If you are like me, you are feeling overwhelmed by the sheer size, scope, and number of federal spending proposals that have been coming out of the Biden White House: The American Rescue Plan. The American Jobs Plan. The American Family Plan. The budget. It is too much to process, and the price tag – trillions of dollars – too gargantuan to conceptualize.

Unfortunately, because the stakes are so high, we cannot let these proposals go unscrutinized, even if we think all we can do is hunker down and hope we survive the tidal wave threatening to crash over us. Given their astonishing cost and expanse, if these proposals are enacted and do not work we will suffer.

Yesterday, I testified before the House Committee on Education and Labor and was able to zero in on what, at least in education, are the big thrusts in all this. You can read my written testimony for my thoughts on education spending broadly. What follows here is a relatively quick offering of research and data on what appear to be the major targets for funding: early childhood education and childcare, building and renovating K‑12 schools, and “free” community college.

This is not a comprehensive analysis or rebuttal of any proposal, but a quick collection of evidence to get you started on responding when someone tells you, “Of course Washington needs to spend more on these things.”

Constitutionality

I know this is no longer even an orange traffic cone in the way of the federal Mack Truck, but the Constitution does not allow broad federal spending for child care, schools, etc. And the rule of law should still matter.

This 2010 blog post remains the most succinct thing I’ve written explaining that nothing in the Constitution – not the “general Welfare” clause, not the taxing power, not the “necessary and proper” clause – allows the feds to go beyond the specific enumerated powers given to them, among which you will find nothing about education. I also recently completed reading these volumes, and there is almost zero mention of education except for a bit of discussion of a national university. And how was National U dealt with? As James Madison recorded Gouverneur Morris of Pennsylvania explaining, placing the creation of a national university among the enumerated powers “is not necessary. The exclusive power at the Seat of Government, will reach the object.”

Creating a specific, enumerated power to engage in education was turned down because another specific, enumerated power handled it, not because it could be done using the “General Welfare” or some other clause.

Early Childhood

I heard much yesterday suggesting the evidence is overwhelming that money spent on early childhood education and care is a terrific investment. What gets in the way is the early childhood research, especially the top-quality, random-assignment kind that controls well for unobservable characteristics like motivation, and allows for long-term tracking. What we often see is that whatever benefits there are soon fade out, and a lot of research cited as proof that early childhood funding pays off falls short of proving anything.

This 2014 Policy Analysis from Professor David Armor is a great overview and analysis of the research, both the methodologies and what the body of research shows.

I also came across this paper from the Institute for Family Studies, which discusses a lot of the child welfare research on early childhood. Not only is government child-care assistance not always positive, it can sometimes hurt.

K‑12 School Conditions

It is asserted that public school buildings are often in terrible condition and only the feds can spend enough to resurrect them.

There is some grounds for this conclusion, including a recent Government Accountability Office (GAO) report showing that about 41 percent of districts say at least half of their schools need updates or replacements of HVAC systems, about 28 percent improvements of their interior light fixtures, and more.

Matters, however, are not as simple as “districts say they’ve got problems, the feds have to fix them.”

For one thing, a federal report on school conditions based on a 2012–13 survey found that only 3 percent of permanent buildings were in “poor” condition, meaning they fell short of “minimum requirements for normal school performance,” and even in poor districts only 4 percent of permanent buildings were in such health. Despite the 4 percent finding, the crumbling building problem is thought to be especially acute in low-income districts, and perhaps it is. But if so, it is not clear that it is for want of resources. As a 2019 federal report shows (table 7), in the large majority of states the lowest-income quartile of districts spend the most per student. When aggregated at the national level they spend almost as much as the wealthiest districts, and if you include the second lowest quartile, the spending in the bottom half of wealth is more than $1,000 per student higher than in the top half.

Another problem, which the GAO report and others find, is that many districts do not want to pay for building construction or improvements, and when the public does want something it is not mundane stuff like maintaining a boiler, but building new, much bigger buildings, or buying the latest tech. As the GAO reported of a Rhode Island district, “Officials said participants in public forums told them they preferred educational enhancements over facility repairs.” Of course, money could also just get burned off in bureaucracy.

