Data doesn't support GOP opposition to infrastructure spending

  • Ralph Martire

    Ralph Martire

 
By Ralph Martire
Posted3/26/2021 1:00 AM

President Biden is considering a range of potential investment options for the federal government covering everything from traditional infrastructure like roads and bridges, to housing, school buildings and even environmentally friendly technology. And while his press secretary Jen Psaki has emphasized the initiative is still in the discussion phase, speculation is a package will be presented to Congress imminently, bearing a price tag that could reach $3 trillion. To cover some of the anticipated cost, Biden is considering increasing the taxes paid by very wealthy Americans, with annual incomes over $400,000.

Given that Biden's predecessor in the Oval Office consistently promised -- but ultimately failed -- to introduce a significant infrastructure investment initiative, you'd think Republican leaders would be willing to engage with the Biden Administration to negotiate a package they could support. So far, however, that doesn't seem to be the case. Indeed, Republican Sen. Mitch McConnell dismissed what he referred to as Biden's "so-called infrastructure proposal" out of hand, labeling it a "Trojan horse for massive tax hikes and other job-killing left-wing policies."

 

Now, it isn't entirely clear why McConnell believes investing in infrastructure is either a left-wing policy, or a job killing endeavor. After all, infrastructure investments have enjoyed bipartisan support over the years at both the state and federal levels, and with good reason. While many variables impact the value of the benefit created when the public sector spends on infrastructure, the research conducted over the last two decades does indicate investing in infrastructure stimulates the economy and creates job growth. For instance, Mark Zandi, one of the principle economists at Moody's, found every dollar the feds put into infrastructure boosts the nation's GDP by $1.60.

Of course, it's not surprising McConnell claimed tax increases kill jobs. He's just parroting what has been GOP orthodoxy on this point for decades. Ever since the Reagan Revolution in 1981, the Republican Party has been preaching tax cuts, particularly for the wealthy, stimulate the economy and create jobs, while tax increases slow the economy and kill jobs. The problem is that line of thinking simply is not supported by the data.

Let's start with a little context. From the end of World War II through 1980, the top marginal income tax rate the feds applied to the highest level of earnings varied from 90 percent to 70 percent. During this time period, the nation's economy grew by an average of 3.8 percent per year in real, inflation-adjusted terms. Then came Reagan, who cut the top marginal tax rate imposed on the highest incomes significantly, all the way down to 28 percent by 1986. He promised this would create a huge economic stimulus, by incenting wealthy folks to work harder and thereby create jobs for everyone else through a "trickle-down" effect. Moreover, this trickle-down effect would be so powerful that the tax cut wouldn't increase the deficit because it'd pay for itself.

In the first two years after Regan's tax cut, the economy did improve. However, economic growth over the seven years Reagan was in office averaged only 3.5 percent in real terms, or less than the average rate of growth when top marginal tax rates were much higher. Slower growth meant the tax cuts never trickled-down, so the deficit exploded. Compare that to the record of President Bill Clinton, who increased the top marginal tax rate back up to 39.6 percent, which, under GOP orthodoxy should have caused the economy to crater. But it didn't. Instead, real GDP growth averaged 3.9 percent annually during Clinton's seven years in office, better than Reagan.

Bigger picture, the Congressional Research Service found there was no correlation whatsoever between any changes made in federal tax policy from 1945-2010 and economic growth, savings rates, investment rates or productivity. Which means the GOP should face facts when it comes to fiscal policy and work to craft initiatives that truly are in America's best interests, rather than spout rhetorical positions that have been thoroughly discredited.

• Ralph Martire, rmartire@ctbaonline.org, is executive director of the Center for Tax and Budget Accountability, a fiscal policy think tank, and the Arthur Rubloff Professor of Public Policy at Roosevelt University.

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