Thursday, April 15, 2021

Republicans and Democrats Are Wrong About Taxes and the Infrastructure Bill, But I'm (Mostly) OK With That

by Neil H. Buchanan 
Having overseen the surprisingly smooth passage of the COVID relief act earlier this year, the Biden Administration quickly unveiled its next major piece of legislation.  The bill has a generic official name ("The American Jobs Plan"), but everyone in both parties is simply calling it the infrastructure bill.  As I will explain shortly, that label is misleading in a few very important ways.

Earlier today, I published a column on Verdict in which I responded to the Republicans' attempts to convince people that the infrastructure bill is not about infrastructure at all.  Because it is the core of their job description, writers at reactionary think-tanks have been lying through their collective teeth, claiming that only some tiny percentage of the spending in Biden's proposal is for "real" infrastructure.  As I explain in the piece, that this is nonsense has not stopped the mainstream "tough interviewers" on chat shows, including people who should know better (especially CNN's Jake Tapper), from adopting the Republicans' framing.

The conversation is thus now dominated by Democrats being forced to defend various parts of the bill against the charge that it is merely a liberal wish list of social welfare programs.  Here, I will briefly summarize my response to that absurd conversation.  My main focus, however, will be to discuss a background assumption that is currently being accepted on all sides, which is that the infrastructure bill must be "paid for" (either with the tax increases that Biden has proposed as part of the plan, or with some other source of revenue).

That shared assumption is wrong.  Moreover, this is the kind of error that is usually both infuriating and damaging to good policy analysis.  In this instance, however, it turns out that this very bipartisan error is politically beneficial to progressives.  I would prefer an honest conversation, but if there must be widespread confusion, it is nice to see it finally benefit my side of the policy debate.

Republicans, as I noted a moment ago, are trying to argue that the bill is mislabeled.  They are stuck making that claim because they have chosen not to challenge the overwhelming popularity of every element of the bill.  They thus cannot complain about the merits, and they also cannot complain about the process, because the Democrats are following well established procedure.  That leaves Republicans to make what amounts to a labeling argument.

It is not clear why they think this is politically useful.  Yes, they can always get the Tappers of the world to bend over backward and overcompensate for the press's supposed liberal bias.  That is not nothing, but as we saw with the COVID relief bill, actual voters seem not to care about whether something hews to the standards that D.C. insiders cherish -- like bipartisanship, regular order, or whatever.  Republican voters loved the relief bill almost as much as independents and Democrats did, and they are likely to be even more excited about rural broadband, assistance with caring for elderly and ill family members, and so on.

No voter, in any case, is going to refuse to accept a benefit in the bill on the basis that it was mislabeled.

But the more important point is that nothing in the infrastructure bill is in fact mislabeled.  As I explain in today's Verdict column, we typically use the term infrastructure as a short-hand for "public investment," which is the category of spending that governments at all levels use for programs that pay benefits in the future.  Such spending programs are, in other words, not a use of current resources for current consumption but rather self-denial of current consumption in the service of creating more prosperity in the future.

It is easy enough to convince people that bridges and roads -- which are the standard shorthand when discussing infrastructure -- are worthwhile investment spending.  But when we talk about "spending on infrastructure, such as bridges and roads," those are merely illustrative examples.  They are not the entire list, and other examples of physical infrastructure include water systems, sewers, ports, toxic waste disposal, and many others.

I emphasize in the Verdict column that this shorthand is not merely incomplete but also misleading in a completely different way, because not all spending on roads and bridges is useful public investment.  I mention the "bridge to nowhere" trope, which are infrastructure projects that -- though composed of concrete and steel -- are not economically useful enough to be worth the cost of building them.  I can also add that even some productive roads are not necessarily good public investments, if they displace (either physical or as a matter of budgeting) even more productive transportation alternatives.

The other side of the story is that many productive public investments are not made out of concrete and steel.  More and more, economic productivity is based on ideas, making R&D spending on basic research (of the sort that even large companies would not bother to fund, because it is too speculative and impossible for one company to exploit to its sole advantage) very much public investment, as is spending on education at all levels.

Biden could have called this a public investment bill, which might have forestalled the "but it's not real infrastructure" talk.  But as I argue on Verdict, that would not have stopped Republicans from coming up with some other, equally bad-faith, attack line against the bill.  People, especially policy wonks, know that infrastructure is a near-synonym for public investment, so this label was probably Biden's best choice.

So much for summarizing (and extending) what I wrote in my other column.  Although it is essential to emphasize just how wrong Republicans are in claiming that Biden's plan is merely a liberal Christmas tree bill, we also need to look at the paired "pay-for" in the bill.  That is, Biden has proposed funding these public investments by increasing corporate tax rates, splitting the difference between the previous top statutory rate (35 percent) and the rate that Republicans enacted in their scammy 2017 tax law (21 percent).