It is not clear that school districts have major facilities problems, and if they do, that a lack of funding creates them.

“Free” College

Nothing is free. Someone has to pay. And if we have learned anything in higher education it is that when students pay with someone else’s money, especially taxpayer dollars, it is a recipe for massive, expensive distortions.

The chart below strongly suggests that, ironically, what created skyrocketing college sticker prices – arguably the biggest problem in higher ed – were federal laws creating and expanding student aid to make college more affordable. It turns out the more you give people someone else’s money to pay for something, the more they demand that thing, the less they focus on getting it as efficiently as possible, and the higher prices go.

But we got a lot of additional, powerful learning out of this, right?

Wrong. We got a lot more degrees. But not all credentials are created equal.

We have two national assessments of adult literacy that we can break down by educational attainment, and both show declining average literacy for degree holders as degree-attainment rose. The National Assessment of Adult Literacy, conducted in 1992 and 2003, found both “prose” and “document” literacy dropping substantially for holders of four-year and advanced-degrees, and the Program for the International Assessment of Adult Competencies, administered in 2012/14 and 2017, also found falling literacy (though not statistically significant) among people with more than a high school education. And as the chart below shows — taken from this report — earnings for all higher education attainment levels dropped between 2000 and 2018.

Added to these pieces of evidence, we have long had about a third of Americans with bachelor’s degrees in careers – not just short-term employment – that do not require the credential.

Alas, what government breaks, it often “fixes” by making problems even worse.

Free college would further sever the consumer from the payment, encouraging even more overconsumption and fueling a cycle of even worse credential inflation – needing degrees for jobs that did not previously require them. The push is starting with community college, which is already essentially free: the average Pell Grant of $4,418 more than covers the average community college tuition and fees of $3,377.

Nor surprising, as data from the National Student Clearinghouse show, community colleges – typically two-year programs – have six-year completion rates of only about 40 percent. As I wrote about a defense of community colleges by Tom Hanks a few years ago, what the completion data suggest is, like a young Hanks experienced, community colleges may often be places to dabble in education, which is fine on one’s own dime, but not someone else’s. And there is no reason to believe “free” two-year colleges are the end goal: that is almost certainly free four-year public institutions.

That said, one thing about free college may prevent mass lingering and over-creation of degrees: rationing. If demand is goosed beyond what even the federal government might be able to spend, spaces would have to be rationed. As a paper from Jason Delisle and Preston Cooper at the American Enterprise Institute illustrates, at the very least there are tradeoffs between how much government funds colleges, the levels of resources those schools have, and how many people can attend.

Also, as bloated as America’s ivory tower is, ours is almost certainly the best in the world because, unlike most other countries, we primarily fund students instead of schools, and leave institutions a lot of autonomy to innovate and compete. England moved to our model over the last couple of decades, and wouldn’t you know it, the top ten universities in the world are all in the U.S. or England (granted, as rated by a publication in London).

Conclusion

The Biden proposals seem to be premised on one idea: we do not spend enough money. At the very least, the situation is not at all that simple.

Senator Ted Cruz has harsh words in the Wall Street Journal for “woke” CEOs who criticize the new Georgia election law. But he doesn’t stop with a defense of the law or a recommendation that the CEOs stick to business. No, this paragon of limited government is threatening to hurt companies who express opinions he disagrees with:

This is the point in the drama when Republicans usually shrug their shoulders, call these companies “job creators,” and start to cut their taxes. Not this time.

This time, we won’t look the other way on Coca-Cola’s $12 billion in back taxes owed. This time, when Major League Baseball lobbies to preserve its multibillion-dollar antitrust exception, we’ll say no thank you. This time, when Boeing asks for billions in corporate welfare, we’ll simply let the Export-Import Bank expire.…

Enough is enough. Corporations that flagrantly misrepresent efforts to protect our elections need to be called out, singled out and cut off.…

To them I say: When the time comes that you need help with a tax break or a regulatory change, I hope the Democrats take your calls, because we may not.

