Infrastructure is in the news as policymakers face a deadline to pass a new highway bill. President Obama visited the Tappan Zee Bridge yesterday and said that “rebuilding America … shouldn’t be a partisan issue,” and then cast blame on the Republicans.
The president is right that America ought to have better infrastructure. But the leaders of both parties are overlooking the most straightforward and powerful way to do it: slashing taxes on business investment.
Most of America’s infrastructure is provided by the private sector, not governments. In fact, private infrastructure spending—on factories, freight rail, cell phone towers, pipelines, refineries, and many other items—is more than four times larger than federal, state, and local government infrastructure spending combined. BEA Table 1.5.5 shows that gross private fixed investment in 2013 was $2.56 trillion, while investment by all levels of government was $606 billion.
Private investment was $2.05 trillion when you take out residential. And government investment was $448 billion when you take out defense. Thus, when infrastructure is measured this way, private investment is also more than four times larger than government investment.
Why do U.S. companies spend more than $2 trillion a year on infrastructure? They do it in the hopes of earning profits years down the road from often risky investments. The government stands in the way of these growth-generating investments by confiscating a large share of those profits with income taxes.
We have the highest federal-state corporate income tax rate in the world at 40 percent, which sends a strong signal to manufacturers, utilities, energy firms, and other infrastructure companies not to expand and upgrade their facilities. If policymakers want infrastructure, they should slash the federal corporate income tax rate from 35 percent to 15 percent, which is the rate in Canada after recent reforms.
Another reform is “capital expensing,” meaning allowing businesses to immediately deduct the cost of new fixed investments. That tax treatment would be a huge simplification, and it would end the anti-investment bias in our income tax system. In recent years, Congress has passed temporary and partial capital expensing measures, but we really need a permanent policy change so that businesses could plan for the long term.
Also, expensing should be expanded to include business structures, such as factory buildings, and not just business equipment as has been the case in recent years. The chart at the bottom shows that real U.S. investment in structures was hammered by the recession and still remains at disturbingly low levels (BEA Table 1.5.6).
The stagnant investment in structures is troubling because it suggests a major lack of confidence in the outlook for U.S. economic policy. If business leaders see little hope for relief from Washington’s aggressive tax and regulatory policies, they will build their factories elsewhere and supply expanding global markets from abroad.
President Obama is right to focus on “rebuilding America,” but step one should be to remove the high tax barriers to private infrastructure investment. Let’s follow the successful Canadian approach and slash our corporate tax rate. And then let’s move toward permanent expensing for structures and equipment. As William McBribe of the Tax Foundation notes in a new analysis of expensing, the benefits would “go primarily to workers with low incomes due to higher productivity, higher wages, and more jobs.”