Page 14 - April ISQ 2021

APRIL 2021

$14,000 Windfall
Under the American Rescue Plan, a family of four with household income under $150,000
could receive as much as $14,000 via individual stimulus checks and the child tax credit.

these programs become more permanent and whether these initial increase followed by a multi-year phase-in to a higher
efforts are establishing new economic tools that government rate in the 28% range, depending on the course of the economic
will consistently access. The size of the overall household aid, recovery. During the debate, we are likely to see an effort to
especially with monthly payments of the child tax credit and reform the current cap on the state and local tax (SALT) deduc-
unemployment support, has similarities to calls for the estab- tion, focused on reducing the financial incentive to move from
lishment of a universal basic income. a high-tax to low-tax state. However, this would likely go hand
in hand with a return to the top individual rate of 39.6% for the
The key question is whether this is a temporary phenomenon, highest income earners – reducing the benefit of any state/local
or if this is the beginning stage of a new normal for the US tax deduction adjustments for higher income filers. In DC, we
economy. Once a benefit has been created through legislation, typically advise that major policy changes take longer than
it is very difficult to reverse. Crisis response programs, including expected. Given the current uncertain economic situation, we
direct payments and the more recently formulated monthly view next year as the most likely implementation of these
advances of the child tax credit, see some level of bipartisan changes (with passage later this year), but will be watching to
support among lawmakers. This raises the likelihood that they see if anything is implemented for 2021.
could become more permanent fixtures of the economy. They
could also be reversed depending on future Congressional
majorities – adding volatility tied to election results. Current political dynamics have placed
domestic policy at the forefront of the
THE RECOVERY PACKAGE: A BROADER DEFINITION Biden administration’s first term agenda.
OF INFRASTRUCTURE SPENDING
Following the $1.9 trillion American Rescue Plan, we anticipate DOMESTIC POLICY AS FOREIGN POLICY
the focus to pivot toward a recovery package, which has largely Finally, the Biden administration’s focus on domestic invest-
been referred to as an infrastructure package, for which we cur- ment is also underscored by the approach to foreign policy and
rently see appetites among Democrats in the $3 trillion range trade relations. The administration’s recently outlined national
(bond market reaction/inflation metrics will be watched closely security strategy emphasises that “distinctions between
and will influence the final price tag). Importantly, while it will domestic and foreign policy have simply fallen away.” Keeping
be referred to as an ‘infrastructure bill,’ it is likely to be much with this theme, we expect the Biden administration to pursue
more than a traditional ‘roads and bridges’ package. Demo- an agenda of enhanced domestic manufacturing as a strategy
crats view ‘infrastructure’ in much broader terms, including: closely tied to overall economic and national security, which
modernisation of the economy, tackling climate change, elevates the issue in a bipartisan manner for this year.
addressing racial (first time homebuyer tax credits/down pay-
ment assistance) and economic inequalities (e.g., universal We have already seen the first steps taken in this direction, with
broadband), and investments in the workforce (e.g., paid sick an early push by the Biden administration to enhance ‘Buy
leave). Democrats are united in advancing a recovery bill American’ procurement provisions in federal spending to invest
addressing infrastructure priorities, and believe that unless in domestic producers and suppliers. We expect this to be a
they deliver, they will suffer in the midterm elections. These longer-term theme of economic policy, as it is closely tied in the
dynamics set up a ‘generational opportunity’ to enact major eyes of policymakers to the ability of the US to remain compet-
planks of their agenda. itive with China. Domestic manufacturing capability in
next-generation technologies such as 5G, artificial intelligence,
As typical with DC conversations about infrastructure spending, quantum computing, and semiconductors will also be a key
look for revenue raising measures to be floated as funding area of focus with federal investment and incentives directed
mechanisms. We expect the majority of any potential tax toward technology supply chain reshoring. We expect this shift
changes to be targeted at the corporate tax rate and at the in economic policy to be a primary driver in Biden’s foreign
highest income earners. Other conversations may involve a policy, guiding relations with traditional allies, competitors,
financial transactions or wealth tax, but we view these as less and adversaries.
likely to advance. On the corporate rate, we may see a smaller

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