That’s breathtaking. As they say, he’s saying the quiet part out loud. We all suspect that politicians of both parties use tax money and the regulatory apparatus to reward their friends and hurt their opponents. Indeed, the most honest politician in history might have been Lord Bolingbroke, an English Tory leader in the eighteenth century, who wrote in a letter to a friend:

I am afraid that we came to Court in the same dispositions as all parties have done; that the principal spring of our actions was to have the government of the state in our hands; that our principal views were the conservation of this power, great employments to ourselves, and great opportunities of rewarding those who had helped to raise us and of hurting those who stood in opposition to us.

And that’s exactly what Cruz now tells us he does. He is saying that he and his Republican friends have given businesses tax breaks, antitrust exemptions, and Ex-Im subsidies because the corporations made political contributions. But now that’s not enough: if the corporations don’t shut up about politics, they’ll get no more benefits from Republican officials. 

Cruz is no machine hack nor a naive Mr. Smith plucked straight from the Boy Rangers. He’s a graduate of Harvard Law School who has been a clerk for Chief Justice Rehnquist, an associate deputy attorney general, and solicitor general of Texas. He wrote his senior thesis at Princeton on the Constitution. He might even have read Lord Bolingbroke, as I did, in Political Writers of Eighteenth-Century England edited by Jeffrey Hart. He professes, credibly, to have read Friedman and Hayek (who would have advised him to cut off the export subsidies on principle). He is thoroughly familiar with law and economics. So he knows just how bad his admission is, how corrupt he would declare it if a Democrat said something similar.

One might say that Cruz is engaging in “cancel culture,” but that would minimize the offense. Cruz is not a university, publishing house, or student speakers committee. He’s one of 100 United States senators, entrusted by the voters to exercise judgment on public matters under the Constitution. He has failed to live up to that standard. 

President Biden’s infrastructure plan is a mess of contradictions. It promises to increase America’s competitiveness and “create millions of good jobs,” but it would be funded by a corporate tax increase that would do the opposite. The plan would provide large corporate subsidies, even though leading Democrats often complain about corporate subsidies.

Perhaps the most striking contradiction in Biden’s plan is that it is supposed to combat climate change, but the plan’s $2 trillion in taxpayer funding is not green. The green way to fund infrastructure is through user charges that restrain consumer demand. But Biden’s plan relies on income taxes to pay for infrastructure subsidies, and that approach does not moderate consumption or reduce resource use.

If water systems need upgrades, for example, they should be funded by increases in water charges to limit water use and benefit the environment. In the same way, gas taxes are a good way to fund highways because they restrain automobile use and passenger charges are a good way to fund airports because they restrain airline use. Well-structured user charges can also reduce congestion.

Biden would subsidize the upgrades to water systems, highways, airports, and other facilities, rather than relying on green and efficient user charges. In his infrastructure plan, the president mentions climate change 20 times and the environment 14 times, but the plan is entirely funded in a non-green manner.

The table shows some of Biden’s proposed non-green infrastructure subsidies and the preferred green funding approach.

Other commentary on Biden’s infrastructure plan here, here, here, here, here, here, and here.

The California high-speed rail project was originally projected to cost $25 billion and is now projected to cost $100 billion. It was originally expected to be complete by 2020; now they are saying some time in the 2030s. Since they don’t have the money to complete it, it may never get done, and the part that will be finished serves the least-populated part of the route.

Hawaii has its own rail debacle that sounds like California’s system on a smaller scale. Honolulu decided to build a rail transit line that was originally projected to cost less than $3 billion. The latest estimates are that it will cost $12 billion including finance charges. The line was supposed to open in 2020; now they are saying 2031. But that date may be irrelevant because the transit agency building the project is $3 billion short of what is needed to finish it, and the part that will be finished serves the least-populated part of the route.

These two examples are a little extreme, but rail transit projects on average cost about 50 percent more than their original projections and very few end up costing less than 20 percent more than projected. While it is too soon to tell for California or Honolulu rail, ridership projections also average 70 percent more than actual ridership. A planning process that systematically overestimates benefits and underestimates costs is effectively biased towards capital intensive, high-cost projects.

