A State Suicide Pact, Part I

There are some very important long-run demographic and cultural trends in the United States.

The aging of the population – and the concomitant problem of poorly designed entitlement programs – probably belongs at the top of the list.

But another big trend is internal migration, which occurs when Americans move from one state to another.

There are many reasons why people (and businesses) relocate, but tax policy seems to be an important factor.

Simply stated, some state governments grab a lot of money and don’t provide much value in return.

So it makes sense that some people will move to states with lower tax burdens and better-quality governments.

That’s bad news for high-tax states.

But some of them have responded wisely by lowering tax rates (North Carolina, for instance, used to have one of America’s 10-worst tax systems and now is ranked in the top 10).

Others, however, want to double-down on bad policy. In a report earlier this month for the Washington Post, Julie Zauzmer Weil shares some details about a multi-state proposal for wealth taxes.

Left-leaning proponents of taxing the assets held by America’s billionaires have a new target: In lieu of a federal wealth tax, state lawmakers want to tax billionaires where they live, in states like California, Washington and New York. A group of legislators in statehouses across the country has coordinated to introduce bills simultaneously in seven states… The state legislators say they would like to try such ideas as a test case for future national policy while acting collectively to minimize the threat of people moving to a nearby lower-tax state. …said Noel Frame (D), a state senator in Washington. “…This is why we are all here together. No longer will states “get pitted against each other,”… Del. Jheanelle K. Wilkins (D-Montgomery),…said…“That’s quite a bit of funds that we’re leaving on the table.”

If you read the details, these state lawmakers are not proposing the same policy. They’re not even necessarily focusing on wealth taxes.

Yes, some of them have introduced state wealth taxes, but others are proposing higher capital gains taxes, some are proposing higher death taxes, and others want to impose mark-to-market taxes which are a strange combination of wealth taxation and capital gains taxation.

In every case, though, they are digging their own graves. The Wall Street Journal opined on the proposed multi-state cartel of greed.

Democrats finally have a strategy to stop billionaires from fleeing high tax states: Block the escape routes. That’s the logic behind coordinated moves in progressive states to tax wealth. …The legislators say their plans will fund social spending, but they have a specific recipient in mind. The multistate launch was coordinated by Fund Our Future, an advocacy group affiliated with the American Federation of Teachers. As usual, public unions are pushing the progressive lawmakers they fund to tap new streams of tax revenue so they can get bigger salaries and pensions. …Each of the new tax schemes would speed up the flight from the states trying to impose them, and our readers might think even Albany and Sacramento can’t be that dumb. But ideas that begin in the progressive fringes tend to become Democratic orthodoxy these days. For those planning ahead, real-estate agents in Texas and Florida are standing by.

Building on what the WSJ wrote, the class-warfare crowd is only partly blocking the escape routes.

If these proposals become law, it may not make sense to move from California to New York, or from Illinois to Connecticut.

But there are more than 40 states that are not part of this hate-and-envy cartel. Including a bunch of states with no income taxes and others with flat taxes.

And the editorial correctly observes that real-estate agents in Texas and Florida are probably salivating at the prospect of more tax refugees looking for nice homes.

The bottom line is that there are clever ways to push for tax cartels (for example, the OECD’s despicable campaign to squash tax competition). By contrast, the states mentioned in this column are pushing a really dumb, sure-to-fail approach.

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Assessing North Carolina’s Fiscal Policy

When I first started citing the Tax Foundation’s State Business Tax Climate Index back in 2013, North Carolina was one of the 10 worst states.

In a remarkable turnaround, North Carolina is now one of the 10 best states.

The big improvement is partly because the state joined the flat tax club.

But there were other tax cuts as well, along with some much-needed spending restraint.

Sounds like great news, but you won’t be surprised to learn that not everyone is happy about what’s happened in the Tarheel State.

In a column for the Raleigh News & Observer, Ned Barnett opined yesterday against tax cuts – both the ones that already have occurred and the new ones that the state legislature is considering.

Republican state lawmakers think cutting taxes makes North Carolina more attractive to new businesses, but cutting taxes too much has the opposite effect. …Now, with the General Assembly back in session, they’re looking to cut some more. It’s a reckless path… Since Republicans began aggressively cutting taxes in 2013, the state has lost billions of dollars in revenue. …North Carolina has excess revenue because the state has reduced what it has historically spent as a share of the state economy – a drop from 5.8 percent to 4 percent… The state corporate tax has fallen from 6.9 percent to 2.5 percent and will be phased out by 2030. The personal income tax has been stepped down from a two-tier progressive tax with a top rate of 7.75 percent to a flat tax of 4.75 percent today. Now state Senate leader Phil Berger says the legislature should consider cutting the personal income tax to 2.5 percent.

The most important data cited above is that the burden of state government spending has dropped from 5.8 percent to 4 percent of the state economy.

This upsets Mr. Barnett, but the rest of us should view this as a major triumph for genuine fiscal responsibility.

And by imposing genuine spending restraint, North Carolina lawmakers created the “fiscal space” for meaningful tax cuts.

So why is Mr. Barnett upset? In the column, he complains that some parts of the budget are not increasing as fast as he would like. But he never offers any evidence that the state is suffering economic harm.

I suspect he offered no evidence because he has no evidence.

Or perhaps he offered no evidence because the data shows that he’s wrong.

And that’s exactly what I discovered when I checked the St. Louis Federal Reserve Bank’s per-capita income data. Lo and behold, incomes in North Carolina are growing faster than the national average and faster than the regional average.

The differences are not huge, but it’s nonetheless better to have faster income growth rather than slower income growth.

Some of my more sophisticated friends on the left doubtlessly will point out that states in other regions still have higher overall levels of average income, which is a fair point, but it’s also fair for me to respond by noting that the cost-of-living is generally much lower in North Carolina.

The bottom line is that North Carolina’s better tax policy has the state moving in the right direction while high-tax states are moving in the wrong direction.

P.S. North Carolina also is close to being among the 10 best states for educational freedom.

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The School Choice Revolution

It’s time to celebrate another victory for school choice.

• In 2021, West Virginia adopted statewide school choice.
• In 2022, Arizona adopted statewide school choice.
• In 2023, Iowa adopted statewide school choice.

Now Utah has joined the club, with Governor Spencer Cox approving a new law that will give families greater freedom to choose the best educational options for their children.

Here are some details from Marjorie Cortez, reporting for the Deseret News.

The Utah Senate gave final passage to legislation that will provide $8,000 scholarships to qualifying families for private schools and other private education options… The bill passed by a two-thirds margin in each legislative house, which means it cannot be challenged by referendum. …The bill creates the Utah Fits All Scholarship, which can then be used for education expenses like curriculum, textbooks, education, software, tutoring services, micro-school teacher salaries and private school tuition.

As you might expect, teacher unions and their allies are very disappointed – which is a very positive sign.

…the Utah Education Association…opposed HB215… The bill was also opposed by the Utah State Board of Education, Utah PTA, school superintendents, business administrators and school boards. The Alliance for a Better Utah was pointed in its reaction… “Conservative lawmakers just robbed our neighborhood schools of $42 million. Private school vouchers have been and continue to be opposed by Utahns but these lawmakers are instead pursuing a national agenda to ‘destroy public education.’

The Wall Street Journal opined on this great development.

School choice is gaining momentum across the country, and this week Utah joined Iowa in advancing the education reform cause. …Utah’s bill, which the Senate passed Thursday, 20-8, makes ESAs of $8,000 available to every student. There’s no income cap on families who can apply, though lower-income families receive preference and the program is capped at $42 million. The funds can be used for private school tuition, home-schooling expenses, tutoring, and more.

But the best part of the editorial is the look at other states that may be poised to expand educational freedom.

About a dozen other state legislatures have introduced bills to create new ESA programs, and several want to expand the ones they have. In Florida a Republican proposal would extend the state’s already robust scholarship programs to any student in the state. The bill would remove income limits that are currently in place for families who want to apply, though lower-income applicants would receive priority. …South Carolina legislators are mulling a new ESA program for lower-income students. In Indiana, a Senate bill would make state ESAs available to more students. An Ohio bill would remove an income cap and other eligibility rules for the state’s school vouchers. Two Oklahoma Senate bills propose new ESA programs… ESA bills are in some stage of moving in Nebraska, New Hampshire, Texas and Virginia.

Let’s hope there is more progress.

School choice is a win-win for both students and taxpayers.

P.S. Here’s a must-see chart showing how more and more money for the government school monopoly has produced zero benefit.

P.P.S. There are very successful school choice systems in Canada, Sweden, Chile, and the Netherlands.

P.P.P.S. Getting rid of the Department of Education would be a good idea, but the battle for school choice is largely going to be won and lost on the state and local level.

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Politician Humor

Since I only shared two column of politician humor last year (here and here), I want to get an early start for 2023.

Our first example comes from the only good president of my lifetime.

For our second item, here’s a visual explanation of “public choice” theory.

For our next item, let’s go across the Atlantic Ocean for a quick look at the scandal-plagued (and big government-oriented) European Parliament, where bribery has a long tradition.

The European Parliament always wanted to go viral… but maybe not like this 😬 pic.twitter.com/wygNdKZ04N

— Jakob Hanke Vela (@HankeVela) December 22, 2022

I’ve long argued that we don’t want “productive” politicians and that’s the message from our fourth item.

As usual, I’ve saved the best for last.

Amusing, but it’s genuinely scandalous that politicians from both parties often become very wealthy during their time in office.

I’m in favor of people becoming rich, but only when they do something valuable in the private sector, not because they are using insider knowledge about bad policy to line their pockets.

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Protecting Individual Savings from Double Taxation

While speaking last year in Hawaii on the topic of good tax policy, I explained why it is misguided to impose extra layers of tax on saving and investment.

Regarding the problem of double taxation, I’ve addressed how various features of the tax code need to be fixed.

• Get rid of the capital gains tax
• Get rid of the double tax on dividends
• Get rid of the death tax

Today, we’re going to focus on the fixing the tax treatment of household savings. And the problem that needs fixing is that the federal government taxes you when you earn money and also taxes any interest you earn if you decide to save some of your after-tax income.

As you can see from the chart, this creates a tax wedge.

And that tax wedge distorts people’s decisions and makes them more likely to choose immediate consumption rather than savings (which can be viewed as deferred consumption).

As mentioned in the video, every economic theory recognizes that saving and investment (again, just another way of saying deferred consumption) are critical to future growth and rising living standards. So there are good reasons to fix the tax code.

The good news is that there are two ways to fix this problem.

