Financing Infrastructure Spending with Corporate Tax Increases Would Stunt Economic Growth

Written by: Alex Durante, Huaqun Li, and Garrett Wilson

Original Article link here:

The Biden administration’s American Jobs Plan (AJP) proposal to fund infrastructure spending relies on a bet that the benefits outweigh the costs of a higher corporate tax burden. Using the Tax Foundation model, we find that this trade-off is a bad one for the U.S. economy, resulting in reduced GDP, less capital investment, fewer jobs, and lower wages.

To show the combined effect of infrastructure spending and different financing options, consider a stylized example of $1 trillion in additional infrastructure spending evenly spread over five years. New infrastructure will accrue returns over time, raising economic output. We assume a 5 percent return for public investments, consistent with assumptions by the Congressional Budget Office. The infrastructure spending could be financed entirely through the issuance of new federal debt, or alternatively by increasing the corporate tax rate, or by imposing new private user fees or excise taxes (such as the federal gas tax).

We find that financing $1 trillion in new infrastructure through additional borrowing would raise long-run GDP by about 0.2 percent. New borrowing raises long-term interest costs for the federal government, both because of the immediate infrastructure spending and long-term maintenance costs, but it does not result in substantially higher interest rates or crowd-out of private investment. However, much of the borrowing would be financed internationally, so the returns to that financing would accrue to foreign investors, reducing American incomes (GNP) in the long run by 0.1 percent.

Economic and Revenue Impact of $1 Trillion in Additional Infrastructure Spending and Three Financing Options

Financing OptionsBorrowing (issuance of federal debt)Increase the Corporate Tax RateImpose User Fees or Excise Taxes
Long-Run Gross Domestic Product (GDP)+0.2%-0.3%+0.1%
Long-Run Gross National Product (GNP)-0.1%-0.2%+0.1%
Capital Stock+0.2%-0.7%+0.1%
Wage Rate+0.2%-0.2%+0.2%
Full-time Equivalent Jobs+36,000-48,000-50,000
Long-Run Annual Conventional Deficit, 2031 Dollars-$67$0$0
Long-Run Annual Dynamic Deficit, 2031 Dollars-$52-$39+$6
Source: Tax Foundation General Equilibrium Model, May 2021.

On the other hand, financing the new infrastructure with an increase in the corporate tax rate reduces long-run GDP by 0.3 percent, because it raises the cost of corporate investment. It also reduces GNP by 0.2 percent, lowers the capital stock by 0.7 percent, reduces employment by 48,000 full-time equivalent jobs, and reduces wages by 0.2 percent. While this option would be deficit neutral in the long run on a conventional basis (which holds GDP constant), on a dynamic basis annual revenue would drop by $39 billion in the long run due to a smaller economy.

A third financing option is to rely on private user fees, such as tolls, or excise taxes, such as a higher gas tax. We find that this financing option would raise long-run GDP and GNP by 0.1 percent, but would reduce employment by 50,000 full-time equivalent jobs. Financing infrastructure through user fees or the gas tax would create a better connection between the usage of the new infrastructure and tax collections. Taxes imposed on consumption (in this case, consuming infrastructure services) tend to be less damaging to GDP.

Our modeling illustrates that the financing method for infrastructure matters, and that corporate tax increases would be one of the most counterproductive ways to finance the infrastructure spending, ultimately shrinking the U.S. economy, incomes, and available jobs. It is also worth noting that public investment tends to deliver only half of the economic returns as private sector investments (5 percent for public investments, versus about 10 percent for the private sector), which is an additional opportunity cost worth considering.

Modeling notes: We assume the infrastructure requires an increase in depreciation-related outlays to maintain the assets over time. Roads and bridges are assumed to have more than a 50-year life, and require about 2 percent of their initial cost in annual maintenance. We target the amount of financing that would be required to cover the long-run costs of maintenance and interest payments.

10 Myths About Government Debt

Antony Davies, Phd goes through a listing of 10 Myths about Government Debt. For future blog posts, I will attempt to expand on each of these 10 myths. This growing debt is a huge issue, not only for current generations, but for those to come in the future. As mentioned in the video, Dr. Davies does provide a “solution” to handle the Government Debt. It is a must see. Take copious notes.