This makes it particularly frightening that the Biden infrastructure plan calls for spending $85 billion more on transit. Transit carries only 1 percent of passenger travel in the United States and zero percent of freight, yet under Biden’s plan it would get nearly as much money as highways, which carry more than 85 percent of passenger travel and nearly 40 percent of the nation’s freight.

Biden’s proposal specifically calls for bringing “rail service to communities and neighborhoods across the country.” But rail transit was rendered obsolete by buses nearly a century ago, which is why between 1920 and 1975 around a thousand cities replaced rail lines with buses. Only when the federal government agreed to pay part of the cost of building new rail lines did many transit agencies get interested in new rail transit construction. Since then, the number of cities with rail transit has quintupled.

This is just one way in which the Biden infrastructure plan will waste money. Another is a “fix-it first” provision associated with Biden’s proposed highway spending. Although highways nominally get a little more money than transit ($115 billion vs. $85 billion), the “fix it first” rule means that states will not be able to build new roads until all existing roads are considered to be in good condition. No such rule will be applied to transit.

In fact, America’s state highways and bridges are already in pretty good condition. The number of bridges rated to be in “poor” condition has declined from 124,000 in 1992 to 45,000 in 2020. The average roughness of pavement has also declined, meaning fewer potholes. These improvements were made without a giant infrastructure bill.

Transit infrastructure, meanwhile, is in terrible shape and deteriorating faster than agencies are maintaining it. The latest estimate is that transit needs $174 billion to get into a state of good repair. (It would cost a lot less to convert most rail transit to buses, which could be done in most cities whose initials are not NYC without harming transit systems.) If a fix-it first rule should be applied to anything, it would be transit.

An even more fundamental flaw with the Biden plan is that it completely ignores recent events, namely the pandemic. Even after everyone is vaccinated, it is expected that more people will work at home, fewer jobs will be located in downtowns, and more households will move to lower density areas. All of these changes hurt transit ridership, which is not likely to recover to more than about 75 percent of its pre-pandemic levels. This is a bad time to increasing spending on transit infrastructure.

The federal government should stop giving cities incentives to build expensive rail transit lines they don’t need. If Congress really wants to help infrastructure, it should just give money to the states based on a formula that takes population, land area, and miles of passenger travel and freight shipping (or user fees) into account and let the states decide how to spend the money.

U.S. Treasury Secretary Janet Yellen recently complained about a “30-year race to the bottom on corporate tax rates,” and is pushing for a higher U.S. rate and a global minimum rate. Yellen wants to make sure that corporate taxes “raise sufficient revenue to invest in essential public goods and respond to crises.” Economist Gabriel Zucman approved of the proposed tax hike, saying corporations should “pay more in taxes, instead of them paying less and less.”

Zucman’s claim about “less and less” is incorrect when looking across the major economies in recent decades. The New York Times charts the OECD average corporate tax revenues as a percent of GDP since 1965 here. The percent has trended upward since the mid-1980s, although it is currently below the 2007 peak.

The OECD has added new member countries over the years and data is not available for all countries in earlier years, so the NYT average includes different countries in different years. To calculate a more consistent average, I narrowed the group of countries to 22 that have good data back to 1980. For the same 22 countries, I calculated the average corporate tax rate, which for all countries includes the federal plus the state or provincial tax rates. The data is mainly from the OECD, as discussed below.

The chart below shows the average corporate tax rate and average corporate tax revenues as a percent of GDP for 22 countries. The average rate fell from 47 percent in 1980 to 25 percent in 2019. As a consequence, Yellen or Zucman might think that corporate tax revenues would have fallen. But corporate tax revenues are up substantially since the 1980s. Corporate tax revenues for the 22 countries rose from 2.2 percent in 1980 to 3.0 percent in 2019.

Of course, revenues follow business cycles. Revenues rose during the 1990s boom, fell during the recession in 2009, and then rose again as economies recovered. When economies grow, governments win as tax revenues rise.