1. Tax income only one time when it is first earned.
2. Tax income only one time when it is consumed.

In practical terms, the first option treats all savings like a “Roth IRA,”, which means you pay tax the year you earn your income, but the IRS does not get another bit at the apple if you save some of your after-tax income and it earns interest or otherwise grows in value.

The second option treats all savings like a 401(k), which means you are not taxed on any income that you place in a savings vehicle, but you are taxed on any money (including any interest or other returns) that you withdraw from the account.

As shown by Adam Michel of the Heritage Foundation, both of these approaches lead to the same long-run result (and thus are superior to what happens when people save without being protected from double taxation).

The good news is that Americans can protect their savings from double taxation by using either individual retirement accounts (IRAs) or 401(k)s.

The bad news is that those “qualified accounts” are restricted. Only people who are saving for retirement can protect themselves from double taxation.

That needs to change.

Here’s what I wrote back in 2012 and I think it’s reasonably succinct and accurate.

…all saving and investment should be treated the way we currently treat individual retirement accounts. If you have a traditional IRA (or “front-ended” IRA), you get a deduction for any money you put in a retirement account, but then you pay tax on the money – including any earnings – when the money is withdrawn. If you have a Roth IRA (or “back-ended” IRA), you pay tax on your income in the year that it is earned, but if you put the money in a retirement account, there is no additional tax on withdrawals or the subsequent earnings. From an economic perspective, front-ended IRAs and back-ended IRAs generate the same result. Income that is saved and invested is treated the same as income that is immediately consumed. From a present-value perspective, front-ended IRAs and back-ended IRAs produce the same outcome. All that changes is the point at which the government imposes the single layer of tax.

The key takeaways are in the first and last sentences. All savings should be protected from double taxation, not just what you set aside for retirement. And that means government can tax you one time, either when you first earn the income or when you consume the income.

This means we need universal savings accounts, sort of like they have in Canada.

Here’s what Robert Bellafiore of the Tax Foundation wrote about the idea back in 2019.

USAs do not penalize withdrawals on account of their purpose or timing. In contrast, some types of existing savings accounts are not neutral, penalizing people who withdraw their money for anything but approved purposes at approved times. For example, withdrawals from 529 accounts can only be made without penalty if they are used to fund education. If a parent has a 529 account for a child but must make a withdrawal to cover emergency expenses, he or she must pay income taxes on the earnings, plus a 10 percent penalty. Withdrawals from 401(k)s before the age of 59½ incur the same penalty, though there are certain exceptions. USAs’ neutrality would likely boost saving, for two reasons. First, when savings are not hit by multiple layers of taxation, savers can expect a higher return and are therefore likely to save more. Both IRAs and 401(k)s tax savings only once, and studies have estimated that roughly half of 401(k) balances, and roughly a quarter of all IRA contributions, constitute new saving—in other words, dollars that would have been spent are saved instead.

The bottom line is that we need to copy jurisdictions such as Hong Kong and Singapore that have little or no double taxation of any kind.

Especially since we now live in a world where inflation has become an issue, which acts as a hidden tax on saving and investment.

I’ll close with this chart from the OECD. It’s a few years old, so I’m sure some nations have changed their policies, but it gives one a good idea of how savings is treated around the world.

The bottom line is that it’s good to avoid Norway and the United States is unimpressive.

I’m very surprised to see that Argentina and Germany have good policy.

P.S. For some of our friends on the left, policies that protect from double taxation are akin to an entitlement.

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Does America Have an Under-Taxation Problem?

When leftists (or misguided rightists) tell me that Americans are under-taxed and that the government has lots of red ink because of insufficient revenue, I sometimes will direct them to the Office of Management and Budget’s Historical Tables in hopes of changing their minds.

I’ll specifically ask them to look at the data in Table 1-3 so they can see what’s happened to federal tax revenue over time. As you can see from this chart, nominal tax revenues have skyrocketed.

The reason that I send them to Table 1-3 is that they can also peruse the numbers after adjusting for inflation.

On that basis, we see the same story. Inflation-adjusted federal tax revenues have grown enormously.

The two charts we just examined are very depressing.

So now let’s peruse at a chart that is just mildly depressing.

If you look at federal tax revenues as a share of economic output, you’ll see that Uncle Sam currently is collecting slightly more than 18 percent of economic output. Since the long-run average is about 17 percent of GDP, that’s not a horrific increase.

However, there are still some reasons to be quite concerned.

• The Congressional Budget Office projects the tax burden as a share of GDP will expand even further over the next few decades.
• That means that politicians in DC not only are getting more money because of inflation, but also because the economy is expanding.
• Third, not only are politicians getting more money because the economy expanding, they’re slowly but surely expanding their share.

That’s very bad news for those of us who don’t like higher taxes and bigger government.

Some people, however, have a different perspective

In one of his columns for the New York Times, Binyamin Appelbaum argues that Americans are undertaxed.

…the United States really does have a debt problem. …Americans need more federal spending. The United States invests far less than other wealthy nations in providing its citizens with the basic resources necessary to lead productive lives. …Measured as a share of G.D.P., public spending in the other Group of 7 nations is, on average, more than 50 percent higher than in the United States. …There is another, better way to fund public spending: collecting more money in taxes. …If the debt ceiling serves any purpose, it is the occasional opportunity for Congress to step back and consider the sum of all its fiscal policies. The nation is borrowing too much but not because it is spending too much. The real crisis is the need to collect more money in taxes.

I give Appelbaum credit for honesty. He openly advocates for higher taxes and bigger government, explicitly writing that “Americans need more federal spending.”

And he is envious that spending in other major nations is “more than 50 percent higher than in the United States.”

But this raises the very obvious point about whether we should copy other nations with their bigger welfare states and higher tax burdens. After all, European nations suffer from weaker economic performance and lower living standards.

Does Appelbaum think we’ll have “productive lives” if our living standards drop by 50 percent?

Does he think that “invest” is the right word for policies that lead to lower economic performance?

The bottom line is that I’m completely confident that Appelbaum would be stumped by the never-answered question.

P.S. Dishonest leftists claim tax increases will lead to less red ink while honest leftists like Appelbaum admit the real goal is a bigger burden of government.

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Major Victory for School Choice in Iowa

Since I’ve repeatedly written (and spoken) about the momentum for school choice, I’m naturally a big fan of this video from John Stossel.

It’s not just libertarian-oriented people who recognize that school choice is gaining ground across the country.

The union bosses at the National Education Association have bitterly complained that their under-performing monopoly is being threatened as parents get more options.

Given the malignant role of teacher unions (especially with regards to disadvantaged students), that definitely warms my heart.

Now we have more good news to share – assuming you are a good person who puts the interests of kids above those of union bosses (unlike someone who happens to reside at 1600 Pennsylvania Avenue).

After getting comprehensive statewide school choice in West Virginia in 2021 and Arizona in 2022, the Hawkeye State has now enacted its own version.

Here are some of the details of this remarkable development from Iowa, as reported by Jeremiah Poff for the Washington Examiner.

Gov. Kim Reynolds (R-IA) signed new legislation Tuesday…to establish a universal school choice program. Hours after the state legislature approved the Students First Act to establish a statewide education savings account program for all K-12 students , Reynolds, surrounded by children, triumphantly affixed her signature to the legislation… The new program will provide students with more than $7,000 in annual funds through an education savings account that can be used to cover all sorts of education-related expenses, including private school tuition and private tutoring. …Reynolds said in a statement after the legislature approved the bill. “Parents, not the government, can now choose the education setting best suited to their child regardless of their income or zip code. With this bill, Iowa has affirmed that educational freedom belongs to all, not just those who can afford it.”

This is good news. It means better results for students at lower cost for taxpayers.

By the way, here’s another excerpt that is worth sharing.

The Governor not only is a supporter of school choice, she took the very unusual step of going after Republican state legislators who were siding with union bosses rather than families.

Reynolds, a Republican, had sought to enact a school choice program in the state’s previous legislative session but encountered opposition from members of her own party that doomed the bill. She later took the unusual step of endorsing primary opponents for several of her party’s own incumbents who opposed school choice.

She didn’t just endorse primary opponents.

Many of those candidates actually defeated incumbent Republicans who opposed choice.

And that’s been happening in other states as well, which arguably can be considered the best political news of 2022.

I’ll close with an upbeat prediction that Iowa won’t be the only state to adopt comprehensive school choice this year. So I fully expect big, positive changes in next year’s version of this map.

And I’ll also predict the list of school choice hypocrites will expand.

P.S. Depending on how you rank the importance of different issues, what’s been happening with school choice may be only the second-most important development at the state level in recent years.

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In a Tweet, Everything You Need to Know about California

I wrote last week about the ever-expanding burden of government spending in California.

And that was after writing two columns last year (here and here) about the state’s economic decline.

But sometimes a specific story is more compelling than broad economic trends. So here’s a tweet that caught my eye. It tells us a lot about the nature of government contracting, inefficiency, and cost overruns.

But it also tells us a lot about California (sort of like this story from 2021).

By the way, I don’t know if the above numbers are correct. But even if they are only half right, they are a damning indictment of California budgeting.

As you might expect, bad budgeting and extravagant waste also mean high taxes.

And high taxes mean economic decline, and that’s the focus of today’s column.

In a recent column for the Washington Post, Henry Olsen offers a depressing assessment of the California’s future.

California’s…falling population coupled with its $22.5 billion budget deficit suggest it could experience a swift and wrenching decline. …California offers natural beauty…, but people decide how much they want to pay for these things just like other goods. The state’s…high taxes are a significant deterrent to living there, driving many people to flee. …That outward flow of people is turning into a flood. The state’s population dropped by more than 500,000 people between July 2020 and July 2022. Outmigration to other states fueled the decline: Almost 900,000 more people have moved to other states from California in the past three years than have moved in. …This exodus poses massive risks for the state’s finances because of its reliance on revenue from the rich. As of 2018, almost 35 percent of California’s personal income tax revenue came from the sliver of taxpayers earning $1 million or more. Nearly two-thirds come from those earning more than $200,000. That means a small change in these people’s residence can cost the state billions. …It could take a New York-style collapse to force significant change. Given the direction California is heading, that unhappy prospect is no longer unthinkable.

Writing for the City Journal, Steven Malanga has a similarly grim view.

