including:
- Raising the income tax rate for individuals earning over $400,000
- Raising the capital gains tax rate for those earning over $1 million annually
- Raising the corporate tax rate to 28%
- Expanding the estate tax
- Reducing the preferential treatment for pass-through entities like LLCs and Partnerships
A tax plan of this scope could meet with heated resistance in Congress, so at this point we believe it makes most sense to take a wait-and-see posture to how these negotiations develop.
That said, issues like estate planning should, in our view, almost always remain top of mind given that estate tax exemptions change relatively often. The same could be said for tax management of investment accounts—regardless of the explicit tax level, the ongoing habit of monitoring and optimizing tax burdens is simply an important part of prudent investment.
We’ll be watching how these legislative moves evolve, but in the meantime if you have any questions please feel free to reach out to us anytime. We’d love to have a personal conversation with you about your questions.