Biden proposes tax hikes to pay for $1.8 trillion American Families Plan

President Joe Biden is calling on Congress to raise taxes on the wealthiest Americans in order to pay for programs designed to support families and children — including two years of free community college, paid family leave, efforts to make child care more affordable and universal preschool. 

Biden will outline the American Families Plan in his first address to a joint session of Congress on Wednesday night. The proposal — the second phase of his plan to overhaul the U.S. economy — calls for $1.8 trillion in spending and tax credits for American families and workers over 10 years. Biden unveiled the more than $2 trillion American Jobs Plan last month, which focused on infrastructure and clean energy. 

The latest proposal aims to boost labor force participation and strengthen the economy by supporting children and families. 

"These are about the highest value economic investments we can make for our future economic competitiveness," said a senior administration official. 

Here are some of the key proposals included in the American Families Plan: 

  • Provide universal pre-school for three-year-olds and four-year-olds 

  • Offer two years of free community college for all Americans, including Dreamers

  • Create national paid family and medical leave program 

  • Provide two years of subsidized tuition to eligible students to attend HBCUs and other institutions

  • Increase the maximum award size for Pell Grants 

  • Extend the recently expanded child tax credit until 2025 

  • Make ACA tax credits included in the American Rescue Plan permanent 

  • Make the Earned Income Tax Credit Expansion for childless workers permanent

  • Make the Child and Dependent Care Tax Credit (CDCTC) expansion permanent 

  • Ensure low- and middle-income families pay no more than 7% of income on child care for kids under 5 years old.

  • Increase top individual income tax rate to 39.6% from 37% 

  • Tax capital gains as regular income (a 39.6% rate) for households making more than $1 million  

  • Eliminate "step up in basis" for gains over $1 million, with protections for family-owned businesses and farms given to heirs who continue to run the business.  

  • Close carried interest loophole

The senior official said the plan will produce a "larger, more productive and healthier workforce in the years ahead." 

Paid family leave

Biden is calling for a national paid family and medical leave program that will ensure workers get partial wage replacement to take time off for situations including a new child, a seriously sick loved one or a serious illness. 

By the 10th year of the program, it would guarantee 12 weeks of leave. The program would provide workers up to $4,000 a month with a minimum of two-thirds of the average weekly wages replaced, rising to 80% for the lowest wage workers. 

The Biden administration estimates it will cost $225 billion over a decade. 

Expanded Child Tax Credit, Universal Pre-K and Child Care

The $1.9 trillion American Rescue Plan signed into law earlier this year increased the child tax credit to $3,000 credit per child ($3,600 for young children), made it fully refundable and allowed families to receive payments monthly. The changes are set to expire after a year, but Biden has proposed extending the expansion through 2025 and making the credit permanently fully refundable.

Democrats in Congress, including House Ways and Means Committee Chairman Rep. Richard Neal (D.,Mass.) have been pushing Biden to go further and make the expanded child tax credit permanent. 

The American Families Plan calls for a $225 billion investment in making child care more affordable. The proposal would make sure families earning up to 1.5 times their state median income will pay no more than 7% of their income for all children under age five. 

The plan would establish a national partnership with states to offer free, preschool to three- and four-year-olds. The administration says the $200 billion investment would benefit 5 million children and save the average family $13,000 when fully implemented. 

”A dollar invested in high quality, early childhood programs results in more than $7 in benefits — including increased wages, improved health, reduced crime," said a senior administration official when briefing reporters. 

Tax reform

Senior administration officials expect the American Families Plan would be fully paid for in 15 years, when combined with corporate tax changes included in the American Jobs Plan.

The American Jobs Plan would roughly double the tax rate on capital gains for high earners, eliminate the carried interest loophole, end "step up in basis," and raise the top income tax rate to 39.6%. Republicans cut the tax rate to 37% in 2017. 

The Biden administration said the tax hike on capital gains will only impact about 0.3% of American taxpayers while increasing the highest individual income tax rate would impact the top 1% of taxpayers. The proposal also calls for increased IRS enforcement of the wealthiest Americans. 

"In America today, taxpayers are more likely to be audited if they live in the Mississippi Delta than if they live on Park Avenue. The President's plan would change this and really get at a fundamental element of fairness in the tax code," said a senior administration official. 

Biden has already proposed raising the corporate tax rate to 28%, but Republicans have rejected the idea of raising taxes in order to pay for Biden's proposals. They also would rather Congress focus on physical infrastructure projects, like roads, bridges, airports and broadband access — and debate the revamp of social programs later.

Senate Republicans outlined their own $568 billion infrastructure plan last week and suggested paying for the plan with user fees and unused COVID-19 relief funding. The White House has opposed user fees, saying the burden should be on the wealthiest Americans and corporations "who can afford to pay more." 

Biden plans to invite Republicans to the White House in the coming days to negotiate. Biden has said he's willing to compromise and would like an infrastructure plan to be bipartisan, but Democrats may move to pass a bill through reconciliation if they can't find common ground. 

Democrats in the Senate can not afford to lose a single vote in the evenly divided Senate, which means moderate senators like Sen. Joe Manchin (D., W. Va.) and Sen. Kyrsten Sinema (D., Ariz.) could make passing some of Biden's priorities difficult. 

Jessica Smith is chief political correspondent for Yahoo Finance, based in Washington, D.C. Follow her on Twitter at @JessicaASmith8.

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