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The Biden Administration

5 Ways to Support Economic Recovery in 2021

Here are five actions the Biden administration can take to chart a different course — one that accelerates the recovery and builds a more sustainable future.

A sign on a business tells customers of closure due to the coronavirus pandemic in New York City on May 27, 2020. (Cindy Ord/Getty Images)

In 2020, the pandemic disrupted lives, businesses, and markets, creating a global economic slowdown. The United States witnessed the steepest drop in GDP since the Great Depression, a decline of 9.1 percent in Q2 2020. The unemployment rate rose to 13 percent (the highest level on record since 1948) with women, people of color, and those with lower levels of education experiencing disproportionately higher levels of unemployment. States and local government budgets felt the impact of the health and economic crises as demands for services increased, driven in part by the newly unemployed turning to public assistance for food and health care. In addition, tax revenue across states declined, putting an immediate strain on governments’ ability to provide core services such as education and public safety. 

Research on the fiscal response to the Great Recession concluded that while the federal interventions were helpful, in retrospect, those efforts were too little and ended too soon, leading to a slow economic recovery. Here are five actions the Biden administration can take to chart a different course — one that accelerates the recovery and builds a more sustainable future.

#1 Pass a stimulus bill in 2021

Federal Reserve Chairman Jerome Powell has noted that when it comes to fiscal policy, the risks of doing too little to support the economy are greater than the problems associated with trying to do too much. The bills passed to date were relief bills — focused on dampening the economic impact of COVID-19 by supporting families that are abiding by public health guidelines and experiencing reduced hours or job loss. Stimulus legislation, on the other hand, would be geared to policies designed to generate economic activity. Additional federal resources could assist state and local governments (targeting health care and education), invest in long-overdue infrastructure upgrades, and provide support for rebuilding small businesses in communities hit hardest by the pandemic. 

#2 Take steps to shrink the tax gap.

The tax gap — or the difference between what taxpayers owe and what they actually pay — is large: an estimated $350 – 450 billion per year. A number of steps could be taken to make sure all taxpayers pay what they owe, including increased reporting and enforcement as well as changes to technology and management approaches at the IRS. Some measures require legislation, but others can be accomplished administratively. Reducing the tax gap will contribute to a more fair and equitable tax system while raising revenue for deficit reduction or spending priorities. 

#3 Evaluate the impact of tax expenditure programs in a consistent, transparent manner.

At the federal level, tax expenditures (such as exclusions, deductions, credits, and other incentives that benefit specific activities or groups of taxpayers) total $1.5 trillion per year. To put that number in perspective, all federal health care spending last year was close to $1.1 trillion. Most tax benefits are given to people who fall into the upper-income levels, with the top 10 percent of earners receiving about 46 percent of those benefits. While traditional spending programs are reviewed in some fashion when up for reauthorization, evaluations of tax expenditures and their impact — or lack thereof — is rare. Regular, transparent evaluations of these programs will enable policymakers to enact policies that promote efficacy. 

#4 Include charitable giving reforms in tax legislation.

Today’s tax laws do not sufficiently incentivize donor advised funds (DAFs) and private foundations to distribute funds to charities in a timely fashion, despite the fact that the donors receive tax benefits upfront and taxpayers immediately bear the costs of reduced government revenues. Right now, more than $1 trillion in private foundations and $120 billion in DAFs are sitting on the sidelines — at a time when charities need help more than ever. Common-sense reforms to tax laws could significantly increase the amount and timely flow of resources to working charities so they can address immediate crises. And a new non-itemizer charitable deduction would give more donors — including small-dollar donors — tax incentives to increase their giving. 

#5 Expand access to retirement savings through vehicles like Auto IRAs.

The importance of household savings to weather job loss and health challenges, as well as prepare for retirement, is more salient today than ever. As a country, we need to ensure every individual has the ability to responsibly save by increasing opportunities and limiting barriers that inhibit personal savings. In the long run, establishing a national retirement savings standard would be one of the most effective ways to financially support Americans. In the near term, clarifying that ERISA provisions do not extend to state-initiated retirement programs and rescinding DOL support for a twice-rejected case against California’s CalSavers automatic IRA program would be a good start. Clear guidance on this issue from the Biden administration would encourage more states to provide these important savings vehicles.

Progress on these public finance issues would increase the efficiency of federal efforts and improve fairness for individuals. They also would lay the groundwork for creating a more stable and sustainable fiscal system in the long run.