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President Biden announced the $2.2 trillion American Jobs Plan, declaring it “will invest in America in a way we have not invested since we built the interstate highways and won the space race.” Leslie Preston, Sr. Economist, TD Bank, weighs in on the impact of the stimulus funded by higher corporate tax rate.
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[AMBIENT MUSIC]
- Well, the White House has outlined one of its major initiatives-- a $2.25 trillion, with a T, infrastructure deal. And this is part of President Biden's jobs plan. And it is sweeping stimulus that is being likened to FDR's New Deal. Take a look at some of the numbers. This is a $2.2 trillion plan that could include $174 billion to EVs, $115 billion to repairing roads and bridges, $85 billion to transit maintenance and expansions, and $80 billion to intercity rail.
Now, the deal still needs to pass by Congress. There's already been some pushback, as expected. But here to tell us what it could all mean for the economy-- not just for the US economy, but also for ours-- is Leslie Preston. She's a senior economist at TD Bank.
Leslie, thanks so much for joining us. This is a massive amount of money. I know there's still some political hoops that need to be jumped through, but just really give some context as to how big this is and how important it is to the economic recovery.
- Well, the dollar estimates you outlined there certainly are large numbers-- although after several rounds of stimulus, we're getting pretty used to those large trillion-dollar numbers. But it's important to remember that on the spending side, that infrastructure spend is spread out over eight years. So it's actually more like $270 billion per year. So it is a little smaller than it appears at first glance.
- Still a big number. Hundreds of billions in a year. But yes, you're right. Not all at once, everything happening. Can you give us a sense of just, like, the timeline for the passage of this? Because you said it's going to be parceled out, I'll say, over a few years. But when we actually expect this to get going?
- Well, there's a bit of uncertainty on that. People in the White House had hoped that Congress could pass it in the summer. A more realistic timeline, it could be more, like, September. The administration has indicated that it would like to pass it on a bipartisan basis. I think realistically, given that the large infrastructure spending is paid for by corporate tax increases, I think it will be unlikely that the Republicans will agree with that. So it will be a matter of making sure all Democrats stay on board with it to get passed and to use reconciliation to clear the Senate.
- Interesting. I do want to get to the details of the tax side, because that's significant, especially for those who watch the markets. But maybe just put it in perspective. I mean, I guess it's been likened to, like I said, the New Deal, when I introduced this topic. Do you see it as that big?
- Yeah. No, the short answer is I don't. I mean, we've just come off of the American Rescue Plan being passed, which was $1.9 trillion, and that money is going to get out the door a lot faster. It is about 1% of GDP, sort of on a yearly basis. So it's not nothing. But it is a lot smaller on a year-over-year basis than we've seen in the most recent rescue plans.
And of course, when you're thinking about the economic impact of it, there's really a short- and a long-term impact. In the short term, you get the boost from construction of infrastructure, the jobs and goods that are purchased by government to build infrastructure or to repair infrastructure. But what the government's really hoping for is that this improved infrastructure improves the long-term growth rate of the economy. So you do get that near-term boost to the economy, which could help the economy recover. But the real hope is that it boosts long-term productivity to enable the economy to grow at a faster rate over the long run.
But in terms of helping the recovery in the short run, these types of projects do typically take time to get underway. So it's not something that we would expect to boost growth in this year-- that at the earliest, the impact would start next year, given that it does take time for these projects to planned and for government procurement to go on. So this is definitely more about medium-term growth.
- Yeah. No, that procurement thing is not something to be overlooked. These things take a long time, and there's lots to have to be done there. You mentioned the increase in tax rates. We're hearing that the rates that we're looking for could be in the range of 28%. How significant is that? Because that's a break, I would expect, on some growth.
- Yes. Certainly. And that's the other side of this, when you compare it to the New Deal or other large expansions of social programs in the United States, is that it does need to be weighed against the dampening impact of the increase in corporate taxes. Now, of course, the Biden administration is doing this to make their plan more fiscally responsible, to reduce the amount of debt that they're adding to future generations.
But there's little doubt that this is a big price tag in terms of corporate taxes. It rolls back half of the tax cut that was passed in the Tax Cuts and Jobs Act by the Trump administration. Recall that the corporate tax rate went from 35% to 21%. So this takes it back up to 28%.
The corporate tax cut at that time did have a substantial impact on earnings per share of S&P 500 companies, which rose substantially after the tax cuts were passed. So we would expect that this would have a significant hit both in terms of earnings per share and market implication, but also, in terms of-- from an economic perspective and growth perspective, higher corporate taxes do reduce the after-tax rate of return on corporate investment, and in most standard economic models would reduce long-run economic output and jobs over the long run. So you really have that tug of war. You have the potential boost from the infrastructure investment, but at the same time, the potential negative from the tax increase.
- It's interesting that Janet Yellen coming out right now and calling for a global minimum tax rate for all OECD countries-- it looks as though she's trying to mitigate, maybe, some of the companies saying great, we're just going to move to somewhere where there's a lower tax rate at the same time.
- Well, exactly. And that is a big part of the reason why she's calling for that. But it's not a new subject. It's certainly been a topic at G20 meetings in the past. But the impetus is to really level the playing field in the taxation of multinational corporations.
You know, as you mentioned, on a self-interested basis, it does sort of improve the uncompetitiveness impact of raising the corporate tax rate in the US. But also, the US is not alone in wanting to sort of level that playing field and reduce the incentive or the ability for multinational corporations to shift profits to tax havens.