Wealth and Taxes

I thought that “wealth and taxes” would be a short blog post. It turned in to a 5 part series. Here’s an overview, or table of contents in case the whole thing looks a bit indimidating. The most important one, really I think is Part V, “it’s all political.” The others build bit by bit, well, this can’t be the answer and that can’t be the answer, so what is the answer, and Part V finds it.

Read More:

The Economic Dead Weight Costs of Tariffs

In Economics, the notion of Dead Weight costs are a consideration anytime there is increased Government intervention in the marketplace. Tariffs are not immune from this concept. These costs are increased and resources are misplaced due to the intervention of Government regulation, taxes, or the like.

As it relates to tariffs, the dead weight costs take on a myriad of forms. For example, in the case of tariffs against Chinese goods, the domestic firms must deal with the burden of the tax, and deal with filing exclusions in an attempt to avoid paying the tariffs.

Since the costs are not allocated efficiently, the benefactor of this displacement of resources: The US Government and not the marketplace participants.

This article, “Trade War: Thousands of Companies are asking for Tariff Exclusions even as US and China push to sign trade deal” goes into detail regarding the back log for domestic firms filing a tariff exclusion.


“More than 3,000 companies have filed about 44,000 requests for exclusions from the first three rounds of President Donald Trump’s tariffs on $250 billion of Chinese imports. The overwhelming majority of these requests, about 28,000, are under review as of Nov. 1. About 4,900 requests have been granted, while about 10,970 have been denied.

And more requests for exclusions are likely to flood the administration in the coming months.”

For those who elected Trump to shrink the size of Government, it seems that more Government employees will be hired to deal with the backlog of requests to deal with the avoidance of tariffs. If no new employees are hired to do this work, the backlog will persist, and the US consumers and firms pay the Economic cost for these “dead weight” losses.

A Wealth Tax Consumes Capital

It seems one cannot make a name for one’s self on the Left, unless one has a proposal to tax wealth. Academics like Tomas Piketty have proposed it. And now the Democratic candidates for president in the US propose it too, while Jeremy Corbyn proposes it in the UK. Venezuela finally added a wealth tax in July.

So how does a wealth tax work? The politicians quibble among themselves, as if the little implementation details that differ between them are important. But they share the key idea. The wealth taxman is to go to the people who have wealth, and take some. And next year, come back and take more. And so on.

It should be obvious that this is morally wrong. But we want to focus on the economics. To do that, we need to drill down into the nature of wealth. What is wealth?  Read the rest here:

My Tax Refund is Lower! What??

My Tax Refund..Man!

Tax Season: The time of the year we are all hit with the fantastic commercials regarding getting the best refund, or the most refund, or whatever jingle to capture your attention. However, as I scan social media, and listing to various conversations with people, I see many people who are concerned about receiving a lower refund. Yes, a huge concern..or is it?

A relevant Read: Americans Work Almost 4 Months Just to Pay Taxes

The IRS Thanks You

We all know the IRS sends out “Thank You” cards to all of its clients, when they receive taxes during the year. Wait, they do not. The issue: If you are receiving a refund, this is simply a return of the tax withholding taken out throughout the tax year. In short, you are giving the IRS a loan.Great work.

Wait, hold up..a loan?

Yes, a loan. Even better: An Interest FREE loan. The tax paper work, that designates the withholding amount, tells your employer how much to take out in taxes each paycheck. When you file your taxes, you may receive a refund..maybe.

The Opportunity Cost: It’s Lost

Based upon that scenario, it is an interest free loan given to the IRS. As previously mentioned, you may receive all the money back. Contrast that if you owe the IRS: Penalties and interest are charged if you owe them. Are you able to borrow money from the bank without having any interest charged to you? No. Consider what could have done with the money withheld..oh and the lost interest. Most people are lining up to receive their tax refund sooner, as they are borrowing that money from a financial intermediary to receive their money..which was loaned out to the IRS.

Cash Flow Analysis: Employee vs Business

With regards to how taxes are levied, there is a fundamentally stark difference between an employee versus someone who owns, or controls, a business. With an Employee, when he is paid, his gross earnings are realized…only for an instant. After that moment, taxes are taken out of the employee’s paycheck. Note: The employee can have benefits come out before taxes are assessed, which potentially lowers the gross income amount—this amount is used to calculate the taxes withheld.  After all of those taxes are withheld, the employee can spend what is left over. In short, Uncle Sam obtains his taxes first.

