Infrastructure projects that are paid for by users, not by federal taxes, can be a big boost to the economy.
With President Joe Biden looking to pass a major infrastructure bill and other policy priorities, the growing question is how he will pay for them. While some Republican senators have signaled some interest in cutting bipartisan deals, both sides should be focusing on budget cuts and reprioritizing existing revenues. They must avoid tax increases that could undercut the economic recovery as the number of vaccinated Americans grows and we hopefully emerge from the COVID-19 pandemic.
President Biden has called for upping the corporate tax rate from 21 percent to 28 percent. While that’s still lower than the country’s corporate tax rate prior to the 2017 tax cut bill, which was then 35 percent, it’s a bad idea. At 28 percent, the federal corporate tax rate, combined with state corporate taxes, would be over 32 percent, putting the U.S. back to having the highest corporate tax among the highly-developed OECD, Organization for Economic Co-operation and Development, nations. For example, Canada’s corporate tax rate is 15 percent and Mexico’s is 30 percent. One outcome of Biden’s proposed tax hike would be more corporations looking to move out of the U.S. to lower-tax countries.
Decades of research also show higher corporate tax rates get passed on to workers, who end up paying the majority of the costs in the form of lower pay and benefits. The Tax Foundation estimates Biden’s corporate tax increase would eliminate 159,000 jobs, reduce long-run economic output by 0.8 percent and wages by 0.7 percent, with the bottom 20 percent of earners on average seeing a 1.45 percent drop in after-tax income in the long term.
Biden also wants to raise taxes on the wealthiest Americans. “Anybody making more than $400,000 will see a small to a significant tax increase,” Biden recently said to ABC.
Raising taxes on the wealthy consistently polls well with voters of both major political parties, but it’s a bad policy that doesn’t work as intended. An analysis in the Quarterly Journal of Economics of decades of data shows that tax increases on individual incomes reduce average incomes and economic activity, but the effect is the fastest and largest when taxing the top one percent. The so-called 1990 luxury tax, for example, killed so many jobs that the federal government actually lost revenue because of it. That is because the rich do not sit on mountains of gold in their vaults, as some might imagine. Most of their money is either invested or spent so raising taxes on the rich lowers consumption and all the jobs that creates, and lowers investment and all the jobs that creates. Hence, the top one percent pay considerably more in income taxes than the bottom 90 percent of taxpayers combined.
The country is expecting significant economic growth this year as more Americans are vaccinated and able to travel to visit loved ones, go on vacations, eat in restaurants and attend things like sporting events. Tax increases would undercut this growth by taking money that would be invested in expanding existing businesses or opening new ones.
President Biden and Republicans need to show some seriousness about dealing with the nation’s debt and deficits. In the debate leading up to the recent $1.9 trillion spending bill — which came after President Trump’s own $2.2 trillion stimulus bill and four years running up debt and deficits — the GOP could not credibly claim it cared about debt and deficits. Republicans and conservatives “ditched any semblance of fiscal restraint during the last four years of economic expansion (i.e., precisely when it’s easiest to cut spending),” Scott Lincicome recently noted in his newsletter for The Dispatch.
Spending cuts are needed and the country’s massive defense spending, over $700 billion a year, is ripe for cutting. A group of House Democrats is urging Biden to trim the Pentagon’s budget. Unfortunately, Republicans want more, not less, spending. “The problem with decreased or flat defense budgets is that our adversaries aren’t looking at cutting defense spending. It’s the opposite,” Rep. Mike Rogers, the leading Republican on the House Armed Services Committee, claimed.
As a military veteran I’d argue he is wrong because our current military is more than capable of defending our nation and, if we stopped our absurd and broken attempts at nation-building overseas, our defense budget is more than adequate already.
If Republicans aren’t going to support ending our forever wars and reducing defense spending, they should at least try to ensure that any big infrastructure and spending bills embrace the user-pays principle and utilize public-private partnerships. Raising the federal gas tax is counterproductive — as vehicles become more fuel-efficient — and politically unpopular, but private companies and private equity firms are ready to invest billions in major infrastructure projects. From water and sewer systems to roads and bridges, infrastructure can be built via public-private partnerships using private capital and charging user direct fees to pay for it.