California’s net domestic outmigration ranks highest among the states…In fact, the biggest leavers by far are lower- and middle-income people. And middle-class losses have grown in the last five years to about 200,000 adult residents. Meantime, some 300,000 adult Californians from lower-income categories have also left in that time… Taxes don’t exist in a vacuum; they are one component of a governing philosophy. High taxes represent an approach that favors bigger, more pervasive government, which takes many other forms besides taxes: a tendency to greater regulation and differing spending priorities than those of lower-taxed states, for example. …Fueled by its taxes on high earners and on businesses, California has an enormous budget. Its general fund alone tops $200 billion. You might expect, for that money, top-notch services from government, but the opposite is true. …Advocates for higher taxes often argue that progressive tax systems like California’s are fairer because wealthier residents pay at higher rates. …And yet high-taxing states like California, New York, and New Jersey also have among the highest rates of outmigration. These states are so “fair” that a significant number of their lower- and middle-income residents can’t wait to leave.

The most important insight of Malanga’s column is that California politicians say that they are trying to punish the rich, but lower-income and middle-class people are suffering a lot of collateral damage.

Which should come as no surprise.

P.S. If you want to enjoy some California-themed humor, click here and here.

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The Boring but Important Issue of “Tax Expenditures”

It’s fun to write about big-picture tax issues such as tax reform (for instance, should we have a flat tax or national sales tax?).

It’s also fun to write about contentious issues such as whether there should be tax increases or whether the tax code should be based on class warfare.

Many tax topics, however, are tedious and boring. But they nonetheless involve important issues.

1. Depreciation vs. expensing for new business investment.
2. International tax rules and the choice of worldwide taxation vs territorial taxation.
3. The debate on consumption-base taxation vs. Haig-Simons taxation.
4. Choosing the right way of treating prior-years business losses.
5. The fight over whether border-adjustable taxation should be part of tax reform.

Building on that list, today we’re going to wade into the boring topic of “tax expenditures.”

For those unfamiliar with the term, tax expenditures are special preferences in the tax code. In other words, tax loopholes.

But here’s the challenge: In order to figure out what’s a loophole, you first need to define a neutral tax system. And that means the debate over tax expenditures is actually a fight over consumption-base taxation vs. Haig-Simons taxation (the third item in the above list).

At the risk of over-simplifying, here’s what both sides believe:

• Proponents of consumption-base tax believe you get a neutral system by taxing all income one time, but only one time (i.e., there should be no discriminatory extra layers of taxation on income that is saved and invested).
• Proponents of Haig-Simons taxation, by contrast, believe that a neutral tax system also requires double taxation of income that is saved and invested (for all intents and purposes, taxing income and changes in net worth).

I’m motivated to write about this topic because the Committee for a Responsible Federal Budget put out a report last year entitled, “Addressing Tax Expenditures Could Raise Substantial Revenue.”

Since I don’t think our fiscal problem of excessive spending can be solved by giving politicians more revenue, I obviously disagree with the folks at CRFB about whether it would be desirable to “raise substantial revenue.”

For what it’s worth, I want to get rid of tax loopholes, but only if we use the revenues to facilitate lower tax rates. Indeed, that’s the goal of reforms such as the flat tax.

But let’s set aside that fight over tax increases and instead look at CRFB’s list of supposed tax expenditures. They rely on the Haig-Simons approach and thus include items (circled in red) that are not actually loopholes.

In a neutral tax system with no double taxation, there is no capital gains tax, no death tax, and no double taxation of dividends. In a neutral tax system, all savings is treated like IRAs and 401(k)s, which means the provisions circled above should be viewed as mitigations of penalties rather than loopholes.

Adam Michel of the Heritage Foundation illustrated the differences between consumption-base and Haig-Smons taxation in a 2019 report.

Here’s his table looking at what’s a loophole under both systems and the bottom part of the visual is where you will see the stark difference in how both systems treat saving and investment.

I’ll close by observing that my friends on the left generally support double taxation because they view such policies as a way of getting rich people to pay more (or as a way of punishing success, regardless of whether more revenue is collected).

I try to remind them that saving and investment is what leads to higher productivity, which means it is the most effective way of boosting wages for those of us who are not rich.

Sadly, it’s not easy to get them to understand that labor and capital are complementary factors of production (apologies for the economic jargon).

P.S. While CRFB uses the wrong definition when measuring tax loopholes, they are not alone. The Joint Committee on Taxation,  the Government Accountability Office, and the Congressional Budget Office make the same mistake. Heck, you even see Republicans foolishly use this flawed benchmark.

P.P.S. Here’s my award for the strangest tax loophole.

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“Prioritization” and Debt Limit Nonsense

Back in 2016, here’s what I said about the debt limit during some congressional testimony (and I made very similar points in some 2013 testimony).

Near the end of my testimony (about 4:55) I discuss “prioritization,” which is what would happen if the debt limit is not raised and the Treasury Department has to decide which payments are made (and which payments are delayed).

I then pointed out that federal tax revenues in 2017 were expected to be 11 times greater than annual interest payments.

As such, there obviously would have been plenty of cash available to make interest payments, as well as to finance other economically or politically sensitive items (I assume, for instance, that Treasury would have prioritized monthly Social Security benefits as well).

Would this have been messy? Yes. Would it have been uncharted territory not covered by the law? Yes. But would it have been better than default, which would have caused turmoil in financial markets? Another yes.

Which now brings us to the present day. We’re now in another debt limit fight, so I decided to look at the most-recent data from the Congressional Budget Office to see whether the federal government will still have plenty of cash so that interest payments on the debt can be prioritized.

Lo and behold, annual tax revenue this fiscal year is going to be more than 11 times greater than annual interest payments. Just like in 2017.

In other words, we presumably can sleep easy. There’s plenty of money to pay interest on the debt.

There would only be a default if Joe Biden or Janet Yellen (the Treasury Secretary) deliberately chose not to prioritize. And the odds of that happening presumably are way below 1 percent.

Some people may wonder why we should accept even that small risk? Why not simply increase the debt limit so that the odds of a default are 0 percent?

That’s a fair point, but it must be balanced by the recognition that the United States is on a path to long-run economic and fiscal chaos. So I can also understand why some lawmaker say the debt limit should only be raised if accompanied by some much-need spending restraint.

And, for those who care about real-world evidence, that’s what has happened in the past. Indeed, Brian Riedl notes that it’s the only plausible vehicle for altering the nation’s fiscal trajectory.

I’ll close by expressing pessimism that House Republicans will achieve anything in the current fight over the debt limit.

We won’t get something really good, like a spending cap. But I start with very low expectations, so I guess I’m happy that Republicans are at least pretending to care once again about excessive government spending.

A journey of a thousand miles begins with a first step!

P.S. I partially disagree with Brian Riedl’s list. The 1990 Bush tax increase was not a “deficit-reduction law.” And it was post-1994 spending restraint that produced a balanced budget, not Clinton’s 1993 tax increase.

P.P.S. Remember that debt is bad, but it should be viewed as a symptom. The underlying disease is excessive government spending.

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Donald Trump Supports Massive Tax Increases on Middle-Class Americans, Part I

Copying some self-styled national conservatives, Donald Trump this week endorsed major tax increases on lower-income and middle-class Americans.

But he embraced huge tax increases in an indirect fashion.

• He did not say “let’s adopt money-siphoning value-added taxes” like they have in Europe.
• Nor did he say “let’s impose very high income tax rates on ordinary people” like they do in Europe.
• And he didn’t say “let’s have much higher payroll tax rates” like they have in Europe.

Instead, Trump embraced huge tax increases by default. He told congressional Republicans to ignore America’s slow-motion crisis of entitlement spending.

For all intents and purposes, that is the same as embracing huge tax increases.

To be more specific, if you endorse European-style government spending, you are necessarily and unavoidably endorsing European-style tax policy.

And that’s what Trump did. Here are some excerpts from a report in the Hill by Brett Samuels.

Former President Trump on Friday urged Republicans in Congress not to cut “a single penny” from Medicare or Social Security… “Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security…,” Trump said in a recorded video statement posted to Truth Social. …The former president’s message about protecting Social Security and Medicare is consistent with his previous comments on the issue as a candidate in 2016.

For what it’s worth, I’m not surprised at what Trump said.

He favored big government as a candidate in 2016 and he expanded the burden of spending when he was President.

But some of us don’t want to surrender and doom the United States to European-style economic stagnation.

Which is why I’ve decided to take a sentence I wrote last month and turn it into the 15th Theorem of Government.

Here’s the bottom line: Genuine patriots recognize America has a problem and they have the courage to advocate reforms that will actually solve the problem.

It will be interesting to see how many Republicans fit that definition.

P.S. I’m not a never-Trumper or anti-Trumper. For instance, I praised his tax policy and said nice things about his record on regulation. But I’m loyal to ideas, not to people, so I don’t hesitate to criticize any politician who pushes ideas that are bad for America.

P.P.S. Here are the other 14 Theorems of Government.

• The “First Theorem” explains how Washington really operates.
• The “Second Theorem” explains why it is so important to block the creation of new programs.
• The “Third Theorem” explains why centralized programs inevitably waste money.
• The “Fourth Theorem” explains that good policy can be good politics.
• The “Fifth Theorem” explains how good ideas on paper become bad ideas in reality.
• The “Sixth Theorem” explains an under-appreciated benefit of a flat tax.
• The “Seventh Theorem” explains how bigger governments are less competent.
• The “Eighth Theorem” explains the motives of those who focus on inequality.
• The “Ninth Theorem” explains how politics often trumps principles.
• The “Tenth Theorem” explains how politicians manufacture/exploit crises.
• The “Eleventh Theorem” explains why big business is often anti-free market.
• The “Twelfth Theorem” explains you can’t have European-sized government without pillaging the middle class.
• The “Thirteenth Theorem” explains that people are unwilling to pay for bloated government.
• The “Fourteenth Theorem” explains how poor people are hurt by big government.

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Long-Run Policy Lessons from the Coronavirus Pandemic, Part II

In mid-2021, I wrote about long-run policy lessons from the coronavirus pandemic.

That column focused on insights from my five-part series (see here, here, here, here, and here) about the failure of big government.

More specifically, the CDC and FDA did a terrible job domestically and the WHO did a terrible job internationally.

By contrast, millions of lives were saved by the private sector.

But we also learned fiscal policy lessons in addition to public health lessons.

The most depressing fiscal lesson is that politicians love having any excuse to spend more money.

Though that’s hardly a surprise.

Now that we are in early-2023, are there more lessons to be learned? The answer is yes.

A new study by Professors Alex Tabarrok and Robert Tucker Omberg, published by the Oxford Review of Economic Policy, finds no relationship between supposed pandemic preparedness and health outcomes.