Contrast that to the business owner, assuming he controls/owns a business entity, he earns revenue for his business, pays out expenses, and sees a profit or a loss. A profit is the case if the business owner earns, in revenue, more than he pays out in expenses. The amount that is left over, profit, is used to determine how much in taxes are assessed. If the business shows a loss, the business owner’s tax liability is mitigated, in many cases. Example: Amazon. How does Amazon Pay $0 in Federal Income Taxes?


Taxes, withheld during the year by the taxing authority, is a loan once “refunded” at the end of the tax year. There is a difference, with regards to taxes, between being an employee versus a business owner. The ability to mitigate and take advantage of the tax code favors heavily toward the business owner. Of course, this is a very simplistic example, simply to demonstrate conceptually the differences, as these things can vary based upon the specific situation. That is why working with a tax professional is advised strongly when working with your taxes.

Relevant Article: Americans Work Almost 4 Months to Pay Taxes

Taxation: Do Costs determine Prices?


In the advent of intense competition, due to rise of  innovation and technology, domestic consumers are benefiting from higher standard of living, at lower costs. Due to this exponential expansion of growth, contemporary economists are analyzing in great detail utilizing a menagerie of statistical models to provide civic leaders the most precise information—these leaders feel compelled to make an informed decision while making public policy.

While these publicly elected officials engage in that decision making process, the subject of taxes always seems to rear its ugly head. For some, they see taxes as a necessary function to fund the operations of government. While others may quibble regarding the role of Government in today’s society; the notion of excess taxation always strikes as a rapier into the hearts and minds of the general public, nonetheless, it still something of worthwhile analysis.

Who Pays The Tax?

While the political experts engage in verbal combat over the notion of taxation, two questions always rise during these debates is about this notion: Who pays the tax? Is the tax passed down to the consumer?

Before these questions are analyzed, let us recall the supply and demand model. With this supply and demand model, there comprises two intersecting curves. The first curve, rising from left to right, is the supply curve. This represents the supply of a certain “good” provided to the market. The demand curve, sloping downward left to right, represents the consumers desire for that particular good. Both curves are analyzed graphically as follows: The horizontal axis(x-Axis) shows the quantity of the good, and the vertical axis(y-axis) shows the price of the good. As the two curves intersect, they reveal the Equilibrium point. This is the market price for that good, assuming all things are  constant(ceteris paribus).

Back to our two questions: Who Pays the Tax? Is the tax passed down to the consumer? Before we answer these questions, more analysis must be completed, so patience is required. With regards to taxation, it must be conceded that the notion of taxation is a trade off. A trade off: In a republic, in order to have various Government “positive liberties”, namely, public goods, to be provided to its citizens, taxation is required to underwrite this political model. Since it is a trade off, that means there is an economic cost related to having Government provide these “positive liberties”. We shall keep our analysis of the costs restricted to taxation, as the costs are many. Oh, and speaking of cost, in an economic sense, taxation is a cost.

Are The Taxes Paid By The Consumers?

Economic costs play a role in the bringing of goods to the marketplace. Each firm must gather up all the factors of production in order to bring their goods to consumers to purchase. Those individual firms must pay some sort of tax on those goods. Now is the time we must address the first question: Is the tax passed down to the consumer?

Here is the answer: Yes and no…it all depends. Yes: If the good’s costs are increased due to taxation, and the consumer sees the good as inelastic, meaning they are less concerned with the price of the good relative speaking, the consumer will simply buy that product. When this happens, the consumer simply absorbs “some” of the costs of the good. No: If the price of the good pushes the price elasticity to the point, for the consumer, where the good goes from “inelastic” to “elastic”, the firm selling the good begins to lose gross revenue. This is due to the fact that consumers have found alternative uses for that product, due the price increase. Based upon these answers, it all depends…depends on the price elasticity of the consumer purchasing the good. In both cases, the consumer pays the cost; this is due to the fact that owners of firms are also consumers. So, firms and consumers pay the tax.