Users don’t pay any more than they would’ve otherwise, the projects get built faster, private investors take most of the financial risks of losses if something goes wrong with the project, such as delays and cost overruns, and the companies can make a profit if they deliver the project efficiently.
Infrastructure projects that are paid for by users, not by federal taxes, can be a big boost to the economy. Combining this approach with some smart realignment of other federal spending would allow President Biden to achieve his policy goals without the harmful tax cuts he is considering and the consequent blow to the economy and to lower-income workers.
This past week, President Joe Biden unveiled his new $2 trillion infrastructure plan, scheduled for implementation over the next eight years. He delivered a pep talk about it before a union audience in Pittsburgh: “It’s a once-in-a-generation investment in America. It’s big, yes. It’s bold, yes, and we can get it done.” One central goal of his program is to tackle climate change by reaching a level of zero net carbon emissions by 2035. Many of Biden’s supporters gave two cheers for this expansion of government power, including the New York Times columnist Farhad Manjoo, who lamented that the program is too small to work, but too big to pass. Huge portions of this so-called infrastructure bill actually have nothing whatsoever to do with infrastructure.
In one classic formulation by the late economist Jacob Viner, infrastructure covers “public works regarded as essential and as impossible or highly improbable of establishment by private enterprise.” Classical liberal theorists like Viner believe it is critical to identify a limited scope of business activity appropriate for government. And even here, while government intervention may be necessary to initiate the establishment of an electric grid or a road system, oftentimes the work is completed by a regulated private firm, overcoming government inefficiency in the management of particular projects.
Biden’s use of the term “infrastructure” is merely a rhetorical flourish, the sole purpose of which is to create an illusion that his proposed menu of expenditures should appeal just as much to defenders of small government as it does to progressive Democrats. A quick look at the proposed expenditures shows that they include large transfer payments to preferred groups that have nothing to do with either infrastructure or climate change. Consider this chart prepared by NPR, which breaks down the major categories of expenditure:
“Home/community care” and “affordable housing” constitute over 30 percent of the budget at $613 billion. Much of this money is for child and elder care. Both are traditional forms of transfer payments, which are already available in abundance. Why more? Why now? After all, these cash transfers are not taxable compensation for work done. They increase the motivation to stay out of the workforce, in fact, and thereby reduce the size of the tax base as overall expenditures are mushrooming. Moreover, large doses of home/community care are difficult to target exclusively to the needy. A correct analysis seeks to determine whether such payments are directed toward the truly needy and whether they induce people to leave the workforce to become tax recipients rather than taxpayers.
A similar analysis applies to affordable-housing expenditures, both for renters and owners. In the Biden plan, those expenditures operate as a combined program of disguised subsidies and disguised price controls. An affordable-housing mandate typically requires a developer to build some fraction of total units held for sale or lease at below-market rates to individuals who fall within certain broad income categories. In some programs, the losses to the developer may be offset in part by government subsidies.
These programs are not only costly but also a massive disincentive to new construction, especially when the fraction of affordable units is set too high, at which point the developers cannot recoup their losses on the affordable units by their profits on their market-rate units. A far more sensible regime that reduces both rent controls and subsidies over time allows housing resources to be allocated cheaply and sensibly by market forces. Housing markets are like all others insofar as people are willing to spend other people’s money for their own benefit, which leads to overconsumption. Similarly, price controls reduce the incentive to produce housing that people want, thereby creating systematic shortages, and the long queues and political intrigues that accompany them.
The rest of the initiative’s priorities include investments in electric vehicles at $174 billion, roads and bridges at $115 billion, the power grid at $100 billion, public transportation at $85 billion, and railways at $80 billion. There is absolutely no reason to believe that these expenditures will be made in a responsible fashion, given the political forces that will descend on Washington if the proposed funds become available. Nor is there anything inherently desirable about electric vehicles, for example, that merits their subsidization. To be sure, there is a constant risk of pollution from vehicles powered by fossil fuels, but the correct response is to tax the externality in order to reduce its incidence, not to guess which alternative technology merits a subsidy. Indeed, it is especially wrongheaded to subsidize both electric cars and public transportation when they should be allowed to compete with each other. More generally, any massive subsidy for energy investment is a bad idea for the same reason that it’s a bad idea for housing: it leads to overconsumption, such that total social costs exceed total social benefits.
