April 22, 2021
Does the Productivity of Infrastructure Investment Outweigh the Harm from Higher Taxes?
The Biden Administration argues that the infrastructure investments in its proposed American Jobs Plan (AJP) would provide more than enough productivity boost to offset the damage from new taxes. Is this calculation correct? New research from the American Action Forum examines the tax and infrastructure proposals in the Biden presidential campaign’s Build Back Better (BBB) plan, using a third-party economic model similar to those used by federal agencies. Even though the campaign proposal would have spent far more proportionally on core infrastructure than the AJP proposes, the campaign proposal was only net positive under extreme assumptions. This conclusion suggests that the AJP would not be pro-growth even under the most favorable conditions.
The key findings:
- In the base case, the higher taxes’ negative impacts on growth outweigh the impacts of infrastructure on productivity, despite the significant increase (ultimately 16 percent) in public capital. The net impact after 10 years is to lower gross domestic product (GDP) by 0.2 percent, and household spending by 1.2 percent;
- In the “high productivity” case, where public capital is assumed to have productivity effects 150 percent larger than typically found in the literature, it is possible for the BBB plan to raise GDP after 10 years; and
- These results have important implications for the desirability of the AJP. The AJP raises roughly 1/2 as much in taxes, but it spends perhaps 1/6 as much on high-productivity traditional infrastructure – a mix that these results indicate is likely to have a negative macroeconomic impact.