In the latter case, once revenues decline, firms are unable to purchase more of the inputs for that good, subsequently increasing the scarcity factor, which leads to a higher economic cost of that good. This cost is absorbed by firm, due to the fact it has declining revenues and increasing input costs for the good; the consumer also is impact, as the good’s economic cost increases due to scarcity.

Supply and Demand Model

Now it is time for the supply and demand model to be revisited. As previously stated: The equilibrium point is the market price. Stated differently, this is the optimal price firms can sell the good. If they sell the good at a higher price, based upon elasticity of the good, they will sell fewer  units. This is an instance where the economic cost of the good is paid for by the firm.

Since the equilibrium price is the optimal price, as previously stated, the cost is passed to the consumer; the final price is not determined by cost. If the good’s price was determined by the cost, the firm could simply raise the price to meet the costs of the good, but the business runs the risk of having declined sales. The equilibrium price demonstrates the power the consumer has with the sale of the good.


The discussion of taxes is never a pleasant one. It always lends itself to cantankerous banter, and distribution of mis information…bordering on prevarication. When individuals state that the cost of taxation, of a good, can be simply passed onto the consumer, this is a misspeak of the facts.

Tax Loopholes vs Government Subsidies


Many individuals confuse the notion of Tax Loopholes and Government Subsidies. Typically, these two are confused in the conversation of “big business” getting special favors from the Government. While it is true that many larger firms rent seek, or lobby, the US Government for subsidies, this does not mean both Tax Loopholes and Government Subsidies are the same.

What is a Subsidy? 

A Subsidy is a direct payment received from the US Government. For example, some farmers receive subsidies from the US Government to operate their operation. Of course, this has adverse consequences on the economy. The subsidy is paid from the US Government. Prior to that, the subsidy is underwritten by the Tax payers. However, the farmers receive the direct benefit of the subsidy. Since the funds are re-distributed from the tax payers, to the farmers, this causes economic havoc in the marketplace. Resources are not allocated to their highest uses, as the folks in Washington DC make the choice on how resources are allocated, not the actors in the marketplace using the price system.

What are Tax Loopholes? 

Tax Loopholes are simply ways, as per the law, for individuals to keep reduce their tax liability. This simply means they are not due the same amount of tax liability, based upon the individual’s use of the tax code. This differs from a Subsidy in the fact that a subsidy is a direct transfer payment, and the use of a Tax Loophole is not a direct transfer. Moreover, use of a Tax loophole is an opportunity of the individual to keep more of his/her personal property. Recall: The US Government’s role is to protect individual liberty and individual property rights. Also, this allows business owners to invest more of their profits back into their operation. Reducing the economic costs allows more firms to enter the marketplace, subsequently, it provides the consumers more choice.


Subsidies do more harm to the economy, in the long run, as compared to Tax Loopholes. Subsides create much more economic havoc, as it can be detailed out in another article. Tax Loopholes, on the other hand, simply allow citizens to keep more of their private property. This makes more sense because individuals are better suited to make choices for their happiness.

The Luxury Tax: A Folly of The Consumption Tax


Many politicians and lay persons believe the urban myth that Economics is a quantitative science, and that static analysis works with the interaction of human beings.  Politicians believe this when creating tax policy to generate revenues for the Government. These politicians sell the citizens that “taxing the rich” will increase revenue, or the implementation of a consumption/sales tax can simply be passed on to the consumer. All of these points are remarkably false.  All the costs of a consumption tax go back to the business owner, as it impacts the original factors of production: Labor, land and capital.   A glorious example of how this is proven to be true can be found in the famous Luxury Tax of 1990.

The Promise of the Luxury Tax of 1990

This tax was one part of a larger bill named: “The Revenue Reconciliation Act of 1990”.  This bill was created to generate over $140 Billion over a five year period. (Woof, 1991). For this analysis, we will simply focus on the maritime industry and the impact the firms in this market segment due to the implementation of this law. Specific to the maritime industry, any boat sales exceeding $100,000, there was a consumption (excise) tax levied.  The assumption was that consumers of yachts would absorb the increase price, as the other assumption was that the tax would be simply be passed on to consumers, and the Government would receive their projected revenues. However, this was not the case.

