Donald J. Trump told us during the Presidential debate that America’s infrastructure is crumbling while China, Dubai, Singapore, etc. have state-of-the art infrastructure.
Trump asserted that it is possible to finance the rebuilding of American Infrastructure by letting corporations repatriate profits presently held abroad.
How feasible is this proposal?
The infrastructure deficit in America is well known and documented. Physical infrastructure like bridges, roads, schools, has been crumbling for decades. The American Society of Civil Engineers estimated that $3.6 trillion is required by 2020 to update this infrastructure.
Other infrastructure, like telecommunications, internet, and other “soft” infrastructure, can easily absorb trillions in additional investment.
Meanwhile, major US corporations hold $2.4 trillion in profits offshore.
During the debate, Mr. Trump stated that he believe the true amount to be closer to $5 trillion. Whether it is $2.4 or $5 trillion dollars is irrelevant to the point that American Corporations have collectively decided that it is better to “warehouse” the funds abroad instead of repatriating the funds to USA where they will have to pay corporate income taxes.
The question is whether Mr. Trump has a plausible way to bring this money home, and more importantly, turn them into productive investments in USA.
As long as there is a significant corporate tax on these profits, it will serve as a disincentive to repatriate the funds unless there are substantial offsetting advantages. A general, across the board cut in corporate income tax would be disastrous fiscally as corporate income taxes account for about 10.6% of federal tax revenues (2014) aside from raising issues of equity.
But if a special “one time” window is opened for profits to be repatriated from abroad tax free, it is conceivable that a significant portion of the $2.4-5 trillion held abroad will come home.
America is still a good place to invest, with stable institutions, a highly productive and educated work force, and very much a safe haven for assets in a turbulent world.
What would attract those profits to not only “come home”, but be diverted to rebuild America?
Trump pointed out that outdated regulatory systems that make it costly to build and invest in America is a major hurdle.
He is also fond of pointing out that most infrastructure built by governments (federal, state and local) and agencies are overpriced.
Trump knows he can do better because he has routinely completed projects ahead of schedule and beat competitors on cost.
A major reform of the system of managing Federal, State, Local and Agency infrastructure projects will likely yield substantial cost savings.
While Trump has not explicitly stated that is what he intend to do, fundamental reform / streamlining of the administration of infrastructure projects funded by the Federal Government is an opportunity that have not been on the agenda of any Administration since FDR.
While it is impossible to say at the outset how much more efficient reforms can be, it is worth noting that a similar, but much limited reform at the Pentagon that brought in Commercial Off-the-Shelf (COTS) procurement in 1994 is responsible for much of the present US superiority in conventional weapons systems.
If COTS can improve on infrastructure projects funded by the Federal Government by a fraction of what it did for DoD, it would be a revolution.
Improving the cost and efficiency of infrastructure spending would likely be a threat to many incumbent interests who have profited handsomely from their ability to navigate through the present cumbersome and costly system.
The experience of DoD in bringing in COTS is an interesting lesson. The Mil-Spec constituency fought COTS tooth and nail for decades, and only grudgingly surrendered in 1994 when Secretary of Defense issued the Perry Memo.
If Mr Trump is to even begin to reform the Federal Infrastructure procurement system, he can expect a much bigger fight.
But one weapon he may have that few realize is that if it is an Administrative Reform that do not require Congressional funding, he may have a freer hand as it is the prerogative of the Executive rather than the Legislative Branch.
Trump’s ideas lead to a vision whereby new infrastructure being built will be mostly privately funded — so as to bypass Congress and their inevitable porking and earmarkings of appropriations.
Updating of Federal rules and regulations to enhance efficiency, simplifying and expediting infrastructure projects is likely to produce considerable improvements.
The final piece of the Trump agenda is to make it attractive for the repatriated funds to be diverted into these infrastructure projects — rather than invested in hedge funds or other investment vehicles.
Repatriated profits from abroad who qualify for the “one time” corporate income tax exemption only if the funds are invested in qualifying infrastructure projects.
Qualified infrastructure projects will have to meet a new set of performance standards for both building and operating that either meet or exceed private sector performance standards and provide their investors a return competitive return.
How much impact would such a program have?
Suppose $1 trillion out of the $2.4-5 trillion abroad take up the Trump Administration’s program.
That amount would dwarf the American Recovery and Reinvestment Act of 2009.
Danny Lam is an independent analyst based in Calgary.
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