Next Up on the Legislative Front: Infrastructure

If the Biden White House has exhibited anything, it is extraordinary energy.  Apart from a raft of executive orders, this new administration came out of the gate with a $2 trillion Covid relief bill. It passed into law in the middle of  March and is beginning to have its economic effects.  Pending presently is a $2.3 trillion infrastructure plan, hugely ambitious in both scope and scale.  Behind this piece of proposed legislation is the $1.9 trillion American Families Plan, introduced by the president in his recent State of the Union address.  Some $6 trillion in spending and financing launched in just over three months rivals in relative terms the program Franklin Roosevelt launched to fight the Great Depression, a man with whom President Biden frequently compares himself.

This array of spending and financing is too much for one article, even an unconscionably long one. 

Since the Covid relief bill has already passed and will run its course over the next few quarters and the American Families Plan still lacks complete specificity, this discussion will focus on the largest of the three bills, the one on infrastructure.  Here unfolding likelihoods lead to two conclusions: First, whatever passes into law will almost certainly scale down the White House proposal on both the tax and the spending sides. Negotiations are ongoing, but even before formal counterproposals surfaced, Senators and Representatives of both parties pressed for modifications.  Second, even if the proposal were to pass as written by the White House, its effects would fall far short of the promises that have accompanied its introduction – because these things always fall short and because the plan’s basic structure seems set to undermine its economic impact, for the same reasons, incidentally, as President Obama’s 2009 infrastructure bill failed to lift the economy.

Here are the major ways the White House would spend on infrastructure.  About one-quarter of the spending would go for transportation, mostly roads, bridges, public transport, and rail, but with a large piece for electric vehicles, through both subsidies and for the construction of recharging stations.

A relatively small part of this transport spending, some $31 billion, would go for air and seaports.  Outside the bill’s transportation aims, it would spend $111 billion on water, divided evenly between replacing lead pipes, general modernization, and more complete filtering. Some $100 billion would go toward getting the entire country broadband access at reasonable prices and a like amount would go to upgrade power systems.  The president wants $213 billion to go toward the construction of public housing and retrofitting some 2 million private homes (which ones are not yet clear), $137 billion to improve school facilities, and some $500 billion for childcare, veterans’ hospitals, and facilities to care for the elderly and disabled.  Another part of the plan would dedicate $261 billion for research and development, mostly going through existing agencies, with the proviso that one-fifth of these monies would focus on semiconductors.  Some 10 percent of the R&D part of the proposal would go to business R&D credits.  The balance of the funds would go to various subsides for selected businesses and the establishment of “regional innovation hubs.”     

Part of the financing burden would fall on individuals earning more than $400,000 a year, a group the White House describes as the “top 1 percent.”  This wealthier group of taxpayers would see their marginal income-tax rate rise from 37 percent presently to 39.6 percent.  They would also pay the 12.5 percent Social Security (FICA) levy on all income above $400,000.  Heirs of any behest above a certain amount would have to pay capital gains tax whether they realized those gains or not.  The plans also call for the rate on all capital gains to rise by two thirds from a maximum of 23.8 percent today to just under 40 percent.  This hike would apply to businesses as well as individuals.

It would insist that any funds earned abroad and repatriated to this country, say to expand domestic operations, would pay the full American tax rate.  The plan would set a minimum corporate rate of 21 percent regardless of how many deductions a business claims, something like the alternative minimum tax imposed on individuals.  The While House would disallow presently common practices among real estate developers that allow them to trade properties without tax consequences.  It would insist that those who invest in startups and other forms of entrepreneurial activity – primarily hedge funds and private equity investors – pay tax on their gains at the higher rate levied on ordinary income and not, as they do now in what is referred to as “carried interest,” at the lower capital gains rate.

It is doubtful that all this will pass into law.  With Democrats in the majority in both houses of Congress, there is a possibility for full passage but not a likelihood.  Republicans are demanding downsizing in the spending parts of the proposal, some repurposing of its provisions, and they are objecting strenuously to the tax hikes.  Democratic majorities are too thin to stand up to determined opposition, especially because the Democratic caucus is itself objecting to several of the proposal’s provisions.  Several Democratic Senators have resisted the White House’s desire to move the corporate rate up to 28 percent and have proposed 25 percent as an alternative.  Several Senators and Representatives of both parties have voiced opposition to provisions that demand heirs pay capital gains on their inheritance whether they realize those gains or not.  They point out that the rule would force heirs to sell businesses and farms, some of them in families for several generations, just to meet the tax obligation.  It is especially noteworthy that all these objections surfaced even before business and related lobbies had time to weigh the potential effects of the president’s proposals and begin their efforts to pressure Congress.

Obama famously blamed his plan’s failure on the lack of “shovel ready” projects.  No doubt that had something to do with the bill’s lack of economic effect, but there was something even more fundamentally wrong, and Biden’s plan shares that flaw.  As the great economist John Maynard Keynes pointed when he devised this approach to relieving the strains of the Great Depression, public infrastructure spending only has its full effect when businesses, seeing opportunities uncovered by the government’s efforts, follow on with their own spending.  But, as Keynes also made clear, business will not follow on with its own spending unless it has something to gain after taking the risks implicit in expansion and hiring.  Because Biden’s tax hikes, like Obama’s threats in 2009, limit the potential for business gains, the White House plan as currently structured all but ensurs that business will fail to step up with the needed follow-on spending.  Indeed, Biden’s 21 percent minimum tax seems especially targeted to discourage aggressive business spending, since such spending typically creates the deductions the minimum would disallow.

If this proposal passes into law intact, it will offer a temporary economic boost.  That much spending could not help but spur some economic activity.  But without the necessary business follow on, the effect will fade, as the effects of Obama’s infrastructure efforts faded.  And because the economic effect will fall short of the estimates coming out of the White House, so also will the revenue flows assumed in those estimates, leaving the plan not only to disappoint on the economic front but also to create much larger federal budget deficits than promised and accordingly much more federal debt.  Biden might well hope that Congress modifies his proposal to remove the flaw he and his advisors have placed at its center.