How effective were investments in pandemic preparation? We use a comprehensive and detailed measure of pandemic preparedness, the Global Health Security (GHS) Index produced by the Johns Hopkins Center for Health Security (JHU), to measure which investments in pandemic preparedness reduced infections, deaths, excess deaths, or otherwise ameliorated or shortened the pandemic. We also look at whether values or attitudinal factors such as individualism, willingness to sacrifice, or trust in government—which might be considered a form of cultural pandemic preparedness—influenced the course of the pandemic. Our primary finding is that almost no form of pandemic preparedness helped to ameliorate or shorten the pandemic. Compared to other countries, the United States did not perform poorly because of cultural values such as individualism, collectivism, selfishness, or lack of trust. General state capacity, as opposed to specific pandemic investments, is one of the few factors which appears to improve pandemic performance.

The study is not free to access, but Professor Tabarrok cited it at Marginal Revolution and shared this chart comparing death rates in the (allegedly) best prepared nation and the least prepared nation.

The Omberg-Tabarrok study shows us that pre-pandemic government policies were ineffective.

What about government policies once the pandemic hit?

In a column for the Washington Times, Richard Rahn points out that heavy-handed government intervention also was ineffective.

Sweden had the lowest aggregate excess mortality percentages (2.79)… Sweden was unique in that it had the fewest “lockdown” requirements, while countries like the U.S., with substantial lockdowns, had much higher excess deaths. We also know that within the U.S., states with very onerous lockdown requirements, like New York, have total age-adjusted higher death rates than states like Florida with few lockdown requirements. The big mistake the CDC people (Dr. Anthony Fauci, Dr. Francis Collins, etc.) made was to single-mindedly focus on potential deaths directly from COVID-19 while largely ignoring the potential deaths indirectly induced by the lockdowns. …Other studies support the evidence of health harm to people who have not yet died but are likely to have their lives shortened by the indirect effects of the lockdowns. …If the above-described mistakes had not been made, it is no overstatement to say that hundreds of thousands of lives and trillions of dollars could have been saved.

The information about Sweden is worth noting.

But the biggest lesson from Richard’s column is that politicians and bureaucrats failed to consider direct and indirect effects (a problem that is sadly common with government), so their cost-benefit analysis (to the extent they did any) was very flawed.

And we also need to learn that it is depressingly easy for governments to curtail liberty.

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Macron’s Pension Reform Is Necessary (but Inadequate)

It is an understatement to declare that fiscal policy in France is terrible.

• The highest burden of government spending in Europe.
• The third-highest level of pension spending in the OECD.
• One of the biggest long-run fiscal gaps in OECD countries.
• The fourth-highest tax burden on workers in the OECD.
• The sixth-highest top tax rate among developed nations.

In recent years, France has had terrible presidents such as Nicolas Sarkozy and Francois Hollande.

But when Emmanuel Macron took over, I wondered whether he might push the nation in the right direction.

And he has pushed a few good ideas. But his achievements have been so meager that I was only half-joking when I wrote last year that his reelection meant that a socialist beat a socialist.

But maybe I’ll have to apologize for that column because Macron is pushing reforms to the country’s pay-as-you-go pension system.

In a column for CNN, David Andelman summarizes the plan and explains the motives.

…the French government announced plans to raise the official retirement age from 62 to 64 to qualify for a full pension. …The French budget risks floundering on pensions that are siphoning off nearly 14% of the nation’s GDP each year – roughly twice the drain than in the United Sates and behind only Italy and Greece in Europe. …Currently, all men and women in France can retire with full pensions at 62 – tied with Sweden and Norway for the lowest retirement age in western Europe. …there are special exemptions dating back to the time of Louis XIV. After performing on the stage for 10 years, actors of the Comédie Française…are entitled to claim a lifetime pension. This dates to the company’s creation in 1680. Dancers in the Paris Opera can retire with full pension at the age of 42, a custom that dates to 1689… Stagehands at both companies can still take their retirement at 57. Then there are train conductors who can bow out at age 52. …In all, there are at least 42 different pension schemes… “The French can count on our determination to block this unfair reform,” said Marine Le Pen, leader of the far-right National Rally party, who Macron defeated in the presidential elections last April. At the other end of the spectrum, Mathilde Panot, from the far-left France Insoumise (France Unbowed) party tweeted that the plan was “archaic, unfair, brutal, cruel.”

Meanwhile, the Wall Street Journal opined last week in favor of Macron’s reform.

France currently has 42 different government-funded pension programs, which vary in retirement age and payout. Mr. Macron wants to wind down some of these programs and transition more French workers to a general pension scheme. That would make it easier for workers to change jobs, and it would also be a step toward a fairer pension system. This job mobility point is crucial and would benefit most workers and employers. …the French system scored a D grade, or 40.9 out of a possible 100, on financial sustainability on the Global Pension Index 2022, created by the consulting firm Mercer… The French system is a pay-as-you-go model in which current workers fund retiree pensions. Yet today there are only 1.7 workers for each retiree, compared to 3-to-1 in 1970 and headed to 1.4-to-1 by 2050. …Nothing short of French economic vitality is at stake. Mr. Macron twice won the Presidency with a vision of a more energetic, entrepreneurial France with more opportunity for young people. A more rational pension system is an essential part of the project.

The WSJ editorial is correct. Macron’s reform would give France a “more rational pension system.”

But it would not give the country a good pension system.

Macron is basically asking workers to pay more and get less. And it is true that his plan will prop up the government’s tax-and-transfer, pay-as-you-go scheme.

But that’s like patching the roof of a rotten house.

What France really needs is genuine reform so that younger workers can shift to a system of private savings. Which is something that already exists to varying degrees in other European nations such as Switzerland, Sweden, Denmark, and the Netherlands.

But don’t hold your breath waiting for that to happen.

P.S. Back in 2010, France went through political turmoil to raise the retirement age from 60 to 62.

P.P.S. Sadly, most of the flaws of France’s government retirement system are the same as the ones that exist in the United States.

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Washington’s Fake Spending Cut Charade

Two days ago, I dug into the C-Span archives to share a 15-year old clip of me explaining the theoretical virtues of a national sales tax.

Let’s now go back more than 30 years for this segment from a 1990 interview.

So why am I sharing my thoughts on Washington’s use of misleading budget rhetoric?

Because while I’ve pontificated about this issue in the past (three times in 2011 and two times in 2012), it’s definitely time for a refresher course.

I’m motivated by this chart from the folks at the Committee for a Responsible Federal Budget. They want readers to believe that balancing the budget over the next 10 years would require drastic spending cuts.

To understand what’s wrong with this CRFB chart, let’s go to the latest 10-year forecast from the Congressional Budget Office.

You’ll notice that this year’s federal budget is $5.87 trillion. And you’ll also notice that revenues in 2032 are projected to climb above $6.66 trillion.

At the risk of showing off my amazing math skills, $6.66 trillion is more than $5.87 trillion. Indeed, nearly $800 billion higher.

And what does that mean? Well, it means that we can balanced the budget by 2032 so long as spending does not increase by more than $800 billion between now and 2032. As illustrated by this chart.

To be fair to the CRFB crowd, they didn’t use make-believe numbers.

Their estimate is based on what would happen if the federal budget is left on autopilot, which means the budget grows every year because of factors such as inflation, demographic change, and previously legislated program expansions.

They then compared that artificial “baseline” to projected revenues. That’s how they came up with an estimate of a 26 percent budget cut.

In reality, though, government would be spending more than 13 percent more in 2032 when compared to 2023.

Here’s the bottom line: If CRFB or anyone else wants to argue that the budget should grow by more than 13 percent over the next nine years, they can make that argument. They can say that various programs are important and that overall spending should increase because of inflation. Or demographics.

Heck, they can even say spending should grow at a rapid pace because AOC and Bernie want bigger government.

We can then have an honest and fair debate. I’ll argue we need a TABOR-style spending cap and they can argue we should be like Greece or Italy.

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The Continuing Failure of Government-Run Healthcare in the United Kingdom

I’m routinely critical of the many ways that government intervention has created an expensive and inefficient health system in the United States.

But there are countries where government causes even greater problems. So when I want to feel good about America’s clunky healthcare system, I look at the mess across the ocean.

The United Kingdom has a socialist health system. And it’s real socialism, with government running the hospitals and employing the doctors and nurses.

And this produces predictably bad results.

I’ve shared numerous horror stories about that approach (see here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, here, and here), but this report from David Parsley is so astounding that even some of my knee-jerk leftist friends may reconsider their support for big government.

Ukrainian refugees who travelled to the UK to escape the war are risking their lives by returning to their homeland to seek urgent medical treatments after giving up on the NHS. Due the NHS pressures and long waiting lists for procedures, Ukrainians living with families across the UK are taking the perilous trip back into a war zone where they are treated by doctors immediately despite Russian bombardments of their towns and cities. …Maiia Habruk escaped Kyiv last spring along with around five million fellow citizens and found a safe haven with a couple in south east London. But she returned to Ukraine in mid-December after failing to get the treatment she needed from her local hospital in Lewisham. …She decided the only way to get the treatment she believed she required was to make the 24-hour trip back to Ukraine, which includes a flight to Poland and a long and dangerous train journey to Kyiv. …Maiia, who witnessed almost daily bombing raids by the Russians while in Kyiv, knows three other Ukrainians in London who sought emergency health procedures back in their war-torn country due to the lack of availability of quick treatment from the NHS.

These people were engaging in cost-benefit analysis. They compared the risk of death, injury, or suffering from Russian bombs to the risk of death, injury, or suffering from languishing on a waiting list in the United Kingdom.

And they decided Russian bombs were the better option.

This disaster is attracting attention in other nations. The Wall Street Journal opined two days ago about the NHS.

The American left can’t seem to quit its desire for single-payer Medicare for All. So it’s worth noting that the United Kingdom, which already has a system resembling that socialist dream, is rethinking it amid another winter of healthcare misery. …Waiting times for ambulances for the most serious calls are getting longer, with the average response time reaching 10 minutes 57 seconds in December, compared to a target of seven. Once patients reach the emergency room, 35% now face waits above four hours… As of November, some 7.2 million patients have been referred for treatment but are waiting for it to start. Of those, 2.9 million have been waiting more than 18 weeks. The NHS considers itself a success if it starts treatment within that four-month window, which is the epitome of defining failure down. …Excess deaths in 2022 were the most since 1951, excluding the pandemic. …The U.S. suffers a chronic problem of healthcare financing but not of health-care delivery. Britain shows that with single-payer you end up with both. The U.K. also shows that single-payer’s biggest victims are low-income people who can’t afford to opt out.

Yet there are nonetheless American politicians who want to copy this failed system.

Allister Heath of the U.K.-based Telegraph has a grim assessment of his nation’s government-run system.

