Debt versus tax financing in infrastructure: impact on employment

The study examines whether debt-financed or tax-financed infrastructure investments yield better employmentoutcomes by analyzing U.S. macroeconomic data from 1989–2023. Using data from the IMF and World Bank, key variablesinclude the employment-to-population ratio, real GDP, gross fixed capital formation, inflation rates, interest rates, taxrevenue, and FDI. Two key indicators government borrowing for infrastructure (Infra_debt) and tax-funded infrastructurespending (Infra_tax) are constructed to quantify financing methods. These are adjusted for GDP to ensure comparabilityover time. Regression models with Newey-West standard errors address heteroskedasticity and autocorrelation, whilestructural shifts are accounted for with lagged variables and dummy variables for events like the (2007) Financial Crisisand (2021) COVID-19. The results indicate that GDP growth is a strong predictor of employment.Debt-financed infrastructure investment has a modest positive effect on employment, suggesting that borrowing supportsjob creation. In contrast, tax-financed infrastructure investment has little to no effect, potentially due to the economicdrag of increased taxation. These findings align with theories that borrowing can stimulate employment more effectivelyin developed economies by avoiding distortions in consumer and business spending. In conclusion, debt-financedinfrastructure investment appears more favorable for employment growth than tax-based financing. While both methodssustain public investment, policymakers should consider the potential drawbacks of higher taxation on labor markets.Strategic debt financing can promote economic expansion while minimizing employment disruptions.