- Leslie, great to have you with us. We'll have you back just to figure out how that infrastructure plan gets rolled out and what the real impacts are. Thanks so much.
- My pleasure.
[AMBIENT MUSIC]
- Well, the White House has outlined one of its major initiatives-- a $2.25 trillion, with a T, infrastructure deal. And this is part of President Biden's jobs plan. And it is sweeping stimulus that is being likened to FDR's New Deal. Take a look at some of the numbers. This is a $2.2 trillion plan that could include $174 billion to EVs, $115 billion to repairing roads and bridges, $85 billion to transit maintenance and expansions, and $80 billion to intercity rail.
Now, the deal still needs to pass by Congress. There's already been some pushback, as expected. But here to tell us what it could all mean for the economy-- not just for the US economy, but also for ours-- is Leslie Preston. She's a senior economist at TD Bank.
Leslie, thanks so much for joining us. This is a massive amount of money. I know there's still some political hoops that need to be jumped through, but just really give some context as to how big this is and how important it is to the economic recovery.
- Well, the dollar estimates you outlined there certainly are large numbers-- although after several rounds of stimulus, we're getting pretty used to those large trillion-dollar numbers. But it's important to remember that on the spending side, that infrastructure spend is spread out over eight years. So it's actually more like $270 billion per year. So it is a little smaller than it appears at first glance.
- Still a big number. Hundreds of billions in a year. But yes, you're right. Not all at once, everything happening. Can you give us a sense of just, like, the timeline for the passage of this? Because you said it's going to be parceled out, I'll say, over a few years. But when we actually expect this to get going?
- Well, there's a bit of uncertainty on that. People in the White House had hoped that Congress could pass it in the summer. A more realistic timeline, it could be more, like, September. The administration has indicated that it would like to pass it on a bipartisan basis. I think realistically, given that the large infrastructure spending is paid for by corporate tax increases, I think it will be unlikely that the Republicans will agree with that. So it will be a matter of making sure all Democrats stay on board with it to get passed and to use reconciliation to clear the Senate.
- Interesting. I do want to get to the details of the tax side, because that's significant, especially for those who watch the markets. But maybe just put it in perspective. I mean, I guess it's been likened to, like I said, the New Deal, when I introduced this topic. Do you see it as that big?
- Yeah. No, the short answer is I don't. I mean, we've just come off of the American Rescue Plan being passed, which was $1.9 trillion, and that money is going to get out the door a lot faster. It is about 1% of GDP, sort of on a yearly basis. So it's not nothing. But it is a lot smaller on a year-over-year basis than we've seen in the most recent rescue plans.
And of course, when you're thinking about the economic impact of it, there's really a short- and a long-term impact. In the short term, you get the boost from construction of infrastructure, the jobs and goods that are purchased by government to build infrastructure or to repair infrastructure. But what the government's really hoping for is that this improved infrastructure improves the long-term growth rate of the economy. So you do get that near-term boost to the economy, which could help the economy recover. But the real hope is that it boosts long-term productivity to enable the economy to grow at a faster rate over the long run.
But in terms of helping the recovery in the short run, these types of projects do typically take time to get underway. So it's not something that we would expect to boost growth in this year-- that at the earliest, the impact would start next year, given that it does take time for these projects to planned and for government procurement to go on. So this is definitely more about medium-term growth.
- Yeah. No, that procurement thing is not something to be overlooked. These things take a long time, and there's lots to have to be done there. You mentioned the increase in tax rates. We're hearing that the rates that we're looking for could be in the range of 28%. How significant is that? Because that's a break, I would expect, on some growth.
- Yes. Certainly. And that's the other side of this, when you compare it to the New Deal or other large expansions of social programs in the United States, is that it does need to be weighed against the dampening impact of the increase in corporate taxes. Now, of course, the Biden administration is doing this to make their plan more fiscally responsible, to reduce the amount of debt that they're adding to future generations.
But there's little doubt that this is a big price tag in terms of corporate taxes. It rolls back half of the tax cut that was passed in the Tax Cuts and Jobs Act by the Trump administration. Recall that the corporate tax rate went from 35% to 21%. So this takes it back up to 28%.
The corporate tax cut at that time did have a substantial impact on earnings per share of S&P 500 companies, which rose substantially after the tax cuts were passed. So we would expect that this would have a significant hit both in terms of earnings per share and market implication, but also, in terms of-- from an economic perspective and growth perspective, higher corporate taxes do reduce the after-tax rate of return on corporate investment, and in most standard economic models would reduce long-run economic output and jobs over the long run. So you really have that tug of war. You have the potential boost from the infrastructure investment, but at the same time, the potential negative from the tax increase.
- It's interesting that Janet Yellen coming out right now and calling for a global minimum tax rate for all OECD countries-- it looks as though she's trying to mitigate, maybe, some of the companies saying great, we're just going to move to somewhere where there's a lower tax rate at the same time.
- Well, exactly. And that is a big part of the reason why she's calling for that. But it's not a new subject. It's certainly been a topic at G20 meetings in the past. But the impetus is to really level the playing field in the taxation of multinational corporations.
You know, as you mentioned, on a self-interested basis, it does sort of improve the uncompetitiveness impact of raising the corporate tax rate in the US. But also, the US is not alone in wanting to sort of level that playing field and reduce the incentive or the ability for multinational corporations to shift profits to tax havens.
- Leslie, great to have you with us. We'll have you back just to figure out how that infrastructure plan gets rolled out and what the real impacts are. Thanks so much.
- My pleasure.
[AMBIENT MUSIC]