…the NHS is finished. It is broken beyond repair, ruining the lives of hundreds of thousands, and threatening the social fabric and economic performance of our nation. …this 75-year experiment in health socialism has failed appallingly, culminating in a surge in excess deaths, waiting lists that aren’t worthy of a civilised nation, inhumane strikes, intolerable delays for ambulances, explicit rationing… NHS spending is up 12 per cent in real terms since 2019-20; there are 13 per cent more doctors and 11 per cent more nurses, and yet the service delivered 5 per cent fewer treatments in the first nine months of 2022 than in the same period in 2019. …Its six pillars – that it is “free” at the point of use, the full state ownership of hospitals, its complete dependence on taxpayer funding, its supposed culture of altruism, its nature as a shared moral project uniting rich and poor, and its centrally planned workforce – are the very causes of its disintegration.

P.S. I can’t resist some closing comments about the politics of government-run health care.

The first story cited above includes these comments from left-of-center U.K. politicians.

Labour’s shadow health secretary Wes Streeting told i “Vladimir Putin is dropping bombs on Ukrainian hospitals, yet patients are travelling back to Kyiv rather than face NHS waiting lists. …Liberal Democrat health spokesperson Daisy Cooper said: “It’s a damning indictment of the government’s record on the NHS that Ukrainian refugees are returning to a war-torn country to access health care.”

Accurate criticisms, to be sure. But both Labour and the Lib Dems simply want to dump more money in the system.

But the so-called Conservative Party does exactly the same thing, as the Wall Street Journal noted in its editorial.

Former Prime Minister Boris Johnson in 2021 pledged an additional £36 billion over three years for the NHS and related home and nursing-home care, funded by a payroll-tax increase. Mr. Sunak and Chancellor Jeremy Hunt followed in November with another £3.3 billion a year for the next two years.

And Allister Heath made a similar observation in his column.

The Cameron-May-Johnson survival strategy was to “neutralise” the NHS by refusing to contemplate difficult reforms, genuflecting endlessly at its altar, prioritising it in every Budget, greatly boosting its funding after Brexit and worshipping it hysterically during the lockdowns; yet, in the end, it was the NHS that neutralised the Tories. Small-state, high-growth Toryism is incompatible with an unreconstructed NHS, with its need for ever-higher taxes. How long will the Conservatives continue to lie to themselves about this?

This is a good opportunity to revisit my “what’s the alternative?” argument.

Self-styled right-of-center parties have to choose whether to become tax collectors for the welfare state or whether to push for entitlement reform. There’s no other alternative.

P.P.S. There is one group of people who are net winners from the U.K.’s government-run system.

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National Sales Tax Update: Test Vote for the Fair Tax

Fundamental tax reform is back on the agenda, with House Republicans promising a vote this year on a national sales tax, so I dug into C-Span’s archives so I could share a few of my thoughts from 2007 on the Fair Tax.

As you might suspect, the principles I believed in back in 2007 and the principles I still support in 2023.

If anything, I have even greater disdain for the IRS and our awful tax system.

Politicians have combined the worst of two worlds, giving us a tax code that simultaneously is filled with class-warfare provisions that punish success while also containing thousands of special tax breaks that benefit the well-heeled friends of politicians.

As I said in the video, it would be nice to toss the current tax code in the trash and replace it with something that collects revenue is a less-damaging and less-corrupt fashion.

For what it’s worth, I’ve always preferred the flat tax over a national sales tax.

Not because one is theoretically better than the other, but because of two political reasons.

1. As noted in the above clip, I’m very worried about giving untrustworthy politicians a new source of tax revenue without unambiguously and permanently getting rid of the income tax (so that we don’t repeat the European mistake of giving politicians a way of expanding government).
2. I also worry that a Fair Tax is vulnerable to demagoguery since lawmakers will get hit with election-year ads stating they want a big 30 percent tax on everything people buy (while overlooking that our paychecks will be much bigger once income taxes and payroll taxes are abolished).

Indeed, many sympathizers openly admit that the Fair Tax has vulnerabilities.

And there’s plenty of less-friendly opposition. In an article for the Bulwark, Jim Swift pours cold water on the idea.

…nobody has ever taken the Fair Tax seriously. Not in the years after the Tea Party wave… Not in 2011, when Texas Gov. Rick Perry briefly campaigned in support of the Fair Tax, only to quietly walk back his support and switch to a flat tax proposal.Not in 2017, when the Republican-controlled Congress passed the Tax Cuts and Jobs Act. …Do moderate House Republicans really want to be forced to vote on the Fair Tax? …In light of all this, why promise a vote on such a loser? Going straight to the floor poses risks, given the slim GOP majority. It’s a lose-lose situation: Vote yes, and the House Republican Conference looks frivolous, to say nothing of the messaging gift they would give Democratic speechwriters in 2024 (“Republicans want to instate a 30-plus percent federal sales tax!”). Vote no, and invite primaries by far-right candidates who will accuse you of siding with Democrats when given a chance to abolish the IRS. …It’s possible that McCarthy agreed to a floor vote expecting moderates to break ranks and the bill to fail by a spectacular margin. That would drive a stake through the heart of the Fair Tax. …What’s likelier is that McCarthy knew this was a promise he could break. He never said anything about when he would bring the bill to the floor.

While I do worry about the political blowback against a Fair Tax, I hope Speaker McCarthy keeps his promise and there is a floor vote.

Not because I’m deluded about something good getting through the Senate or surviving a sure-veto from Biden.

But if tax reform becomes a big issue this year, that may set the stage for a bigger debate in 2024 and maybe one of my fantasies will come true and we’ll get something good in 2025.

P.S. Here’s another video from the archives, in which I discuss the flat tax and national sales tax.

P.P.S. Speaking of archives, here are my brief thoughts from 2011 about the various proposals for tax reform.

P.P.P.S. And click here, here, here, or here if you want to peruse my arguments for the flat tax.

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Fiscal Follies: Texas vs. California, Part VIII

I have a seven-part series (here, here, here, here, here, here and here) comparing Texas and California, mostly to demonstrate that the not-so-Golden State has hurt itself with excessive taxation and a bloated government.

Today, we’re going to augment our comparisons by looking at a very practical example of how California’s approach is much worse.

The National Association of State Budget Officers publishes an interesting document (at least if you’re a budget wonk) entitled State Expenditure Report.

And if you to to Table 2 of that report, you’ll find the most important measure of state fiscal policy, which shows how fast the burden of government spending increased over the past two years.

Lo and behold (but to no one’s surprise), California politicians increased the spending burden much faster than their Texas counterparts.

As you can see, both states were irresponsible the first year, thanks in large part to the all the pandemic-related handouts approved by Trump and Biden.

But California was twice as bad. Politicians in Sacramento used federal handouts to finance a grotesque spending binge (whereas the spending binge in Texas deserves a more mild adjective, such as massive).

Both states were better the second year, with California’s spending burden climbing by 2.2 percent in 2022 and Texas actually delivering a spending cut.

Remember, though, that the spending burden exploded between 2020 and 2021, so the 2022 numbers only look reasonable compared to the bloated trendline.

Now let’s consider whether California’s grotesque spending binge had negative consequences.

The answer is yes, according to a Wall Street Journal editorial.

Gov. Gavin Newsom last year touted a $100 billion budget surplus as evidence of California’s progressive superiority. He was less triumphant…when announcing a $22.5 billion deficit in the coming year, a contrast to Texas’s record $32.7 billion surplus. …California’s problem, as usual, is that Democrats baked too much spending into their budget baseline. They expanded Medicaid to undocumented immigrants over the age of 50, enacted universal pre-school and school lunches, extended paid family leave by two weeks, and boosted climate spending by $10 billion. …Much of Texas’s surplus this year owes to surging sales-tax revenue from inflation and population growth—i.e., Californians moving to Texas and spending their tax savings. Mr. Newsom claimed Tuesday that California has a more “fair” tax system than the Lone Star State and that Texans pay more in taxes. This is disinformation. According to the Census Bureau, California’s per capita state tax collections ($6,325) were second highest in the country in 2021 after Vermont. Texas’s ($2,214) were second lowest after Alaska. …California’s budget problems will grow as more of its rich and middle class move to lower-tax states like Texas.

Per-capita state tax collections are the most striking numbers in the editorial.  The average Californian is paying $6,325 for state government, nearly three times as much as the $2,214 that is paid by the average Texan.

Does anyone think that Californians are getting nearly three times as much value as their counterparts in the Lone Star State?

Based on how people are voting with their feet, the answer is obvious. But if you prefer more technical measures of state government value, California loses that contest as well.

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Statism, Captured in Five Images

After five columns mocking statism in 2021 (here, here, here, here, and here), I only produced one in 2022.

So let’s get an early start for 2023.

This cartoon is a helpful reminder that government has done many wonderful things throughout history.

Next we see a reminder that just because you ignore the government, that doesn’t mean the government will ignore you.

For our third item, here’s some satire about people who are ignorant of world history.

Next is a reminder that nitwit bureaucrats (I assume at the Department of Agriculture) want us to believe processed flour is better for us than vegetables.

Per tradition, I’ve saved the best for last.

Just like our third item, this is a helpful reminder that we should not trust government.

Unless, of course, you like that kind of shower.

And, as a libertarian, I support your right to like weird things…so long as one of those weird things isn’t imposing wasteful and venal government on the rest of us.

P.S. I have an entire page of cartoons and images mocking government, so feel free to peruse.

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Addressing IRS Dysfunction

I’m not a big fan of the Internal Revenue Service, but our awful (and anti-growth) tax system is mostly the fault of politicians.

Ever since that dark day in 1913 when the income tax was enacted, presidents and members of Congress have been making the system more and more complicated.

The net result is that we now have a tax system that – according to the IRS website – requires more than 2,700 separate forms, instructions, or publications (a huge increase over the past two decades).

In my fantasy world, we would throw all those forms in the trash and replace today’s convoluted tax system with a simple and fair flat tax.

Instead of 2,700-plus forms, we would have one simple postcard-sized tax return for households and another simple postcard-sized tax form for businesses.

Yes, there would be a few other forms for instructions and things like that, but compliance costs would drop by more than 90 percent.

Seems like a win-win approach, but the Washington Post has a different perspective, editorializing instead in favor of simply giving the IRS more money and power.

For the past three years, the IRS has failed to do its most basic job: processing tax returns in a timely manner. There are many reasons. The pandemic upended almost everything for a while. …Ancient computer systems hampered operations. And Congress kept asking the IRS to do more: implement the sweeping 2017 GOP tax code overhaul, then send stimulus checks — three times — to the vast majority of Americans during the pandemic. …Yet House Republicans made it their first priority this year to pass legislation slashing IRS funding, which would worsen the agency’s problems — and the service it provides Americans. …Congress’s priority should be modernizing the IRS and getting it back to full functionality. That’s why Democrats passed $80 billion in extra funding for the agency… This isn’t the time to cut. It’s the time to resuscitate.

