• Abiye Alamina

Financing $1.5 trillion in Infrastructure Spending

In his first State of the Union address President Trump, among other things, called on Congress to send him a bill for $1.5 trillion in spending on public works. He further emphasized that this should be works that foster self reliance and private sector initiatives that attracted local spending.

In a traditional sense this is one of the hallmarks of what the role of government might involve in an otherwise private market economy.

The market is sometimes cast as this mechanism that is able to efficiently allocate resources and address potential economic maladies with little or no active role for government. In the real world the mechanism is dogged by failure to be perfectly competitive in its structure, we also still have to ask how jointly consumed goods will be provided efficiently, and how we address the problem of externalities.

Most economists see a vibrant role for the government in addressing the limitations of the markets and one such role will include provision of public works and reducing the informational problems the private sector might face in carrying out investment projects that ultimately benefit the economy as a whole. So this call by the Administration is proper and needed. Three urgent comments however are called for:

Building for the Future

First, by their very nature public works projects both cost a lot of money and are intended to last for a fairly long period of time, their objective being to facilitate private sector activities and meet existing demand for goods that lack private sector incentives for investment. As a result they should aim to be futuristic. While our roads and bridges might be in disrepair, are roads and bridges as we know them, the future? If the auto industry is currently pushing toward driver-less vehicles, would the new infrastructure planned increase the efficiency of such and similar innovations currently in the offing?

The point here is public works need not be playing catch-up or be status quo oriented. They offer the promise of transforming the economy in a way in which the private sector on their own may have difficulties in spearheading due to coordination and spillover problems. Considerable thought should be committed toward this and not just be a ballot-box driven attention grab.

Missed Opportunity in Tax Reform?

Second, the question that quickly comes up in light of this objective has been “show me the money”? Tax Reform law that passed late last year called for massive tax cuts such that the federal deficit is projected to increase by as much as the same $1.5 trillion over the next decade. Here is where a suggestion I made in a previous blog post about incentivizing the corporate tax cut to ensure that it meets desired objectives could have been useful if applied.

The point here is that there is moral hazard associated with the expectation of trickle down from the corporation tax cuts. The tax cuts could still have been provided, but retroactively, after businesses took significant enough action in line with desired trickle down expectations. Leveraging this with planned public works would have been a well planned policy, especially since by design the tax cuts reduce the amount of money in the public purse.

Estate Taxes: Another Tax Reform Blunder?

Finally, any administration that is serious about public works projects might need to rethink how to interpret the estate tax. This is an area that is obviously anathema for many on the right.

There is perhaps a feeling that the blood and sweat of some to generate a valuable estate for their posterity should not be subjected to punishment in the form of a tax. There is also the economic argument that sees the estate tax as a tax on capital, which discourages its accumulation and so inefficiently creates distortions in capital allocation.

At some level if I stood to inherit a multi million dollar estate I would probably agree vehemently with those two perspectives and more. However all policymaking in general implements some form of redistribution in society, which, in the context of the expected role for government, we generally accept as being for the overall good of the economy provided human rights and other accepted social and moral conventions are not violated.

So leaving aside momentarily personal sentiments about the tax, we could conceive of such a tax as being necessary in weaving together the social fabric of society by having estate beneficiaries contribute toward public works financing, the provision of which is necessary to keep in place the assets accumulated by their progenitors.

This would be an application of the so called benefit principle in taxation - a tax is paid in proportion to benefit. So though the benefit is not seen directly, the public works represents the provision of the enabling environment that allows for continued benefit to estate beneficiaries.

Further, for a market economy where the allocative mechanism is biased toward the initial distribution of wealth, each generation should face a fairly level playing field, and the estate tax serves to inform this. Besides, the tax not being too punitive and allowing for flexibility in its payment over time does not deny the departed their bequest motives upon acquisition of the estate by the intended beneficiaries.

The point here being that the tax reform law passed, which all but eliminated the tax for a period of time, makes no sense in light of expected spending on public works projects. It should rather have been expanded, and any existing loopholes associated with it closed and revenues generated could have been earmarked toward these projects.

Second Best solutions?

The first comment does not need a solution but rather is a call for policymakers to do the hard work of governing through forward looking policies. There will always be the temptation to relapse back to the status quo. It often guarantees the coveted office, whereas change could be politically costly, even if beneficial down the road.

The second comment suggests that the government could at least use its clout and presence to continue to call out corporations to take actions in line with the generous tax cuts and breaks they have received from the tax reform policy. This should be done in consort with the public works projects so that the desired private sector leveraging for the public works projects is put in place.

The last comment is one that will have to be revisited again by Congress with a political will to do the right thing, even if costly. Some might still argue that the right thing is to do away with the estate tax. At this point it might be helpful to consider a social justice resolution where if we all stood behind the Rawlsian veil of ignorance, whether we would indeed vote for an estate tax that provides for public works or not?

#taxreform #publicworks #StateoftheUnion #estatetax #corporatetax

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