The longer-term trend can be seen in decade averages. Corporate tax revenues for the 22 countries averaged 2.4 percent in the 1980s, 2.7 percent in the 1990s, 3.2 percent in the 2000s, and 2.9 percent in the 2010s. Revenues were down a bit in the 2010s from the 2000s, but they were up from the 1980s and 1990s when rates were much higher. The average corporate tax rate was 46.2 percent in the 1980s, 37.5 percent in the 1990s, 31.3 percent in the 2000s, and 26.7 percent in the 2010s.

When tax rates fall, the tax base expands as corporations increase real activities and report more income. Countries have also legislated changes in corporate tax bases. Yellen seems to worry that the “30-year race” resulted in a shortage of “sufficient revenue,” but that is not what actually happened.

What about the United States? As a share of GDP, U.S. federal-state corporate tax revenues were 2.1 percent in the 1980s, 2.2 percent in the 1990s, 2.1 percent in the 2000s, 1.9 percent from 2010–2017, and 1.0 percent in 2018 and 2019. U.S. corporate tax revenues were stable for decades, but then dropped sharply due to the Trump corporate tax cut.

What is amazing about the stability of U.S. corporate tax revenues when measured against GDP is that a large share of U.S. GDP has moved from corporations that pay corporate tax (C corporations) to other business structures. In the early 1980s, three-quarters of U.S. business income was earned by C corporations (Figure 1), but that share has dropped more recently to less than half. Despite the declining importance of C corporations in the economy, their tax revenues as a percent of GDP was fairly flat from the 1980s until the Trump cuts. By the way, I support the Trump corporate tax cuts regardless of the near-term revenue effects.

In sum, corporate tax revenues are higher today than they were during the 1980s and early 1990s across major economies, even though corporate tax rates are much lower. Rather than creating some sort of social loss, as Yellen and others seem to believe, the reduction in corporate tax rates has been a win-win-win for businesses, governments, and workers. Workers benefit from lower rates because corporate investment raises their productivity and wages, as discussed here.

The win-win-win is possible because the corporate income tax is the most damaging major tax. OECD economists studied different types of taxes and concluded, “Corporate taxes are found to be most harmful for growth.” Thus, it would be beneficial to cut corporate tax rates and replace any lost revenue with increases in other less-damaging taxes. But OECD countries have not had to make that trade-off because cutting corporate tax rates from the previous high levels has generally not resulted in governments losing revenues.

Data Notes

The 22 countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea, Luxembourg, Netherlands, New Zealand, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States.

Data on corporate tax revenues are here and in Table 3.9 here. Australia was missing 2019 so I used 2018.

The corporate tax rates are the OECD figures for the combined national and subnational rates. OECD has data back to 2000 on its site. Previously it posted data back to 1981, which I have in a spreadsheet.

Using data from a University of Michigan dataset, I filled in tax rates for 1980 for all countries, and I filled in data for missing early years for Korea and Turkey. For Korea and Luxembourg, I estimated the subcentral rates for the early years.

Transportation Secretary Pete Buttigieg says America’s roads and bridges are “crumbling.” The administration’s infrastructure plan says, “After decades of disinvestment, our roads, bridges, and water systems are crumbling,” and it notes that 45,000 bridges are in “poor condition.”

The Washington Post says, “President Biden aims to tackle some of the nation’s most pressing problems—from climate change to decaying water systems to the nation’s crumbling infrastructure,” and it claims that “the nation’s infrastructure woes … have been growing for decades.”

Rolling Stone says Biden’s plan “promises to revitalize 20,000 miles of roads and fix 10,000 crumbling bridges.” A 2018 NBC report was titled, “More than 50,000 American bridges are falling apart,” and pointed to 54,259 bridges that are “structurally deficient.”

What the politicians and news stories don’t tell you is that America’s bridges have been steadily improving for three decades. The Federal Highway Administration produces annual data on the condition of the nation’s more than 600,000 highway bridges. From 1992 to 2017, the agency has data on the number of bridges that are “structurally deficient.” Then the agency switched to new definitions and has data from 2009 to 2020 on the number in “poor” condition.

