Gauging the potential results of a Trump presidency is difficult because of the wild claims he’s made on the campaign trail. Politicians have often made claims which prove to be false, but Trump has claimed Ted Cruz’s father was involved in the JFK assassination. This is an example of how his rhetoric can get beyond the usual bluster. One policy-related example of this was when he claimed he would spend $550 billion on infrastructure. This type of policy would balloon the deficit to unprecedented proportions. Unfortunately, I made the mistake of actually taking him at his word. I’m not sure why he said this was his plan, but it’s not even close to the plan his advisors came up with.
Maybe making a claim about Cruz’s father is something that doesn’t affect markets, but in this case his infrastructure plan has wide ranging implications on stocks and the economy, so he should be more precise. Now I question whether his healthcare plan would really cover pre-existing conditions and young adults. I can’t take him at his word for anything. I haven’t read through his health care plan, but I have read through his infrastructure plan which is what I will review in this article. Being that Trump is still not in office yet we have no idea whether his rhetoric or ‘pen to paper’ policies will get done. Maybe the GOP Congress will set the country’s agenda. We won’t know for sure until it happens.
As I said Trump’s plan is not a $550 billion spending plan which will be financed by government bonds. The plan calls for $167 billion in tax credits which will attempt to spur private investment in infrastructure. The type of infrastructure built will be projects which have usage fees, for example tolls. The package is a 10 year plan which aims to spur $1 trillion in private spending on infrastructure.
In the paper, which lays out the plan, it comes up with an example scenario on how the math would play out. The reason why I call the plan an example scenario is because it may have to be changed because of its flaws which I will explain at the end. In the example, 17% of the projects will be financed with equity and the rest with debt. The plan has a rate of return, for the private corporations taking on these projects, of 9% to 10% for the equity portion and 4.5% to 5% for the debt portion.
The tax credit is equivalent to 82% of the equity portion. Because the equity portion is more expensive than the debt portion, this tax credit reduces financing by 18% to 20%. I will explain the reason why this assumption may not work out when I get into my criticisms.
The spending on tax credits to fund this plan is supposed to be completely offset by the income taxes generated by workers and the corporate taxes paid by the firms involved in these projects. There are criticisms about these assumptions as well. In my perspective, the fact that it only costs $167 billion over 10 years is exciting. Even if the plan only pays for 50% of the costs, it would be much lower than the $840 billion infrastructure plan under President Obama which was criticized for not investing in ‘shovel ready’ projects.
Trump also plans to cut red tape with infrastructure projects which have been halted by the Obama administration. The red tape scenario is not an issue where either Trump or Obama are wrong. It’s a matter of how you weigh the costs and the benefits of each plan. What Trump plans to do is act more favorable to private projects and care less about the environmental impact of the projects. One example of this is the Keystone XL Pipeline which Trump will allow to go through. There will be $8 billion spent on the project which will create 42,000 jobs. Another area where red tape has slowed down infrastructure spending is energy. The plan states $33 billion in spending has been halted since 2013. I’m assuming Trump’s administration would allow most of those projects to go through.
A final component of the plan is related to the repatriation of corporate profits overseas. Firms do not want to bring their profits home to America because they don’t want to pay the 35% corporate tax rate. Trump’s plan calls for a 10% repatriation tax which would encourage firms to bring some of their capital back to America. The infrastructure plan can be combined with this repatriation plan. This combination could allow a firm repatriating money to pay no taxes if it decides to invest part of the money in infrastructure.
There are a few negatives of Trump’s plan. The first negative is inherent in the plan. Because it relies on private investment, infrastructure projects which purely have a public good such as upgrading schools, roads repairs, and fixing bridges will not be taken on. Trump talks about these projects in his rhetoric, but they won’t be done in this plan. Another criticism is some types of investors cannot take advantage of it. Non-taxable pension funds, endowments, and sovereign wealth plans have capital to invest, but won’t benefit from this plan. Maybe if there was a lot of money in these areas and there wasn’t enough other private investment, Trump could simply pay them for part of their investment in a public/private partnership.
The other issue with the plan is it assumes the employees who work on these projects will pay incremental income tax. This is only the case if all of the workers would be jobless without this plan. In fact, some would have had other jobs, so this tax revenue is not all incremental. The plan also assumes the corporate taxes paid on the profits earned are incremental tax revenue as well. However, the firms could have made profits elsewhere. These two areas are the way the $167 billion plan is paid for without adding to the debt. The math is a leap of faith which is optimistic to the point of not being based in reality.
The final mistake in the plan is the estimate that interest rates will be 4.5% to 5%. This very plan along with Trump’s other pro-growth measures such as lowering taxes and cutting regulations are already increasing interest rates. Therefore, relying on cheap money, may be a flaw in the plan. Trump’s plan believes low rates are a safety net, but there’s no net. Maybe they don’t understand why interest rates are low in the first place (low growth & the Fed).
The plan may get through Congress because both parties want infrastructure spending and the GOP likes private investment. Another question is if it will work. That’s tough to tell because we don’t know what the final bill will look like. Changes are usually made to plans as they are debated in the public and within Congress.