The imaginary cost of tax breaks

The main argument levelled against the Partnership to Build America Act is the amount it will cost the government in lost tax revenue. But ‘lost’ implies having something in the first place.

Vice President Joe Biden’s recent remark that New York’s LaGuardia Airport is ‘third world’ sums up the state of US infrastructure pretty well.

So when a proposal comes along such as the Partnership to Build America Act, which has been touted as original and creative, it is a welcome development.

It was in fact welcomed by both parties, with the bill enjoying bipartisan support from the beginning when Congressman John Delaney, a Democrat from Maryland, introduced it last May. Since then support has grown further – the bill currently has 50 co-sponsors – and a companion version is in the Senate.

Introduced by Senator Michael Bennet of Colorado in January, the Senate’s version of the Partnership to Build America Act is similar – although not identical – to Delaney’s bill.

Both versions call for the creation of a $50 billion infrastructure bank – which can be leveraged up to $750 billion – that would be capitalised through the sale of 50-year bonds. US corporations would be incentivised to buy these bonds by repatriating tax-free a portion of their foreign earnings, which according to Delaney total about $2 trillion – for every dollar they invest in the bonds.

It is this funding mechanism critics have taken issue with.

“These bills are a mix of good and bad, with the bad being important enough to argue against their passage,” Thomas L. Hungerford, a senior economist and director of tax and budget policy at the Economic Policy Institute, a non-partisan think tank, wrote in a recent policy memo.

Hungerford argues that the funding mechanism proposed would cost the government $70 billion to $100 billion in tax breaks, while a direct appropriation of $50 billion would be more cost effective.

His argument is flawed for a number of reasons, critics argue. His cost estimate is based on a 35 percent tax rate. However, Hungerford doesn’t take into consideration that multinationals that have paid taxes in a foreign jurisdiction will be charged less than the 35 percent rate when they repatriate those earnings.

More importantly his argument is based on the assumption the government would be able to tax corporations on their foreign earnings, which according to the current tax code, is simply not possible.

His analysis also fails to take into consideration how the benefits of infrastructure investment, in terms of economic growth and job creation, would offset the hypothetical cost in lost taxes.

According to the McKinsey Global Institute, an investment of $150 billion a year would add nearly 1.5 percent to annual GDP and create at least 1.5 million jobs.

Finally, funding the bank through repatriated earnings and not appropriations has the benefit of not burdening taxpayers, not increasing the country’s debt, and not linking the funds to possible sequestrations – or the kind of partisan politics that led to a government shutdown last October.

N.B.: The April 2014 issue of Infrastructure Investor will include a keynote interview with Congressman John Delaney.