By the way, “slashing” is a very inaccurate word when describing the GOP plan to cancel a giant budget increase for the IRS. Indeed, the IRS budget (adjusted for inflation) has dramatically expanded in recent decades.

But we should expect misleading analysis from the Washington Post.

So let’s conclude by instead asking a fundamental question: Is it better to continue on the current path (an ever-more-complex tax system requiring ever-more-money for the IRS) or is it better to have a clean tax system?

The answer should be obvious.

P.S. I’m sure that not every additional form on the IRS website represents additional complexity. But I’m also sure that the tax code is far worse than it was in the past. Perhaps the most compelling evidence is the huge increase in the number of pages needed for the instruction manual for the 1040 tax form.

P.P.S. Also keep in mind that there is a lot of evidence that tax complexity is a major source of political corruption.

P.P.P.S. If you like gallows humor, click here.

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The Solution to Maine’s Fiscal Problems – and a Lesson for the Entire Nation

When I write about fiscal policy, there are two ever-present themes.

• Bad tax policy reduces growth and competitiveness, driving away jobs, people, and investment.
• Bad spending policy occurs when budgets grow faster than the economy’s productive sector.

And both of these themes can be found in a comprehensive new report issued by the Maine Policy Institute.

The report provides lawmakers with a detailed analysis of the state’s fiscal status and it shows specific spending reforms that would save money and create “fiscal space” for pro-growth tax reforms.

I realize that readers from most places won’t care very much about some of the Maine-specific data, but the report contains some charts that teach a very important lesson that can be applied in other states, as well as in Washington and other national capitals.

Consider, for instance, this chart showing that Maine is getting in trouble because spending in recent years is growing significantly faster than inflation.

The same is true in Washington, except the problem is far worse.

And in other states. And various cities. And other nations.

In other words, governments at all levels and in almost all places have a hard time complying with fiscal policy’s Golden Rule.

That being said, spending caps are a universal solution to this universal problem. Let’s look at Figure 10 from the report, which shows how a TABOR-style spending cap would have produced very good results for Maine.

Once again, we can take this information and apply it very broadly.

A spending cap is the smart and effective way of dealing with irresponsible fiscal policy at all levels of government.

For instance, Switzerland is well know for its spending cap, known as the debt brake. This approach has yielded very good results for the nation’s finances, but less well know is the fact that many subnational governments in Switzerland’s federalist system have their own versions of a spending cap.

The bottom line is that good fiscal policy is universally applicable. And spending restraint is a necessary precondition for that to happen.

P.S. Some people ask whether a balanced budget amendment would be better than a spending cap. This question gives me an excuse to share one more chart from the study. As you can see from Figure 9, annual tax revenues are very unstable. Sometimes they grow rapidly, sometimes they grow slowly, and sometimes they actually shrink (and the same thing is true in Washington).

This means that a balanced budget requirement is very difficult to enforce and often does not produce good results. During boom years, when revenue is rapidly increasing, politicians have too much leeway to increase spending. And during downturns, when revenue if stagnant or falling, politicians claim that spending restraint would be too difficult and they raise taxes instead.

The advantage of a spending cap is that it targets the real problem of spending (rather than the symptom of red ink). Moreover, politicians are subject to a rule that is much easier to enforce (increasing spending by, say, 2 percent every year is very straightforward compared to the wild swings in spending that occur with a balanced budget rule).

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Another Bureaucratic Attack on Lifestyle Quality (and Freedom of Choice)

The nanny-state crowd in DC generates red tape with big macroeconomic costs. But also quality-of-life costs.

• Inferior light bulbs
• Substandard toilets
• Inadequate washing machines
• Dribbling showers
• Dysfunctional gas cans
• Crummy dishwashers

And it seems they never rest. After making one part of our life less convenient, they search for a new target.

Next on their list is an attack on gas stoves.

This is not because these appliances are exploding.

It’s not because they lead to fire hazards.

And it’s not because they leak gas and cause preventable deaths.

Instead, the bureaucrats imagine we might possibly be at risk of something, somehow.

I’m not joking. Here are some excerpts from a Wall Street Journal editorial about the latest assault on appliance freedom.

Coercion in the cause of banning fossil fuels is no vice for the Biden Administration… The Consumer Product Safety Commission (CPSC) could soon ban gas stoves. CPSC Commissioner Richard Trumka Jr. teased in an interview…that the agency plans to propose new regulations for gas stoves, which could include a ban. …Mr. Trumka isn’t worried that gas stoves might cause accidental burns—a hidden hazard for electric range-tops that stay hot long after they’re turned off. Instead, the agency’s purported concern is that gas stoves cause indoor air pollution and asthma, though there’s scant evidence to support such claims. …The real hazard isn’t gas stoves but how people use them. Not that this distinction matters to the CPSC, which has a long history of targeting products…because of accidents that are the fault of customers. In this case, Mr. Trumka wants to use indoor pollution as a pretext to advance the climate left’s goal of forcing all buildings to use electricity for everything.

In a column for National Review, Charles Cooke has a withering assessment of this hare-brained initiative.

One could advance any number of compelling arguments against the Biden administration’s reported desire to institute a nationwide ban on gas stoves. …yet to offer any of these objections would ultimately be counterproductive, insofar as it would signal an acceptance of the premise underlying the policy, which is that this is the sort of matter that a free people should expect their federal government to superintend. …That’s right. The correct response here is a rather simple one, all told: Go away. Leave us alone. Stick your ludicrous propositions where the sun don’t shine. …That is a private matter — a matter in which the powers that be ought to have no say. …most of the “science” that’s being sold by the Anti-Stove Brigade seems extremely thin to me, but, even if it weren’t, I still wouldn’t give a toss about it, because I’m an adult, and I’m aware that life is full of trade-offs. …Justifying the administration’s proposed move, CPSC commissioner Richard Trumka Jr. explained that “products that can’t be made safe can be banned.” What, I wonder, would be excluded from that definition?

Amen, especially to the point about letting adults take risks.

• Drinking can be risky, but that doesn’t mean we should have prohibition.
• Doing drugs can be risky, but that’s not an argument for the War on Drugs.
• Smoking can be risky, but that’s hardly a reason to impose a cigarette ban.
• Vaping can be risky, but it’s very misguided to restrict the freedom to vape.
• Consuming sugar can be risky, but politicians should not ban Big Gulps.

And there are lots of other activities that have produce risks of death and injury, such as scuba diving, hang gliding, skateboarding, etc.

In a free society, none of these things should be controlled by government bureaucrats.

P.S. Let’s not forget how some subnational governments are going after plastic straws.

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Chicago’s Downward Spiral

It’s not easy to identify America’s worst-governed city. You can make a case for jurisdictions such as San Francisco, Detroit, New York City, Minneapolis, or Seattle.

For what it’s worth, there is statistical research from last decade showing places like New York and Los Angeles are among the worst of the worst, but I wonder if Chicago actually deserves top billing

There are many reasons to criticize the Windy City. Crime is rampant, taxes are excessive, and schools are terrible.

And, to make matters worse, Chicago is in America’s worst-governed state (at least based on my poll, which is not scientific but is probably accurate).

I already wrote once about bad public policy in Chicago. Today’s column is going to show that things are getting even worse.

I’ve written about how taxpayers are fleeing poorly governed states. Well, they’re also fleeing poorly governed cities. And the AP reports that Chicago is a popular place for companies…to leave.

The Chicago area saw an exodus of corporate headquarters in 2022, including investment firm Citadel, which moved to Miami along with its billionaire founder, Ken Griffin; Caterpillar, which relocated from north suburban Deerfield to Irving, Texas; and aerospace giant Boeing, which moved to Arlington, Virginia, after more than 20 years in the West Loop. The most recent high-profile departure was announced in November, when Lake Forest-based auto parts manufacturer Tenneco said it was shifting its headquarters to Michigan. …vacancy rates in the central business district rose to 19.6%, while the Chicago metro ticked up to 21.8%… Meanwhile, Citadel principals and employees generated billions of dollars in tax revenue for the city and state over the past decade, according to the firm, money that has also headed south.

And why are businesses escaping?

As Adam Schuster explained last October in National Review, the city’s economic management is getting worse.

Can anything be done to save the financial future of one of America’s largest and best cities? …Let’s go through the numbers. The business community is right that a property-tax increase is unnecessary considering the $3.5 billion in pandemic-related federal aid. ..The property-tax hike could be prevented by using just 2.5 percent of Chicago’s $1.9 billion in American Rescue Plan funding. But instead of using the aid to prevent tax hikes that would impede Chicago’s economic recovery, the city has proposed to use those billions to create new programs. The mayor’s proposed budget increases spending by roughly $1.2 billion… Unfortunately, that spending is propped up by one-time federal aid that expires by 2024 — meaning many programs will have to be…financed with significant tax hikes within just two years. And about those pensions: Pension costs will consume more than $2.3 billion of the city’s budget, or 21.4 percent of its own source revenue, excluding state and federal grants. That’s more than a $967 million increase in pension spending since Lightfoot became mayor and $461 million more than last year alone.

In other words, the city is trying to raise taxes today while also making decisions (especially regarding unfunded pensions) that will almost surely mean additional tax increases in the future.

No wonder people and business are fleeing the state and the city.

P.S. To make matters worse, Chicago still has major problems with corruption.

P.P.S. My long-run fear is that politicians in DC will provide bailouts for profligate cities and states.

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The Public Choice Challenge

Back in 2016, I shared three videos to explain the theory of “public choice,” which is simply the application of economic principles to understand the self-interested behavior of politicians, bureaucracies, and voters.

Wonky readers will enjoy this fourth video.

I’m citing public choice because the Economist, in a recent article, shared a very depressing chart about the decline of economic growth in the developed world.

As you can see, the average increase in per-capita economic output has dropped by more than 50 percent since the turn of the century.

From a policy perspective, there’s a very simple explanation.

As explained in this fascinating video, the western world enjoyed pro-growth policies of the 1980s and 1990s. You can credit Reagan and Thatcher or you can credit the “Washington Consensus.”

Unfortunately, the opposite has happened in the 21st century. The United States has moved toward statism and the same is true for Japan and most of Western Europe.

So it’s no surprise that growth has slowed in industrialized nations.

And it’s also no surprise (given the magazine’s ideological bent) that the Economist doesn’t really understand what’s been happening. Here are some excerpts from the article.

