Investments, not just subsidies

In September of last year I argued in The Hill for a 15 percent flat tax on the 2 trillion of untaxed foreign earnings held overseas which would then be forever tax free when those dollars are invested here at home. On Monday, President Obama included this proposal to Congress in his FY 2016 budget albeit at the slightly lower rate of 14 percent.  This potential windfall will be earmarked for the Highway Trust Fund which currently stands near insolvency at just under $3 billion and will also pay for approximately half of the proposed total $478 billion surface infrastructure improvements proposed in the FY 2016 budget. This is a smart policy choice and will no doubt put a huge dent in the estimated $2 trillion of deferred infrastructure repairs businesses small and large rely on everyday to keep America competitive. This is also a big miss for Obama. One that is not too late to correct. 

In an IMF study cited by the White House, the case is made for infrastructure development because the private sector, despite the overwhelming evidence that investment yields significant long-term benefits, rarely devotes capital to infrastructure due to large start up costs, positive externalities (where the investing party doesn’t receive the full benefit), and economies of scale. The common good embodied by the transportation and information networks we now enjoy is clearly mis-priced by the private sector. There is no more clear of a case where capital markets are , and always will be, inefficient than when pricing economic value where externalities, both positive and negative, exist. 

{mosads}We seem to be entering a troubling period where technology is increasingly used to solve first world problems in the Silicon Valley echo chamber erected on the myth of making the world a better place without actually solving real-world problems. We can fix this. On the flip side of the positive externalities seen within public infrastructure investment, there also exist negative externalities where startups enjoy the largess of others and, as a consequence, have jaw-dropping valuations even on the back of negative cash flows. Increased efficiency – be it Uber or a more efficient way to extract oil – creates true, tangible economic value. No question this is true. But this progress and efficiency, either within the tech space or the real world space, doesn’t happen in a vacuum. 

If there is significant and real economic value in fiscal policies that correct positive externalities within public infrastructure financing then that same significant and real economic value exists within policies that correct the negative externalities within startups who derive their value, in part, from the ecosystem of values, rule of law, health, education and social safety nets that allow thousands of small companies to create the value they do. This begs the question: what is the right way to price this externality since private capital markets are incapable of pricing value where externalities exist? 

What is missing within Obama’s proposal yesterday is the allocation of zero capital to purchase minority equity ownership stakes in companies that are actually making a real world difference. Instead, we see the allocation of investment via direct subsidies and grants to research and development alone where the U.S. has no recourse to that capital. This is a fine, yet significant, difference. The United States Treasury should be in a position to profitably exit just like any other investor who has benefited from the positive externalities working, living, and innovating in America affords. The only way this is possible is by small equity ownership stakes – not just supporting research and fixing roads.

Providing capital to fund transportation improvements and pay for research in technologies that will create jobs, reduce health costs, and solve our energy problems is no question smart. It also isn’t fair, or true, to say the administration isn’t making significant investments in potentially world changing technology. The FY 2016 budget proposes to increases R&D spending over 5 percent to $146 billion and specifically targets “transformational knowledge and technologies”. However, monetizing the extraordinary value the existing institutions and infrastructure the United States already lends to the companies that will ultimately solve these problems will never be priced by inefficient capital markets. “Let’s pay more to the country that made this all possible” has never been uttered, by any venture capitalist, ever. 

Clearly, higher taxes alone isn’t the right choice. Despite what the techno-libertarians of Silicon Valley would like you to believe, negative externalities exist, private markets are incapable of pricing them, and ultimately we all owe more to the country we were lucky enough to be born in. As little as a $5 billion carve-out from the Highway Trust Fund to purchase small stakes in companies that could change the world is enough to move the needle. Unfortunately, the window to put that on the table is closing. 

Cooper is a Truman National Security Fellow and a Term Member at the Council on Foreign Relations. Views expressed are his own.