It was reported on Tuesday that Senate Democrats intent on creating a National Infrastructure Bank (NIB) have quietly thrown Republicans a bone on the corporate tax repatriation issue. Led by Sen. Charles Schumer (D-N.Y.), senior Democrats in “the world’s greatest deliberative body” are dropping hints that they will back Republicans’ wishes on repatriating foreign corporate earnings to be subjected to reduced tax rates for one year, provided Republicans support some form of NIB.
Boosters of a repatriation tax holiday, including Sen. John McCain (R-Ariz.) and the U.S. Chamber of Commerce, are claiming that this will spur much-needed investment in our economy. While it is likely there will be some temporary benefit to the one-year holiday, it isn’t likely to greatly increase private investment across the economy or result in many new hires. The problem facing investment does not appear to be a lack of access to capital. Banks’ willingness to lend has been increasing. Corporate profits are recovering [PDF] (even non-bank profits). Yet investment has plateaued [PDF]. Why might this be the case?
Some on the left have offered the absurd explanation that corporations are sitting on profits just to mock the many unemployed Americans. This relies on the insane premise that businesses do not make decisions based on perceived exploitable market opportunities; rather, they make decisions as irrational jerks. Therefore, say the lefties, businesses must be subjected to even more regulation and taxation, as if this is a good way to drive private investment. This is more than 99 percent wrong.
A better explanation: the private sector isn’t investing because it is nervous about the future of the American economy. They are concerned that there is too much regulation, too little genuine consumer demand, and that it is only going to get worse under the present administration and its allies in Congress. Investment is sluggish because the private sector is extremely wary of assuming new debt, while households, many of which found themselves underwater with the housing market collapse, are still deleveraging.
I for one find the economic uncertainty explanation for soft investment more plausible than the one that assumes that Robber Barrons in monocles and top hats are being mean for meanness’ sake.
Those in favor of the one-year repatriation tax holiday argue that it would be a shot in the economy’s arm. While this may temporarily boost tax receipts (and prevent some government service cuts), and benefit shareholders due to firms’ share repurchases and dividend payouts that would likely occur as a result, this would most likely not meaningfully boost investment (although investment could be spurred as a secondary effect of reinvested gains from dividends and share repurchases, as well as temporarily increase consumption, this effect would likely be small and it would not address business’ underlying uncertainty) [PDF].
It would be preferable to move toward a permanent reduction in the U.S. corporate tax rate, which ranks among the highest in the world [PDF], and move away from taxing global earnings toward a tax system based on territoriality. But in the current political climate, these extremely sensible proposals are unlikely to gain broad support. A one-year “holiday” is unfortunately the best we can hope for at the moment.
However, were the repatriation tax holiday proposal to be bundled with a so-called National Infrastructure Bank, the small economic benefits of the tax holiday would be greatly outweighed by the staggering costs of an NIB boondoggle. A few fundamentally flawed NIB proposals are currently being championed by the Obama administration and some members of Congress. A basic truth: Banks make loans, they don’t make grants. Yet the proposal from the White House [PDF, pg. 22] relies on federal funds and permits the “bank” to issue grants.
While a House proposal more closely resembles a bank, it would actually most closely resemble Fannie Mae, which its chief sponsor has deemed a feature, not a bug. The House version even requires projects that accept financing from the NIB must comply with pro-union prevailing wage laws, which regularly increase the cost of construction by more than 10 percent. If increasing sound investment is your goal, that seems like a strange way to go about achieving it.
The NIB proposal introduced in the Senate by John Kerry (D-Mass.) was largely adopted by the White House in Obama’s “American Jobs Act.” The Jobs Act would create a government-owned corporation, the American Infrastructure Financing Authority, which would offer subsidized services such as sub-market rate loans and loan guarantees. Of course, it specifically calls for giveaways to rural areas (gotta’ keep the Corn Belt happy).
It is also incorrect to equate this NIB proposal with the Federal Highway Administration’s successful TIFIA loan program, as was falsely claimed at today’s House hearing on NIB proposals. TIFIA has been successful because it has a narrow surface transportation focus and has built up a high level of institutional knowledge coupled with experienced practitioners. Not only would the NIB be starting from scratch with a new crop of inexperienced practitioners, highway projects would be competing with dams, ports, inland waterways, mass transit, “high-speed” passenger rail, airports, water treatment facilities, “green” energy generation, and energy efficiency-enhancing building projects, to name a few eligible project classes. Taking a non-specialized, “everything but the kitchen sink” approach to infrastructure investment, especially by a political entity, is almost guaranteed to increase waste, fraud, and abuse.
I’m sympathetic to some fiscal conservatives who argue that in theory an NIB could produce beneficial transportation investments. However, it is unlikely that the White House and Congress will be able come up with a National Infrastructure Bank proposal that would be sufficiently independent from political forces and one that can actually function as, you know, a bank. More likely, an NIB will result in poor investment decisions and increased infrastructure waste. And, sometime in the future, potentially a Fannie-Mae-style taxpayer bailout from the Treasury.
Say what you want about the short-run benefits of a repatriation tax holiday, but enacting this Band-Aid policy should not come at the price of creating an extremely reckless and doomed-from-the-start NIB.