Tim Fernholz examines the advantages of, and objections to, a stimulus program encouraging local infrastructure spending:
Before Build America Bonds, the federal government supported infrastructure by making city and state bonds tax-free — if you loan money to a city, you don’t pay taxes on the interest it pays you in return. While this encouraged lending, it’s also regressive and something of a tax shelter boondoggle: The higher an investor’s tax bracket — the wealthier she is — the more she is subsidized.
A Congressional Budget Office analysis notes that with this kind of bond, high-income investors gained several billion dollars in government money each year, with no discernible savings to borrowers. Now, that’s a bailout. Economists, including those at the CBO, don’t believe tax-free bonds are particularly efficient, and entities like nonprofit foundations and pension funds that are already tax exempt have no incentive to buy these bonds.
