The American Jobs Plan: An Overview and Critique

President Joe Biden has unveiled the American Jobs Plan, a $2.25 trillion investment in infrastructure and more. The “more” concerns me, as does the likelihood proposed tax increases will prove insufficient to cover the costs. With a second infrastructure plan looming, along with tax reforms and a variation of the Green New Deal, there are significant risks that debt servicing will negatively affect economic growth… and the ability of the federal government to respond to any further emergencies.

As I have argued before, infrastructure investment during a time of low interest rates makes good sense, especially since we need $4 to $5 trillion in upgrades of and maintenance to existing infrastructure. The American Society of Civil Engineers maintains infrastructure report cards for each state and for the nation overall. In a nation with failing bridges, rotting water systems, and unreliable electrical grids, deferred maintenance costs lives and money.

Assuming shared responsibility with the states, I might consider a $3 trillion federal investment over a decade reasonable and beneficial.

But, The American Jobs plan isn’t the infrastructure plan the ASCE suggests we need. It is an expansion of federal involvement in state, local, and private responsibilities. Mixed in with good ideas, there are progressive priorities that should not be in this package. (And I am prepared to debate their propriety in any federal budget package.)

Paying for these extraneous priorities will require substantial new revenues. The Biden administration’s initial proposal for raising revenues is an increase in the corporate tax rate from 21 percent to 28 percent. That tax increase represents a 33 percent increase in tax liabilities. Yes, that’s a 7 percent rise, but you need to look at the percentage increase, not the raw percentages. If taxes rise from 10 percent to 20 percent, that a 100 percent increase… a doubling of the tax burden.

National Public Radio published the following breakdown of the American Jobs Act, which I have annotated in brackets.

By The Numbers: Biden’s $2 Trillion Infrastructure Plan
NPR.com
April 2, 2021

Transportation:

$174 billion in electric vehicle investments [If these are federal purchases, merely a redirection of spending from combustion to EV fleets, I might be persuaded there are long-term benefits and savings.]
$115 billion for bridges and roads
$20 billion to improve road safety
$85 billion for existing public transit
$80 billion for railways
$50 billion to improve infrastructure resilience
$25 billion for airports
$17 billion for waterways and ports of entry
$20 billion to reconnect urban neighborhoods cut off by highways

Water, Internet, electric:

$45 billion to remove lead pipes
$56 billion for modernizing water systems
$100 billion for high-speed broadband [Not a federal role, though I might not oppose cities, counties, or states forming limited purpose public Internet providers.]
$100 billion for the electric grid and clean energy
$16 billion for putting “hundreds of thousands [of people] to work in union jobs” plugging oil and gas wells and restoring and reclaiming abandoned mines [Energy companies should pay for all end-of-life procedures, not taxpayers.]
$10 billion for a Civilian Climate Corps [No, not an infrastructure project.]

Homes, schools, buildings:

$213 billion for affordable housing [Research finds affordable housing programs often have unintended consequences. Block grants and Universal Basic Income remain better solutions.]
$100 billion for school construction [State and local responsibility.]
$12 billion for community colleges [State and local responsibility.]
$25 billion for child care facilities [Not a federal infrastructure project.]
$18 billion for VA hospitals
$10 billion for federal buildings

Workforce, innovation: [None of these should be in an emergency infrastructure spending plan.]

$400 billion for home- or community-based care for the elderly and people with disabilities
$180 billion for research and development, including investing $50 billion in the National Science Foundation and $35 billion “to achieve technology breakthroughs that address the climate crisis”
$300 billion for manufacturing and business, including $50 billion for semiconductor research and manufacturing, $30 billion for pandemic preparedness and $52 billion for domestic manufacturers
$100 billion in workforce development programs targeted at underserved groups, including $5 billion for violence prevention programs

Infrastructure has a multiplier effect, while a sudden jump in taxation tends to suppress economic growth. What if the funding mechanism, the 33 increase in corporate taxes, slows the economy more than the spending increases economics activity?

Some economists, and too many politicians, trust forecasts and models to be predictive. It’s one thing to model the past, another to model what has never occurred. A lot of humility is called for at this moment.

If the Biden proposals work, he will be regarded as among the great presidents. If, however, the economy stalls, inflation rises, and the investments go as well as the California high-speed rail project, Biden and the Democrats will be offering a cautionary tale on the limits of Keynesian stimulus.

Republicans need to find a compromise with Pres. Biden and Democrats, but that’s politically unlikely. Neither party’s base tolerates genuine compromise.

Assuming the tax increases are implemented and businesses don’t actively offset higher rates, there could be net-neutral result. That’s not a win for Biden or progressive economic theories.

Biden’s $2 trillion infrastructure plan would lift economy
but higher taxes may hamper growth until projects roll out
USA Today
April 1, 2021
Paul Davidson

President Joe Biden’s $2 trillion infrastructure plan could keep this year’s projected economic boon from slowing significantly in 2022 following the COVID-19 downturn while boosting growth and productivity over the long term, economists say.