The chart shows both types of bridges as a percent of total U.S. bridges. The structurally deficient share fell from 21.7 percent in 1992 to 8.9 percent in 2017, while the poor share fell from 10.1 percent in 2009 to 7.3 percent in 2020. Biden’s 45,000 bridges and NBC’s 54,259 bridges are correct figures, but they miss the crucial context of these dramatic improvements.

Not every news story sounds like a press release from a construction lobby group. A 2018 Reuters investigation found that an “analysis of nationwide bridge data reveals the fretting over the safety of bridges and other road infrastructure is overblown.” The article noted that “structurally deficient” bridges need repairs but would be closed if they were actually dangerous. It also noted that America’s roads and bridges compare quite favorably to those in other advanced economies.

For more on infrastructure, see here and here. Cato intern Jeremiah Nguyen helped with this blog.

Monopolies in business usually lead to bloated costs and high prices. As such, economists generally favor opening industries to competition in order to promote efficiency and product quality. Governments are monopolies that also tend to be bloated and inefficient, and so we should favor ways to subject them to competition also.

Cross-border competition for people, businesses, and investment dollars is one way to do it. Within the United States, people and businesses can weigh the costs and benefits of different states and cities, and freely move when they find a better deal. That creates pressure on state and local policymakers to restrain taxes and provide quality services.

National policymakers now face similar pressures as globalization has intensified over the years. To attract investment, many countries have reformed the most damaging parts of their tax codes, including cutting high marginal tax rates on corporate income. Cutting corporate tax rates would be beneficial even without globalization, but cross-border competition has nudged policymakers in the right direction.

U.S. Treasury Secretary Janet Yellen has a different view. She recently complained about a “30-year race to the bottom” in corporate tax rates. The average corporate tax rate across OECD nations has fallen from 41 percent in 1990 to 25 percent today. But this has been a race to reduce the economic damage of corporate taxation, which in turn has promoted broad-based economic growth. As I discuss here, if workers were a lobby group defending their self-interest, they should favor slashing corporate tax rates. Workers and capital are complements in production, and more capital generally leads to higher wages.

Yellen seems to make the mistake of assuming that international tax competition is a zero-sum game. In fact, it is a positive-sum game. Reductions in corporate tax rates generate growth and expand the global economy to the benefit of all.

The race-to-the-bottom claim is off-base in another way. Yellen said, “It is important to work with other countries to end the pressures of tax competition and corporate tax base erosion,” and she wants governments to raise “sufficient revenue.” But reducing corporate tax rates tends to expand corporate tax bases, with the result that corporate tax revenues across major countries have not fallen. Average corporate income tax revenues in the OECD have risen from 2.4 percent of GDP in 1990 to 3.1 percent in 2018.

Yellen said she would work “with our allies on a global tax regime that protects American competitiveness while ensuring corporations pay their fair share.” But the corporate tax revenue share of GDP has risen, as noted. Besides, the corporate tax burden ultimately lands on individuals, so it is meaningless to talk about corporate “fair” shares.

If Yellen is concerned about fairness, she should rethink her idea of imposing a global minimum corporate tax rate. That would be an arrogant move by a big and powerful country such as the United States. The corporate income tax is an inefficient tax, and so poor countries that want to attract investment and grow should cut them. Just a few decades ago, Ireland was much poorer than Britain, but its implementation of a low corporate tax rate has helped the Emerald Isle grow strongly and surpass Britain in living standards. Yellen’s approach would unfairly deny small and poor nations the ability to adopt Ireland’s powerful reform approach.

Smaller countries tend to have lower corporate tax rates because they know that they need to be welcoming to investment to compete with giants such as the United States. The chart shows average corporate tax rates for the 24 largest and 24 smallest economies in Europe, based on KPMG data. Yellen’s global minimum tax rate would undermine small-country growth prospects, and that would not be fair at all.

For background on international tax competition, see Global Tax Revolution. For the chart, 48 European countries were sorted by GDP.