It was predictable that Biden's preemptive move to the exact center was a self-inflicted wound.  He could and should have proposed either going back to 35 percent, or at least to a rate somewhat above the mid-point, so that he could negotiate his way down to 28.  As it stands, he will get something like 25 or even 24 percent -- if he gets anything at all.

There is, however, a more fundamental question: Why is funding even included in this bill?  There was no additional funding in the COVID relief bill.  Why this one?  Biden's team says that the eight years of investment spending in the bill will be fully paid for with a fifteen-year increase in corporate taxes.  There is nothing wrong with stretching out the payment period beyond the spending period, but that is a minor aside.  What is a tax increase doing in an infrastructure bill at all?

Businesses go into debt to invest in their futures.  Families go into debt to invest in their futures.  I generally hate the "just like businesses and families do, governments must learn to live within their means" sermons, and that is precisely because businesses and families would never agree to forgo borrowing.  Moreover, when governors brag about balancing their state budgets, they ignore that (1) they were required to do so by law (meaning that they did not choose to be particularly virtuous), and (2) states and cities balance their budgets only after excluding the deficits that they run to finance public investments.

Why should the federal government insist on increasing taxes to pay for productive public investments?  That they are productive makes it sensible to finance them by increasing debt, not by levying taxes to pay for them, as if they were unproductive consumption spending.

As I pointed out above, this error is truly bipartisan.  Not only does Biden return to his center-right instincts in including pay-fors, but even some of the more progressive pundits fall for it.  Washington Post columnist E.J. Dionne, hardly a radical but still unlikely to be a captive of the neoliberal conventional wisdom, offered a nice distillation of the mistaken argument in an op-ed yesterday:
"With the Biden administration proposing a significant increase in public spending for long-unmet needs — as varied as roads and bridges to caregiving for kids and seniors — a reckoning with what is euphemistically called 'the revenue side' is inevitable."
To be sure, Dionne offers that nugget in the course of arguing that the IRS's enforcement budget should be increased, thus allowing us finally to start collecting some of the estimated $1 trillion of unpaid taxes every year (mostly from high-income taxpayers and businesses).
He is right that we should do that, but it has nothing to do with public spending for long-unmet needs.  We should collect uncollected taxes because we should enforce the law, and because taxpayer "morale" is real and under severe assault.  If we had no spending projects that we wanted to undertake, we should still collect the unpaid taxes, using the money either to reduce overall debt (not my first choice, for many reasons beyond the scope of discussion here) or to provide a progressive tax cut.

In short, we do not need "a reckoning" with revenues as part of Biden's public investment plan.  Indeed, Biden's first two major plans are examples of the two categories of government spending that can responsibly be financed with debt: anti-recessionary spending during a crisis, and public investment in projects that will justify the costs of borrowing over time.

In the title of this column, I tipped my hand that I have only minor misgivings about this error.  In some of my remarks above, I even suggested that this error is likely to help progressives.  That is rare indeed, because the usual tropes in the budgetary sphere almost always cut in favor of austerity.  If nothing else, it is nice to see this working in the other direction.

How does this help progressives?  Essentially, we need to raise taxes progressively anyway, so using the infrastructure bill to achieve that independent objective is not a bad thing.  Biden could have proposed one piece of legislation with all of the spending in the current bill -- or more, given that the amounts involved are actually quite small, especially given the eight-year time frame -- and separately proposed a progressive tax bill.  Instead, he put them all into one bill.

This has several advantages.  First, it is realistic about the conventional wisdom that even Dionne accepts.  Second, there is literally no reduction in his tax proposal that would make it necessary to walk away from the bill.  There is no "squeal point" on taxes.  If Republicans and Joe Manchin say that they will only accept an increase to 22 percent, so what?  If they refuse to increase taxes on business at all, also so what?

In fact, it is possible that being "forced" to compromise on tax increases now could help Biden and the Democrats later.  The more that they can say that Republicans and conservatives have hampered their ability to pay for spending, the better positioned Democrats will be to propose other progressive tax changes.

Admittedly, I am often concerned whenever Democrats reinforce the conventional wisdom, and it is worrisome to hear non-Republicans talking about how scared they are of "runaway debt."  Here, however, you have a perfect Trojan Horse to recoup at least some of the revenues that Republicans bestowed on the wealthy in their 2017 giveaway.  Saying that we have to do so in the name of fiscal responsibility does make my skin crawl, but if we have to tie spending that does not actually need to be financed by higher taxes with a bill that increases taxes that should have been increased anyway, I think we can all live with that.


CEP said...

Another reason to pair the tax increases in this bill is purely procedural: It may enable use of the reconciliation process, which will evade a Senate filibuster.

May enable. As I understand it, there's a preliminary ruling that what is in this proposal fits... but who knows what will come out of committee?

I'd also sarcastically note that businesses are allowed to deduct their investment costs from their tax bills, so the corresponding account-balancing seems perfectly fair to me — especially since businesses will be the primary beneficiaries of most major expenditure areas.

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