“It keeps the party going,” economist Troy Ludtka of research firm Natixis says of the infrastructure legislation.

Like many economists, [Ludtka] expects growth of close to 7% this year – the most since the early 1980s – as coronavirus vaccinations spread and Americans flush with cash from federal assistance resume regular life in large numbers. Although solid growth is still forecast for 2022, the plan will mark a substantial pullback from this year’s pace as the effects of the government aid fade.

Economists have a horrible, and I do mean laughably mistake, record predicting economic growth. Everyone should remember they also miss most economic downturns. Economists aren’t nearly as accurate as meteorologists.

The Congressional Budget Office uses rosy predictions when modeling tax revenues and future growth. The CBO also misses every recession.

We won’t see 7 percent growth in 2021. That’s unrealistic. If I’m wrong, wonderful, but I sure would not be basing any government spending plans on numbers we haven’t seen since the Reagan administration.

Increase taxes now to pay for projects later? That’s going to slow business in the present, for a return that might never be realized.

Every economic model assumes the end of the COVID-19 pandemic and a quick return to “normal.” That return to normal could be quashed by a jump in tax rates. If businesses cut but significantly, then all the spending won’t work miracles.

Some analysts, however, say the blueprint could actually hinder the economy in 2022 before it begins to juice growth in later years. That’s because infrastructure projects will take a couple of years to roll out while higher taxes may dampen business investment and economic activity in the meantime.

…Mark Zandi, chief economist of Moody’s Analytics, says the projects won’t begin in earnest until 2023. He expects the economy to grow just 1.3% from the fourth quarter of 2021 to the fourth quarter of 2022, with the Biden plan adding nothing to the gains.

It actually wouldn’t surprise me if the economy stalls in 2024 under the weight of higher taxes, rising interest rates, and a national debt that burns through the federal budget.

And don’t imagine for a minute that corporate taxes increasing 33 percent is the only headwind against economic growth. There will be other tax increases. Pres. Biden has promised as much, as have Congressional Democrats.

Biden’s infrastructure plan won’t raise individual taxes, for now. What you need to know
CNBC.com
March 31, 2021
Carmen Reinicke

President Joe Biden on Wednesday is unveiling his latest plan to boost the post-coronavirus economy — a $2 trillion infrastructure package called the American Jobs Plan.

To raise the money to pay for it, Biden is proposing raising the corporate tax rate, cracking down on companies offshoring profits and eliminating tax breaks for some industries. With the tax increases, the measure would pay for itself in 15 years, and thereafter reduce deficits, according to the White House.

The taxes proposed do not impact individuals at this time. Still, there could be personal tax hikes in the future, especially for high earners.

“With this first proposal, it doesn’t really address individuals and the individual tax code,” said Megan Gorman, an attorney and managing partner at Chequers Financial Management in San Francisco. “However, it’s only a matter of time.”

Only a matter of time. We know tax increases are coming. What will high-income earners do to avoid those taxes? What about those with high incomes who are also self-employed through small corporations? Most corporations are small businesses, not Fortune 500 behemoths.

Corporations can and will reduce their tax liabilities, legally. Some of these avoidance methods could boost the economy, such as investing in new equipment or otherwise upgrading facilities. Amazon quite rightly reinvests, which lowers profits and lowers its corporate taxes. New distribution centers aren’t cheap, after all.

High-income families are already developing strategies that will ensure the predicted tax revenues don’t materialize. Many wealthy families turn to tax-free bonds, for example. I’ve noted the irony before: government finances its debts with tax-free bonds, sold primarily to the wealthy seeking to reduce their tax burden.

“Biden has been consistent in expressing that he wants to raise tax rates for Americans that make a certain amount of money in this country,” said Gorman. “So high earners and other high-net-worth individuals are preparing themselves.”

And to be sure, the White House said, “the President will be putting forward additional ideas in the coming weeks for reforming our tax code so that it rewards work and not wealth, and makes sure the highest income individuals pay their fair share.”

The worst case scenario is that the American Jobs Plan fails to stimulate the economy by 2025. That’s when taxes are set to increase for almost every family, as current middle-class tax breaks sunset.

In addition, it’s important to remember that many of the cuts in Trump’s 2017 tax plan are set to expire after 2025, meaning that some individual tax rates would go back up after that unless Congress extends the legislation. Most of the business provisions in the act are permanent.

It’s going to be an interesting four years. However, it’s likely Congressional Democrats only have two years if the economy does start to stagnate. Even without knowing what will happen, progressives are pushing for more and bigger spending plans, and much higher taxes on the envied wealthy.

Republicans have been worse stewards of the national purse than Democrats, but voters will be wanting to punish the party in power during a downturn.