The long-run rate of growth has dwindled alarmingly, contributing to problems including stagnant living standards and fulminating populists. Between 1980 and 2000, gdp per person grew at an annual rate of 2.25% on average. Since then the pace of growth has sunk to about 1.1%. …The problem is that…reviving growth has slid perilously down politicians’ to-do lists. Their election manifestos are less focused on growth than before… Our analysis of political manifestos shows that the anti-growth sentiment they contain has surged by about 60% since the 1980s. Welfare states have become focused on providing the elderly with pensions and health care… Support for growth-enhancing reforms has withered. …unless they embrace growth, rich democracies will see their economic vitality ebb away and will become weaker on the world stage. Once you start thinking about growth, wrote Robert Lucas, a Nobel-prize-winning economist, “it is hard to think about anything else”. If only governments would take that first step. Moreover, even when politicians say they want growth, they act as if they don’t.

At the risk of being presumptuous, it’s not just a matter of thinking about growth. It’s also understanding the policies that produce growth.

And it’s also understanding how to get those pro-growth policies when politicians have big incentives to do the wrong thing. And this brings us back to public choice.

Let’s now look at some excerpts from a column in the Wall Street Journal by Alberto Mingardi.

‘What would you do if you were the state?” So begins the greatest book of political theory you never read. “The State,” by the Hungarian-born economist Anthony de Jasay, was published in 1985… Jasay argued that particular leaders matter far less than might be supposed and that all governments ultimately seek to maximize their discretionary power. …Politicians differ, sometimes sharply, in ideas and character. But governments—like businesses—have basic structural tendencies. The state always seeks to expand. Redistribution, Jasay maintained, is “addictive.” The moment government starts giving out goodies, the mechanisms undergirding society and the economy change. Corporations and interest groups have a new incentive to work to win the state’s favor. So businesses tend to shift resources and attention from engineers to lawyers, from serving customers to capturing decision makers. “The greater the reach of the state, the greater is the scope for profiting from its commands,” Jasay wrote.

Sadly, I don’t have any easy solutions. Once people learn they can vote themselves money, it is very hard to rescue a society.

But I know that protecting and promoting jurisdictional competition is part of the answer if we want to avoid the problem of “goldfish government.”

P.S. For more public choice-related analysis, I recommend these three videos.

P.P.S. For more about politicians, click here and here.

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Another Victory for Tax Competition

I’m a big fan of tax competition.

Why? Because politicians are far more likely to keep tax rates low when they are afraid that jobs and investment can move to countries (or states) with better tax system.

It also explains why tax rates fell dramatically around the world after Ronald Reagan and Margaret Thatcher triggered a virtuous cycle of jurisdictional competition.

And it explains why politicians are fighting to curtail tax competition. They want taxpayers to be akin to captive customers. When that happens, they can push tax rates back up.

Given my cheerleading for tax competition, you won’t be surprised to learn that I get a jolt of pleasure anytime I read about a government being pressured to lower tax rates.

Which is why I’m going to share some excerpts from a story in the New York Times.

Dubai started the new year by suspending its 30 percent tax on alcohol, a move that could help the Gulf emirate attract more tourists and businesses amid growing regional competition. Dubai removed the tax on Sunday, along with the fee for a license that individuals need to buy alcohol, local beverage distributors said. …Offering significantly cheaper liquor is likely to bolster Dubai’s position as the Middle East’s center for tourism and business at a time when economists are warning of a global economic slowdown that could dent spending on travel and leisure. …The changes are likely to give a boost to the local hospitality industry… The decision was the latest in a series of measures that appear to be designed to cement Dubai’s position as the dominant hub for tourism and investment in the Middle East. …Dubai is facing increasing competition from Qatar and Saudi Arabia.

I’ve been to Dubai a few times, but never Qatar or Saudi Arabia, so I can’t personally comment on the relative attractiveness of the three jurisdictions.

But I’m glad that they feel pressure to compete with each other. The net result is more liberty.

P.S. I can’t resist pointing out that our leftist friends should not be overly upset about tax competition. After all, even data from the OECD shows that governments are collecting more money now that tax rates have significantly dropped. Though that data may not be very convincing if folks on the left are motivated by something other than greed for more tax revenue.

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Environment Humor

I normally share humor about collectivism, gun control, politicians, and libertarians, but let’s augment my sparse collection of environment humor.

We’ll start with a video clip from the United Kingdom.

What makes the video amusing (and sad) is that it captures how politicians largely see global warming as an excuse to do things they have always wanted to do – i.e., grab more power and control.

Next, we have two examples of Greta humor, starting with this gas cap.

And this peek into the future.

Our fourth item shows how insufficient commitment to the environment can lead to personal loss.

As usual, I’ve saved the best for last.

Professor Glenn Reynolds (aka, Instapundit) famously has remarked that “I’ll believe it’s a crisis when the people who keep telling me it’s a crisis start acting like it’s a crisis.”

But as we repeatedly see, the people who pontificate about the environment (see here, here, here, here, and here) often have the biggest carbon footprints. And they have no intention of changing their lavish lifestyles.

Which is the message of this cartoon.

P.S. Other examples of environment humor can be found here, here, and here.

P.P.S. And here are examples of unintentional environmental humor.

• Environmentalists assert that you’re racist if you oppose their agenda.
• Some environmentalists don’t believe in bathing.
• How about the environmentalists who sterilize themselves to avoid carbon-producing children?
• Or consider the environmentalists who produce/use hand-cranked vibrators to reduce their carbon footprint.
• There are also environmentalist who claim that climate change causes AIDS.
• Or that it causes terrorism.
• And environmentalists put together a ranking implying that Cuba is better than the United States.
• Environmentalists want to start wars.

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Applause for Globalization, not Global Governance

If globalism means free trade and peaceful interaction among peoples, sign me up. I’m a big supporter.

But if globalism means international bureaucracies working to increase the power of governments (i.e., dirigiste forms of global governance), then I’m a big opponent.

Because the word means different things to different people, I’ve explored various ways to compare and contrast “good globalism” vs “bad globalism.”

For what it’s worth, I think my 2×2 matrix needs to be revised.

One reason for an update is that “globalism” now seems more closely linked with bad policies

In an article for the US-based version of the Spectator, Roger Kimball warns against the statist version of “globalism.”

Globalism…is the enemy of freedom. Why? Because globalism systematically attacks and undermines the moral and political filiations that make genuine freedom possible. …A sterling contemporary example is the Great Reset, recently proposed by the Davos-based World Economic Forum… Here at last was an opportunity to enact a worldwide tax on wealth, a far-reaching (and deeply impoverishing) “green-energy” agenda…the WEF plan involved nothing less than the absorption of liberty by the extension of bureaucratic power. …The globalist alternative dangled before us is a version of utopia. But like The Wizard of Oz, it is all show and no substance. Or rather, the substance is an erosion of traditional sources of strength.

More specifically, the folks at the World Economic Forum are pushing a “great reset” based on “stakeholder capitalism” (which is largely repackaged “cronyism”).

Samuel Gregg of the Acton Institute opined on this issue for the Australian version of the Spectator.

The WEF is a dangerous force in global politics. …In October 2020, Schwab stated that…”Free-market fundamentalism has eroded…economic security, triggered a deregulatory race to the bottom and ruinous tax competition.” Precisely how and where ‘free-market fundamentalism’ has run amuck remains a mystery. After all, we live in a world in which most governments in developed nations routinely control 40 per cent or more of their nation’s GDP. Nor does the regulatory and welfare state’s relentless growth in, say, the European Union, Britain and America suggest that free market radicals have been in charge in Brussels, London or Washington for decades. …Ignoring these inconvenient facts, Schwab believes that the world needs a ‘Great Reset.’ …For all his invocation of the predictable woke pieties, Schwab’s core commitment is to political and economic arrangements which used to be known as corporatism. …The language of corporatism, like that of Schwab’s WEF, may be one of coordinated consultation, but the agenda is one of control. …On an economic level, corporatism discourages innovation, produces inflexible labour markets dominated by unions whose priority is maintaining the status quo, and riddle the marketplace with privileges for well-connected businesses. …anyone who believes in preserving things like liberty, sovereignty, and the decentralisation of power should be concerned.

Writing back in 2020 for the Wall Street Journal, Richard Shinder opined about the dirigiste agenda of modern-day globalists compared to the good version of globalism that existed in the 19th century.

Globalism touts the supremacy of supranational bodies and accords—the United Nations, the Paris climate agreement and the like. …many aspects of today’s globalism—or at least its promotion of market economies, capital mobility, and mostly free trade—aren’t in conflict with nationalism. In one sense of the word, the greatest “globalist” age in history was the period before World War I. Trade among western European countries increased to 10% of the region’s GDP in 1900 from 1% in 1830. Supply chains extended across the globe, and capital and labor flowed freely across borders. The “long” 19th century…was also a time of industrialization, enormous poverty reduction, wealth creation and global economic integration. This unabashed age of nation-states wasn’t all roses, but it was one of free markets, free trade and unrestricted capital flows. …this period demonstrates that globalism need not be unaccountable nor collectivist. …international institutions…shouldn’t impinge on national sovereignty. Sovereign nations consenting to play by an agreed set of rules, or banding together in service of a common objective, differs radically from unaccountable transnational elites engineering outcomes, often without scrutiny. …Nationalism as a response to a collectivist and unaccountable globalism—whether in dealing with a “climate crisis,” “inequality,” or something else—need not be nativist or protectionist. …the nation-state remains the most successful vehicle for advancing liberty, economic advancement and individual achievement in the history of the world.

For a differing perspective, Dalibor Rohac of the American Enterprise Institute made the case for globalism in a column for the Washington Examiner.

Humankind has become vastly more prosperous with extensive international cooperation. Since 1950, the world’s population has roughly tripled; over the same time, real output has increased by more than a factor of 10. In Botswana and South Korea, real per capita incomes have grown 38 and 30 times, respectively. Global prosperity is a direct outcome of economic globalization. Compared to automation, trade accounts for a tiny fraction of total job losses in the U.S. Meanwhile, cheaper consumer products imported from overseas have been among the most effective anti-poverty “policies” in the Western world. …This would not be possible without…the open trading environment created by successive rounds of multilateral trade liberalization under the General Agreement on Tariffs and Trade and, later, the World Trade Organization.

I fully agree about the global benefits of free trade, and the World Trade Organization has played a helpful role.

Moreover, Dalibor also mentions other international agreements and entities that are unobjectionable.

Or even desirable. After all, does anyone oppose the parts of the “rules-based postwar order” that facilitate things such as cross-border air travel, international shipping, and global telecommunications?

But the helpful work of those bodies doesn’t change the fact that major international bureaucracies engage in activities that are counterproductive. A “rules-based order” is only good, after all, if it advancing good rules.