The Economic Impact of the Luxury Tax of 1990

The results of the implementation were not surprising for those who understand economics. First of all, the division of labor was impacted.  George Will remarks on the job losses due to this bill: “According to a study done for the Joint Economic Committee, the tax destroyed 330 jobs in jewelry manufacturing, 1,470 in the aircraft industry and 7,600 in the boating industry.” (Will, 1999)  In the State of Florida, the luxury tax impacted the layoff of approximately 13,000 workers. (Pin, 2011) This shows how the consumption tax impacts the division of labor, as it is one of the original factors of production.  Next, the businesses took a huge hit due to this tax. The Wall Street Journal notes here the following: “Yacht retailers reported a 77% drop in sales..” (Wall Street Journal, 2003)  Since sales drops, this reduces the amount of capital that business owners can purchase, borrow and pay back. The end result with this example:  Capital is impacted. What about land? How is this impacted? One can deduce that if sales are impacted, revenues are not able to keep up with the expenses.  Many of the boat manufacturers shut down their plants, and/or filed for bankruptcy protection from their creditors. (Salpukas, 1992) This would impact the land, since the boating manufacturing plants were closed down.

Economics is about Subjective Value

Many think Economics is about stats, graphs, charts and the like. While these items play a vital role in the historical analysis of human behavior, it does not tell the entire story.  Our individual preferences, as humans, are highly subjective. This sort of subjectivity cannot be accurately quantified, nor is the analysis static.  This is the fundamental reason why these sorts of Central Planning projects always fail.  It assumes that humans do not seek alternative choices when the costs to obtain a good change or rise.  Rising prices act as a harbinger for consumers, so they can alter their ordinal goods/services preference ranking. If someone prefers eggs over toast, yet the price of eggs rises exponentially, this does not mean the consumer will continue to purchase eggs. The consumer’s resources are scarce as well, even if they are “rich”. They have other items they prefer, and may choose to plow resources into those items when the price of eggs, using our example, rises too high. This is the notion of elasticity of demand.  Each individual actor has a different preference ranking, and that ranking changes constantly. It is impossible for any human to “plan” out or predict what those rankings will be for millions of individuals.

Other Economic implications from the Luxury Tax of 1990

The Luxury tax bill of 1990 was passed into law in the hopes to generate more tax revenue for the U.S. Government. However, the tax revenues fell short.  After the first year of its roll out, the tax revenues, due to this tax, was about a few tenth of a million dollars. (Pin, 2011) This is not shocking since many of the firms went bankrupt, shut its operations down, or lost revenues.  Ironically, since there were layoffs due to this tax law, the number of unemployment claims rose during this time period.  The explicit cost to the U.S. Government thanks to the job losses from this law was approximately $24.2 million in unemployment benefits. (Will, 1999)  This shows a double whammy for the U.S. Government: There was a short fall in tax revenues, and the Government had increased cost thanks to paying out unemployment insurance to displaced or unemployed workers.
It should also be noted that during this time period, the United States was suffering from a recession. This also impacted the luxury item industry. However, the “solution” would not be raising taxes on these items during this time period. The proper “solution” would be lowering the taxes to encourage growth and economy expansion.  Raising taxes during this time period simply strengthens the argument on how taxes impact business owners.


The economic impacts of the luxury tax of 1990 are quite clear. This version of a consumption tax demonstrates the ill effects of a consumption tax.  Politicians will sell the citizens on the notion of a consumption tax is “better than” an income tax. Just recall the Luxury Tax of 1990 any time the notion of a consumption tax is raised.  The results will be similar, yet it will spread through the entire economy quicker, since it will impact all good/services sold.   It also will not be passed forward to the consumer, but the economic cost will be pushed backwards to the business owner. Regardless if it is a sales tax on specific items, or all items, the tax will impact those original factors of production: Land, Labor and Capital.

Works Cited

Pin, L. (2011, March 10). U.S. Luxury Tax-A Total Failure. Watching America.
Salpukas, A. (1992, Febuary 7). Falling Tax Would Lift All Yachts. New York Times.
Wall Street Journal. (2003, January 3). Good Riddance to The Luxury Tax. Wall Street Journal.
Will, G. (1999, October 28). Tax Break for the Yachting Class. Washington Post.
Woof, S. M. (1991). A Corporate Perspective on the Revenue Reconcilliation Act of 1990. Journal of Corporate Accounting and Finance.