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IMA Tax Policy Blog

Evaluating the Economic Impact of Additional Government Infrastructure Spending

From the Tax Foundation: New report shows infrastructure spending has very modest impact on GDP, wages, jobs . . .

Federal lawmakers have raised the idea of increasing infrastructure spending not only to repair roads and bridges, but also as a way to boost economic growth. In a new study, the Tax Foundation—with its Taxes and Growth Model—estimates that infrastructure spending would boost the size of the economy, but the impact would be quite modest.

In fact, depending on the funding mechanism, infrastructure spending could actually decrease economic growth in the long run. The study analyzes the economic impact of a $500 billion investment in infrastructure over the next ten years. The report compares five different funding mechanisms for such an investment: borrowing; cutting other government spending; raising excise taxes; raising the top tax rate on individual income; and raising the corporate income tax.

Key Findings

President-Elect Donald Trump and lawmakers on both sides of the aisle have expressed interest in a one-time investment in infrastructure as means to boost economic growth.

Economic literature is all over the map when it comes to assessing the value of additional government civilian infrastructure. Estimates range from a zero to a 10 percent return on additional government capital in the United States.

Using the Tax Foundation’s Taxes and Growth Economic Model, we evaluate the economic impact of a $500 billion investment in infrastructure over the next ten years along with five funding mechanisms: borrowing; cutting government consumption spending; raising excise taxes; raising the top tax rate on individual income; and raising the corporate income tax.

Increasing infrastructure spending either through deficit-financing or lower government spending elsewhere would provide the biggest benefits. In these scenarios, infrastructure spending would boost long-run GDP by 0.11 percent, boost wages by 0.1 percent, and increase employment by 21.4 thousand full-time equivalent jobs. But even these benefits are relatively small compared to policies that would make the tax code more competitive.

If funded by taxes, new infrastructure has a range of economic impacts depending on the revenue source. New infrastructure funded by a broad-based excise tax would boost long-run GDP by 0.06 percent while the same investment funded by a corporate rate increase reduces long-run GDP by 0.41 percent.

“Productivity and wages are not generally suffering from an insufficiency of infrastructure,” the report says. “They are suffering from a dearth of private sector capital formation, which has been hindered by our current tax code. Until the deficiencies with our tax code are addressed, boosting infrastructure will have limited effect on production, jobs, and wages.”

Click here to view the full report.

Source: The Tax Foundation

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