President-elect Donald Trump wants $1 trillion to be spent on infrastructure projects, but he doesn’t want the government to be the one spending it. So he is proposing a scheme based on tax credits intended to stimulate private investment. The projects will then repay the cost of the tax credits through “incremental tax revenues that result from project construction in a design that results in revenue neutrality,” as Peter Navarro explains (p.4). He goes on to claim “Two identifiable revenue streams for repayment are critical here: (1) the tax revenues from additional wage income, and (2) the tax revenues from additional contractor profits” (p.4).
Let’s set aside the crucial question of the degree to which tax credits actually stimulate additional private investment and instead focus on the part that seems to make the plan revenue-neutral. An appropriate adage here is, if it sounds too good to be true, it probably is.
The problem with Navarro’s logic is that he ignores a fundamental part of economics: opportunity costs. First, he assumes the people who work on the project would have been unemployed or for other reasons paying no taxes if not for the Trump plan. To the extent they were already employed and are working on Trump-plan projects instead of something else, then their tax payments are not incremental.
Second, he assumes that contractors would be less profitable without the plan. That could be true if they would not have had work or if the plan allows them to charge more than they would have otherwise. If they would have taken other jobs then, again, the taxes on profits from the Trump projects are not additional taxes, but simply taxes on the stream of income that replaced a previous stream. If their profits increase because they are able to charge more due to increased demand for their services, their taxes should increase, as well. However, the incremental increase is only the amount above what they would have paid otherwise, not the full amount.
The real question for the infrastructure plan is whether the benefits are worth the costs, regardless of how it is financed. But claiming that this plan is necessarily revenue-neutral is misleading because to the extent these projects replace any others that would have happened otherwise, the tax revenues, as well, only replace other taxes that would have been paid.
Increased investment in infrastructure may be good, as long as money is allocated in ways that emphasize cost-effectiveness and a focus on projects that would not happen without this additional spending. But hopefully future planning will consider economic concepts more seriously.
