The hidden costs of the American Families Plan

Stuck behind other Biden administration priorities like the controversial infrastructure proposal, and facing stiff special interest opposition, President Joe Biden’s American Families Plan seems unlikely to emerge from the current Congress in anything like its current form. Nonetheless, it is worth exploring the structure and objectives of the plan.

Unlike the latest COVID-19 stimulus measure passed earlier this year, which added trillions to the federal deficit, the Biden administration has identified revenues to offset the American Families Plan’s large price tag of $1.8 trillion. By presenting the plan as allegedly deficit-neutral, Biden has unintentionally but effectively rebuked the left’s Modern Monetary Theory camp which has tried to extinguish any remaining concerns policymakers might have about large budget deficits. While low interest rates may limit the damage of budget deficits today, continuing to grow the national debt at a rate faster than Gross Domestic Product (GDP) growth is unsustainable over the long run. A plan focused on the welfare of the youngest Americans by creating universal pre-kindergarten and other programs should not also saddle their futures with an excessive public debt burden.

The spending side of Biden’s plan includes multiple proposals intended to lower the cost of raising children. One argument for these measures revolves around the nation’s declining birth rates. But some European countries that have implemented similar “family-friendly” policies, like paid family leave, continue to experience low birth rates.

Although the refundable child tax credits included in the plan may enjoy at least a measure of cross-spectrum political support, other proposals are more controversial. Of special concern is the idea of adding two years of universal pre-kindergarten to public education.

If the plan were to pass, children as young as three would enter the public education system to be instructed by highly-credentialed, unionized teachers. But many three-year-olds are not fully toilet trained and some are still breastfeeding. Americans would rightly wonder whether an early childhood education specialist, perhaps holding a master’s degree, would want to change diapers and if his or her union would even permit him or her to do so. It is also far from clear that this new educational entitlement would meaningfully improve educational outcomes. A 2018 Brookings Institution study found that pre-school attendance had little impact on fourth-grade standardized test scores.

From a fiscal standpoint, two years of pre-k could result in substantial sticker shock for taxpayers and all levels of government. The money allocated to this portion of the American Families Plan ($200 billion over 10 years) is just “starter capital” to help school districts launch early education programs. If public pre-school were to become the default option for the 8 million three- and four-year-olds in the country, and if per pupil costs were similar to that of the K-12 system, we could be spending upwards of $100 billion annually on this new program. The costs beyond the plan’s 10-year budget window could easily balloon, leaving school districts, states, and the federal government to figure out how to keep paying the ongoing bills.

Other components of the American Families Plan that could become more expensive than advertised include the proposed childcare subsidies and free community college. The plan includes a ceiling on out-of-pocket childcare costs, which should increase the demand for daycare services. Given the strenuous nature of childcare work, it may be necessary for providers to sharply increase today’s low compensation levels to attract a sufficient number of employees, passing those cost increases on to taxpayers. Meanwhile, higher education institutions, such as community colleges, are vulnerable to cost escalation (above the rate of inflation) due to administrative bloat.

If Congress wants to unwisely spend more on childcare, early childhood schooling and postsecondary education, it should at least implement programs that have more predictable costs. Providing parents and recent high school graduates with vouchers, on a means-tested basis, would be less expensive over the long run than the new entitlements in President Biden’s plan.

And there is also the larger question of whether taxpayers should be covering more of the costs of child-rearing and education at all. With some progressives arguing that childbearing exacerbates climate change, one wonders why they would want to offer incentives to bring more kids into the world. To the extent that the U.S. is facing a problem with population aging, we could address this issue in a more sustainable way by liberalizing immigration laws.

Biden’s efforts to pay for parts of the plan currently includes a 2.6 percent marginal tax increase on high income earners and a larger tax increase on capital gains and investment income. The largest anticipated revenue source though is greater tax compliance as a result of stepped-up Internal Revenue Service enforcement.

While it may seem reasonable to make more of an effort to root out tax evasion, reenergizing the IRS comes with serious downsides. Increasing the IRS’ ability to conduct audits, confiscate property and even jail those found to have evaded taxes creates a variety of perverse incentives and would create stress for many taxpayers — especially individuals who are not wealthy and may have made honest mistakes while doing their own taxes and trying to comply with the nation’s complex tax laws.

One way to improve tax compliance without confrontational audit procedures would be to allow taxpayers to opt into a simple system in which their tax liability is computed for them and, by choosing this option, the IRS guarantees they are insulated from the risk of being audited. Since the IRS already receives information on wage, self-employment, and investment income directly, it should be able to determine the basic amount most taxpayers owe and could adjust withholding rates or determine the amount due at tax time.

After years of federal debt and deficits, perhaps the American Families Plan could be commended for at least attempting to appear to be self-funded during a 10-year budget window. But taxpayers and lawmakers should note that the fine print and lasting nature of the programs mean the bill would likely significantly add to the deficit over the longer term and spend billions of taxpayer dollars on highly debatable policy ideas and objectives.

Marc Joffe is a policy analyst at Reason Foundation, former senior director at Moody’s Analytics, and author of the study “Unfinished Business: Despite Dodd-Frank, Credit Rating Agencies Remain the Financial System’s Weakest Link.”