The bipartisan infrastructure deal that President Joe Biden embraced last week would add hundreds of billions of dollars to the economy by 2050, in contrast to the economic drag of his original proposal, according to a new analysis.
The difference is the corporate taxes that Biden proposed raising when he laid out his initial infrastructure plan, which are not part of the bipartisan agreement.
Biden argued his proposal would create good jobs and strengthen the economy while making corporations pay their fair share.
But economists at the University of Pennsylvania’s Wharton School calculated the higher taxes would decrease firms’ incentives to invest and disincentivize saving by households.
“That acts as a significant drag on savings in the economy. So with less savings over time, we have less productive private capital,” said Jon Huntley, a senior economist with the Penn Wharton Budget Model.
“And less productive private capital means fewer computers and fewer trucks and fewer buildings, which makes workers less productive as well, which is reflected in lower wages and lower output.”
The result means the difference of hundreds of billions of dollars, according to the Wharton model.
The economy would be 0.8% smaller and wages 0.8% lower than they would otherwise be if the original Biden plan was passed into law, the team calculated in an April analysis.
Under the bipartisan agreement, by contrast, wages would 0.1% higher and the economy would be 0.1% larger, according to Wharton estimates released Wednesday.
“Even though it looks small, it really is a significant amount of money over the long term,” Huntley said.
The economic boost is despite the fact that Biden’s original proposal would decrease government debt by much more than the bipartisan deal would.
But Biden’s proposed tax increase, which included raising the corporate tax rate to 28% from 21%, were a no-go for Republicans.
A group of moderate Republican and Democratic senators agreed on a smaller spending package, $1.2 trillion of which $579 billion is new spending. Biden’s original plan was $2.7 trillion in new spending.
The bipartisan deal would be paid for through a variety of measures that include stricter tax enforcement, repurposing unused pandemic relief funds, reducing fraud and overpayments in unemployment benefits and through a variety of public-private partnerships that typically rely on user fees such as tolls.
Biden pitched the plan during a visit to Wisconsin Tuesday.
“America has always been propelled into the future by landmark national investments,” Biden said, “investments that only the government has the capacity to make.”
Democrats still hope, however, to raise corporate taxes through separate legislation that would include what was left out of the bipartisan deal.
The administration has favored other economists’ assessments of his proposals over the Penn Wharton Budget Model analyses. Moody’s Analytics, for example, found limited impact from the proposed higher corporate taxes.
“If enacted, the plan would be positive for U.S. economic growth, employment and productivity,” Moody’s Vice President Rebecca Karnovitz said after Biden’s American Jobs Plan was released in spring.
But assessments like the Wharton team’s could make it easier for moderates to push back on progressives. West Virginia Sen. Joe Manchin, a Democrat, has already said he won’t support as big an increase in corporate taxes as Biden proposed.
Both the bipartisan deal and the Democrat-only plans still have to be turned into legislation. Their cost will then be assessed by the nonpartisan Congressional Budget Office.
While the Wharton analysis might not find favor with the White House, the previous occupant was also not a fan of its number crunching.
When former President Donald Trump released an infrastructure plan in 2018, the Wharton economists estimated it would have little to no impact on the economy, prompting the Republican administration to criticize its methodology.