• Is it helpful for the OECD to push for rules hindering tax competition?
• Is it helpful for the IMF to push for rules exacerbating moral hazard?
• Is it helpful for the EU to push for rules requiring tax harmonization?
• Is it helpful for the UN to push for rules undermining civil liberties?’
• Is it helpful for the Basel folks to push for rules increasing systemic risk?

The bottom line is that governments should be competing against each other, not conspiring with each other.

Which leads me to a revised version of my 2×2 matrix (the upper-right quadrant is empty because protectionist nations, by definition, don’t want jurisdictional competition).

To summarize, yes to globalization, no to global governance.

P.S. If the choice is nation states vs. global governance, the answer is obvious.

P.P.S. While I prefer nation states over global governance, I’m not happy that the European Union is morphing from an international bureaucracy into a nation state.

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Part I: Does the United States Have Free-Market Health Care?

Does the United States have a market-based health care system or a socialist health care system?

That’s not an easy question to answer.

Because of Medicare, Medicaid, and other government programs, taxpayers directly finance about 50 percent of overall health expenditures. Does that mean we have a 50-percent socialist system?

Once again, there’s no easy answer.

On one hand, Uncle Sam does not operate the hospitals and employ the doctors and nurses (like we see – often with horrifying consequences – in the United Kingdom).

But on the other hand, policies in Washington (not just Medicare and Medicaid, but also the tax code’s exclusion for fringe benefits such as employer-provided health care) have replaced market forces with a massive third-party payer problem.

While there’s no easy answer, my back-of-the-envelope guess from back in 2013 is that the US health system is 79 percent government and 21 percent free enterprise.

If you want words rather than numbers, we have an incoherent and inefficient system that is part socialist, part interventionist, and part market.

That being said, is the US system more market oriented than other nations?

That’s also a hard question to answer. But let’s look at a couple of charts that suggest the answer is more negative than positive.

First we have a chart from Michael Cannon’s recent analysis of the tax treatment of healthcare. As you can see, the United States has a much-higher-than-average amount of health spending dictated by government.

By the way, if you look at dollars spent per capita, you find something similar.

In the United States, government has a huge footprint in the health sector.

For our next chart, Andrew Biggs of the American Enterprise Institute shared a chart last year showing which nations have the most third-party payment (i.e., someone other than the consumer paying the cost of healthcare).

It showed that the United States had a much-lower-than-average share of expenses financed by consumers.

But his chart relied on 2016 data and we now have data from 2019. So here’s the latest look at how the United States is not market-oriented, at least when compared to other developed nations.

Basically the same look as the chart from Andrew Biggs, but I didn’t want anyone to think the data may have changed.

I’ll conclude by noting that America’s healthcare system is a mess. But as I explain in this video, it’s a mess because government plays a big role. Even bigger than some of the nations that have “socialist” health systems.

P.S. You can see the impact (or lack thereof) of third-party payer by looking at prices for birth control, plastic surgery, and abortion.

P.P.S. Everyone should watch this Reason video to see how third-party payer makes healthcare more expensive.

P.P.P.S. And look at these two visuals to grasp the difference between a free market and Obamacare.

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Control the Burden of Government Spending

As part of my annual “Hopes and Fears” column, a rejuvenated interest in spending restraint was at the top of my list.

This clip from a recent interview summarizes the economic issues.

If you don’t want to watch the video, here are the three things to understand.

1. Tax-financed spending is bad for prosperity.
2. Debt-financed spending is bad for prosperity.
3. Monetary-financed spending is bad for prosperity.

And if you understand those three things, then you realize that the real problem is spending.

At the risk of over-simplifying, taxes, borrowing, and printing money should be viewed as different ways of doing a bad thing.

Since I mentioned over-simplifying, I’ll close with a couple of observations that are somewhat contradictory.

• First, I don’t worry very much about whether there is a surplus or a deficit in any particular year, but it is a good idea to have long-run fiscal balance (compared to the alternatives of financing the budget with borrowing or printing money).
• Second, while taxes are the most appropriate way to finance spending, tax increases are a reckless and irresponsible option because we have so much evidence that politicians will respond with additional spending and additional debt.

Which brings us back to the main lesson, which is that spending is the problem and spending restraint is the solution.

Not just a solution. The only solution.

P.S. This video is a bit dated, but all of the economic analysis is still completely accurate.

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Students Benefit from Reform, Not More Spending

There are two important things to understand about K-12 education.

1. There is national evidence and international evidence that spending more money on government schools does not produce good results.
2. There is national evidence and international evidence that school choice produces better educational outcomes for families and society.

With today’s column, let’s add more evidence to the discussion.

Paul Gessing, the President of the Rio Grande Institute, wrote about New Mexico’s comparative educational performance in an article for National Review.

The National Assessment of Educational Progress (NAEP) is known as “the Nation’s Report Card.” Sadly, the most recent “report card” represented failure for many states, not the least of which is my home state of New Mexico, which came in dead-last in all categories studied: fourth-grade and eighth-grade reading and math. Sadly, especially for New Mexico kids, the additional tax dollars being spent by the state’s education system have not moved the needle. If anything, the needle has moved in the wrong direction. Let’s compare New Mexico with lower-spending, reform-minded states, such as Arizona… Arizona neighbors New Mexico and has a similar demographic profile, including large Native American communities and a large Hispanic population. …We’ll use fourth-grade reading scores to make the comparison. …In 2005, New Mexico…was tied with Arizona, with a score of 207. By 2022, Arizona outperformed New Mexico 215 to 202.

Here are the numbers on comparative spending.

As you can see, Arizona is getting better results with frugality while New Mexico is getting worse results with profligacy.

…in FY 2022…Arizona spent $10,639…the…fifth-lowest-spending state…in the nation. …New Mexico, on the other hand, has increased education spending over the past 15 years or so. …Today, New Mexico ranks 19th among states at, considering its dismal educational record, an astonishing $15,338 per student.

But it’s not the frugality or profligacy that matters.

What seems to make the difference is whether the state has some form of school choice.

What happened? …Arizona has had a charter-school law since the mid 1990s and…is ranked as the second-best charter law in the nation… A system of tax credits to be used for private school choice has been in place and growing since 1997, and various specialty programs as well as narrowly targeted vouchers have also made Arizona a school-choice leader. That’s even before the program of universal education savings accounts approved in early 2022 fully takes effect.

Not only is Arizona out-performing New Mexico today, but the gap will probably grow.

Arizona is ranked #1 for school choice while New Mexico is buried in the middle of the pack at #26. And, as Paul noted, there’s a new statewide choice system that will give every family the ability to choose – and that means pressure on both private and government schools to produce better outcomes.

It will be interesting to see if Arizona (especially with its new choice law)…can keep or accelerate the momentum. Sadly, New Mexico is one poorly performing state that has not gotten serious… The children in my state have suffered despite a large increase in government education spending. Better results are possible without breaking the bank.

It’s unfortunate that New Mexico politicians are siding with teacher unions rather than families.

The evidence is very strong that school choice is a win-win for both taxpayers and students.

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The Higher Education Racket, Part II

In Part I of this series, I shared a very amusing video from Bill Maher about how colleges and universities have become “luxury day-care centers.”

I then added some of my analysis to show that government subsidies – such as student loans – were the underlying problem.

Simply stated, colleges and universities increased tuition and fees so they could capture the value of the subsidies (as explained by Professor Daniel Lin back in 2012).

To make matters worse, they’ve been spending the money on more bureaucracy rather than anything that would improve educational outcomes for students (or generate spin-off benefits for the overall economy).

But “more bureaucracy” is an understatement. Here’s a sentence that I initially thought had to be satire.

But I’m not joking. This sentence comes from a jaw-dropping story about university bureaucrats trying to micro-manage student social life at Stanford University.

Here are the full details from the Wall Street Journal report, written by Douglas Belkin.

A recent headline in the Stanford Daily News student paper says: “Inside ‘Stanford’s War on Fun’: Tensions mount over University’s handling of social life.” Stanford has acknowledged the students’ complaints about their doldrums… Stanford has a long reputation as an offbeat party school for high achievers. …on campus, rules around parties dominate the conversation. Stanford began mandating students file an application two weeks ahead of a party including a list of attendees, along with sober monitors, students said. …The number of registered parties dwindled to 45 during the first four weeks of school this fall… Samuel Santos Jr., associate vice provost of inclusion, community and integrative learning within the Division of Student Affairs, says the school is working to address students’ concerns about Stanford’s social atmosphere. The party-planning process will be streamlined and more administrators will be hired to help facilitate student social life.

While this is an extreme example of bureaucracy run amok, it’s symptomatic of a broken system.

In an article for the Federalist, Rebecca Kathryn Jud and Chauncy Depree cite the spread of bureaucracy at a local university.

Over the past few decades, U.S. higher education has seen dramatic changes, few of which have been for the better. …We went to the website of a local public university and checked the office of the dean of the business college. The site identified the following vaguely titled and well-paid hangers-on: senior associate dean, associate dean for undergraduate programs, assistant dean for academic services, administrative specialist, technology and database specialist, marketing coordinator, assistant to the dean for finance and administration, senior major gift officer, and director of the Center for Economic and Entrepreneurship Education. This does not include the multitude of secretaries and assistants who support these dubiously necessary administrators. Nor does it include the deans for other colleges, the department heads, the office of the president, or any of the other administrative offices. Bear in mind, this expensive phenomenon is replicated across colleges and universities throughout the country.

And here are some excerpts from a 2020 column in Townhall by the late (and great) Walter Williams.

…college administrators assume that today’s students have needs that were unknown to their predecessors. Those needs include diversity and equity personnel, with massive budgets to accommodate. …Penn State University’s Office of Vice Provost for Educational Equity employs 66 staff members. The University of Michigan currently employs a diversity staff of 93 full-time diversity administrators, officers, directors, vice provosts, deans, consultants, specialists, investigators, managers, executive assistants, administrative assistants, analysts and coordinators. Amherst College, with a student body of 1,800 students employs 19 diversity people. Top college diversity bureaucrats earn salaries six figures, in some cases approaching $500,000 per year. …Diversity officials are a growing part of a college bureaucracy structure that outnumbers faculty by 2 to 2.5 depending on the college.

Fortunately, we have a way of solving all the above problems.

P.S. The mess in higher education is another example of what happens when politicians create a “third-party payer” problem.

P.P.S. Hillary Clinton was wrong on this issue and Joe Biden is wrong on this issue.

P.P.P.S. Given my libertarian sympathies, I also object to subsidizing folks who are hostile to economic liberty.

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