Shifting to wind or solar energy—both centerpieces of the Biden strategy—is also a bad idea. Those energy sources are too precarious to make more than a dent in the overall energy market. As the US Energy Information Administration reports, fossil fuels account for about 80 percent of total energy production in the United States, as well as raw materials for making “asphalt and road oil, and feedstocks for making the chemicals, plastics, and synthetic materials that are in nearly everything we use.” Keeping crude oil and natural gas in the ground is not a winning strategy. Indeed, relying on wind and solar carries risks, as these forms of energy can respond poorly in extreme situations, a reality that became clear with the breakdown of the Texas power grid recently during an extreme cold snap.
The correct path to environmental soundness lies in the more efficient production and consumption of fossil fuels. This is why one of the best ways to deal with the externalities of fossil fuel consumption, such as air pollution and spills, would be to allow the development of the Keystone XL pipeline. Given how central fossil fuels are to the energy market, any small improvement in their production and distribution will result in enormous benefits. The effort to wean an entire economy off fossil fuels over the next two decades will provide short-term dislocations without any durable long-term relief.
The dubious nature of the Biden plan is made still more evident by looking at its rickety financing. As always, the two favorite targets for new taxation are increases in the corporate income tax and the income tax rates for wealthy individuals. The claim is that these targeted taxes will spare the rest of America from financial pain. Senator Elizabeth Warren made that case for her ultra-millionaire tax, saying her wealth tax would have no impact on 99.9 percent of the population. But that is one strong reason to reject her program or others like it: it encourages majorities to confiscate the wealth of the most productive. Those majorities, of course, would be far less eager if their own taxes were to rise at the same time.
Biden has rightly rejected that approach, but the price of his new, once-in-a-generation expenditure is an increase in the overall corporate tax rate from 21 to 28 percent. Yet this proposal has dangerous consequences too. The United States constantly competes with other nations for corporate investment. Biden’s policy will reduce the level of foreign investment in the United States while simultaneously increasing the level of American investment abroad. This in turn will reverse the beneficial effects of the Trump corporate tax cuts, which notably translated into higher wages. Additional taxes on the wealthy will barely make a dent in the anticipated financial shortfall.
Worse still, it is simply false advertising to say that even if these deferred revenues could be generated, they would cover the full costs of the Biden program. The public expenditures will take place over an eight-year period. As NPR reports, the government plans to keep the corporate tax in place for fifteen years to balance the books. That move will require the treasury to borrow money to cover the anticipated revenue shortfall. And there is no reason to think that the government will meet any of its revenue targets, let alone be able to find the revenues to cover the items on the Biden agenda.
At this point, Republican skepticism about the plan may perhaps peel away some Democratic support. To avert that result, Biden would be well-advised to unbundle the strange bedfellows in his omnibus bill, so that each component can be evaluated on its own merits. The likely result is a smaller program with better outcomes, both for Biden and everyone else.
“This whole controversy: Are you entitled to the fruits of your own labor or does government have some presumptive right to spend and spend and spend?”
by Scott L. Vanatter
Ronald Reagan is well known for his multi-decade devotion America’s purpose and promise. By returning to these lofty ideas America would fulfill its destiny.
His July 27, 1981 speech was President Reagan’s main public effort to educate the nation on the benefits of a bipartisan bill to cut taxes and spending. He taught America, once again, how and why cutting taxes and spending (cutting the rate of growth of government spending) would make for a stronger economy — and help restore America’s latent greatness.
It was Reagan’s habit to speak on large themes. In this particular case he used a two-letter word to illustrate one of the largest of political themes. He stated that the people in electing him wanted to make a change from ‘by’ to ‘of.’ Succinctly put, “It doesn’t sound like much, but it sure can make a difference changing by government,’ ‘control by government’ to ‘control of government.’” Continue reading