Thanks to technology the world is changing quickly. Technology allows us to do more, faster and often better. However, our infrastructure* has not kept up. Life continues to get more difficult for those with fewer resources. According to Pew Research Center, nearly than 3 in 10 young people are neither employed or in school.
The Biden Administration is proposing to pay for the American Jobs Plan with the Made in America Tax Plan. This includes increasing corporate tax, closing tax loopholes, and making our American companies more accountable. Is this a new source of a tax revenue for the US? Not really.
As you can see from the chart above, taxes for corporations have trended downward for the past 70ish years. Government spending has not supported investment in infrastructure for a very long time. We can see it in our roads and bridges, transportation systems, and technology.
*Infrastructure is defined by Oxford Dictionary as “the basic physical and organizational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society or enterprise. Infrastructure investment, as defined above, is just one component of the proposed American Jobs Plan. For purposes of the Plan the term infrastructure is used more broadly to encompass economic, technological and social structures. Read more
The Importance of Infrastructure Investment
Why is investment into our infrastructure so important? As consumers we invest our time and money into the things we hold dear. That may include our homes, education for our children, healthcare, and even our pets. As a society of more than 325 million people we are dependent on the physical infrastructure that supports transporting people, food, building materials, and all other essentials that allow an economy to function. Maintaining and enhancing this infrastructure is critical to our societal and economic wellbeing.
We are also dependent on the sophistication and soundness of our technology, economic and social infrastructures that support our ability to educate our children, care for our seniors, employ our young people and facilitate changes to support a healthy climate. Making these investments will create jobs and opportunities for families to thrive.
A great example of a technology infrastructure fail occurred during the pandemic. We experienced first hand a huge gap in our educational technology infrastructure trying to adapt classroom learning to a virtual solution. In addition many families were without access to high speed Internet as well as the necessary hardware and software. Unless we address this issue, the gap between the ‘haves’ and ‘have-nots’ will only widen further.
How Do We Pay for This Investment?
By now you have probably read or heard about the proposed corporate tax law changes. The Biden administration announced the Made in America Tax Plan to pay for the American Jobs Plan. According to JD Supra the proposed legislation will raise more than 2 trillion dollars over 15 years.
The Made in America Tax Plan includes raising taxes for corporations from 21% to 28%, closing tax loopholes for corporations and keeping them much more accountable. Janet Yellen, Secretary of the Treasury, called for global minimum tax to prevent American companies from racing offshore to tax-haven countries.
The most recent tax legislation for corporations, The 2017 Tax Cuts and Jobs Act (TCJA) had the reverse net effect. According to the Brookings Institute, "given that the economy grew, and in the absence of another policy that could have caused a large revenue loss, the data imply that the TCJA substantially reduced revenues". In fact, Amazon, Chevron, and Netflix are three of more than 60 companies that did not pay federal income taxes in 2018. Hmmm….. Yet the only way many of these technology companies can exist is if their customers have access to the internet and cellular capabilities. And of course they need roads and bridges to transport goods to their customers.
Right now the U.S. raises less corporate tax revenue as a share of economic output than almost all other advanced economies,” Alan Rappeport and Jim Tankersley of The Times write.
The justification for the tax cuts has often been that the economy as a whole will benefit — that lower corporate taxes would lead to company expansions, more jobs and higher incomes. But it hasn’t worked out that way. Instead, economic growth has been mediocre since the 1970s. And incomes have grown even more slowly than the economy for every group except the wealthy.
What Does This Mean for My Portfolio?
Theoretically, higher corporate taxes are supposed to be “bad” for the economy in the form of fewer jobs and lower wages. However, under this plan, the funds from higher taxes will be used to create jobs and improve infrastructure that will help corporations and the economy. In addition, closing tax loopholes slows down companies from moving overseas for more attractive tax havens. Those that do still have to pay.
No doubt, the proposed plan will change before it takes it final form. We believe, in the long run, however, that investment in America will be a net-positive for our economy over the long-term. We build our portfolios focused on the long-term time horizon while being prepared to weather the inevitable storms that occur through various market cycles.
Jenifer Aronson is the Founder of Mosaic Fi.