At the core of the $2 trillion package is a paradox: infrastructure projects are designed to make the United States more competitive, but they will be paired with corporate tax increases that will do just the opposite. While rebuilding roads, bridges, and other infrastructure is a laudable goal, funding it with taxes that suppress private investment and damage our global competitiveness undermines that goal.
Additionally, we found that the proposed corporate tax increase would reduce after-tax incomes for workers across all income levels; for example, by nearly 1.5% for the bottom 20% of earners. Raising the corporate rate would also reduce long-run economic output by 0.8%, eliminate 159,000 jobs and reduce wages by 0.7%.
Changing corporate tax law so drastically in the middle of a pandemic and less than four years after the last major tax overhaul is not wise. Fine-tuning policies over time is common, but these changes will cause more uncertainty and headaches for businesses looking to grow as the economy rebounds, creating more jobs for accountants rather than the jobs we need to rebuild. Changing the already-complex international rules and creating a new tax on corporate book income would complicate the tax code and create a headwind for additional corporate investment.
To fund a large-scale infrastructure package with minimal harm to the economy, policymakers should pursue sources of revenue that are focused on the root of the problem: fixing our infrastructure. Policymakers should consider some potential options that, while not politically popular, just make sense.
Having the Americans who use the roads pay for the roads is a good place to start. Increasing the gas tax is one way to do this, but cars are changing from being fossil fuel-dependent to energy efficient. Rather than using taxes motor fuel as a proxy for road use, implementing a tax directly on vehicle-miles traveled may be an even better solution that reflects the changing economics of the auto industry. Consumers want cars that are fuel efficient, and communities want reliable roads and bridges. Adopting a vehicle-miles traveled tax captures the lost revenue from gas taxes and would connect the financing of infrastructure to its users. The Biden administration could also consider broader taxes on consumption, such as a carbon tax, to help fund the proposed spending and meet climate and green energy goals.
As President Biden moves forward with his infrastructure plan, he should avoid taxes that make it harder to make things in America.