President-elect Donald Trump has promised large increases in infrastructure investment. He has not proposed a detailed plan yet, but $1 trillion in new investment is being discussed as a target.
Actually, Trump has already made a specific proposal that would increase investment by far more than $1 trillion: his tax cut plan. His proposed corporate tax rate cut from 35 percent to 15 percent would increase the net returns to a vast range of infrastructure, including pipelines, broadband, refineries, power stations, factories, cell towers, and other hard assets. With higher net returns, there would be more capital investment across many industries.
How much more? The Tax Foundation estimated that the overall Trump tax cut would expand the U.S. capital stock by 20 percent above what it would otherwise be within 10 years. TF economists tell me that private capital stock is about 189 percent of gross domestic product under the baseline, which would be about $35 trillion this year and more than $50 trillion in 2026. If the Trump tax cut was enacted and the capital stock grew as TF projects, the capital stock would be $10 trillion or more higher than otherwise by 2026.
Other economic models have produced different estimates of the Trump plan’s effects. However, if the tax cut produced anywhere near the benefits projected by TF, then it would amount to a huge multi-trillion-dollar “infrastructure plan.”
Some models show that the Trump plan would not have such large positive effects. They typically hinge on the assumption that “higher budget deficits will crowd out private investment and slow the economy,” as the Wall Street Journal noted. There is disagreement about the size of the crowd-out effect, but the way to avoid it is to match the Trump tax cuts with spending cuts. Both tax cuts and government spending cuts are good for the economy, so such a plan would spur the most growth.
I have focused on private infrastructure here, which is a much larger part of the economy than is government infrastructure. Nonetheless, we need cost-efficient and high-quality government infrastructure as well, and I discuss here how to get it.