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Alex Muresianu: Why is Biden's infrastructure plan punishing private investment?

If President Biden's trying to improve the job outlook in the U.S., he doesn't need to get in the economy's way. Unfortunately, his new infrastructure plan, called the American Jobs Plan, is going to do just that.

While unveiling the huge amount of government spending in the new plan, the president is urging for private investment to deal with specific issues like climate change, manufacturing and housing. But, despite what he thinks, paying for infrastructure by taxing private capital investment won't help that along.

First of all, Mr. Biden's proposal would increase the corporate tax rate to 28%. Of course, that'd make firms much less likely to undertake certain projects because they'd simply earn a lower after-tax return. Mr. Biden's proposed 15% minimum tax based on a different measure of corporate income could prevent firms from immediately deducting the cost of their capital expenditures and could claw back many provisions geared toward incentivizing research and investment within the infrastructure plan itself.

If Mr. Biden's plan is realized, the U.S. economy is certainly going to feel it in the long run. A Tax Foundation analysis from last year found paying for infrastructure with a major corporate tax increase would reduce our economic output. But there are other, superior ways to finance infrastructure, such as raising the gas tax. It might not be ideal, but it'd have a smaller negative effect on the economy than this potential corporate tax increase would.

The American Jobs Plan includes several types of new public spending. Matthew Yglesias, author of the Slow Boring newsletter, neatly categorized the spending into four buckets. First, transportation infrastructure: $621 billion for roads, bridges and trains, as well as support for electric vehicles and a few other items. Second, general infrastructure: $650 billion for water systems, broadband, the electrical grid, affordable housing, and school facilities. Third, it has $580 billion in support for R&D, manufacturing and workforce development, and lastly, it spends $400 billion on support for caretakers.

Public investment in infrastructure cannot completely replace the returns provided by the private sector, especially when funded by corporate increases. According to the Congressional Budget Office, the typical rate of return on public investment is 5%, as opposed to 10% for private investment. That doesn't mean that infrastructure spending can't increase economic growth. Some specific policies in the plan seem particularly beneficial — for example, the social return on investment in lead-removal programs looks quite good. In aggregate, though, the returns on infrastructure tend to be lower than the returns to private investment.

On top of the corporate tax increases, the plan's reliance on tax credits for very specific kinds of investments in clean energy is a mistake. Instead, policy should start with fair and even treatment for all capital investment, where it can be deducted immediately. That would broadly favor making investments in new technology, which tend to be more efficient and climate-friendly than the old, dirtier technology currently in use they would replace. This may be a better approach to tackling climate change than the many clean energy tax credits the administration wants to create or expand.

Mr. Biden's tax proposal also punishes private investment in manufacturing. The framework allocates $300 billion toward supporting American heavy industry, through general subsidies for the manufacturing sector, along with targeted subsidies for certain types of research and development, federal procurement for electrical vehicles, and a tax credit for semiconductor production. However, the tax increases, including his proposed 15% minimum book tax, would end up hurting the manufacturing sector.

Basing a tax on book income would effectively disallow or limit legitimate deductions for major capital investments common in manufacturing. Industries that invest heavily in physical capital would bear the burden. Indeed, a paper from Princeton University found that the minimum book tax would increase taxes the most on utility companies and manufacturers.

Similarly, a study from the right-leaning American Enterprise Institute found that Mr. Biden's tax plan in its entirety would raise taxes on manufacturing — more than almost any other industry. A Treasury Department report released yesterday featured some changes to the minimum book tax proposal Mr. Biden supported during the campaign, but it is still unclear how the minimum tax would treat accelerated deductions for capital investment.

It's ironic that the tax portion of the proposal is called the Made in America Tax Plan, given how it would raise taxes on domestic production and decrease American competitiveness. When including state taxes, the effective average U.S. corporate tax rate was 24.6% in 2019, which was still slightly above the median tax rate for developed countries. Increasing the federal corporate tax rate to 28% would put the U.S. at the top combined statutory tax rate in the OECD. That's not a recipe for reviving American industry.

The goal of the Biden plan to increase productivity in the United States and grow the economy is a worthy one. But the choice to fund the plan by punishing private investment is definitely not how he's going to do it.

• Alex Muresianu is a federal policy analyst at the Tax Foundation and a contributor at Young Voices. Find him on Twitter @ahardtospell.

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Posted: April 8, 2021 Thursday 02:12 PM