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Archive for the ‘Fiscal Policy’ Category

Nearly 10 years ago, I shared some data to show how a Swiss-style spending cap would have prevented some of the excess spending of the Bush and Obama years.

Trillion-dollar deficits would have been avoided. But, more important, the burden of government spending would have been significantly lower.

That would have enabled stronger growth, as confirmed even by researchers from left-leaning bureaucracies such as the OECD and CBO.

I then did the same thing in 2020, showing once again how a spending cap would have produced great results.

And, earlier this year, I crunched the numbers to show how Italy and Greece could have avoided their fiscal nightmares if they had imposed spending caps a couple of decades ago.

Today, let’s look at similar data for Canada.

Except I don’t need to do any work because Livio di Matteo has a new study on tax and expenditure limitations from the Fraser Institute. Here’s some he wrote about the conceptual issues.

Tax and expenditure limits restrict the growth of either revenues or expenditures or both by either setting them at a fixed dollar amount or by limiting the growth rate by linking them to the growth of specific economic variables. …A key perceived benefit of TELs is that they serve as a restraint on politicians and bureaucrats who often have little incentive to restrain spending in response to pressures from interest groups. A second benefit of TELs is that smaller government can be associated with higher rates of economic growth. …One noteworthy type of TEL is a strict restriction on tax or expenditure levels, or, more commonly their rates of growth. This is generally a formula driven approach and the most common mechanism involves restricting expenditure growth to the pace of personal income, GDP, or combined population and inflation growth.

Now let’s look at his numbers for Canada, starting with a look at the the status quo outlook for 2015-2025, which shows that the spending burden will climb by 58 percent over the 10-year period.

Perhaps the best way to illustrate the implementation of a simple TEL and assess its impact and effectiveness is via an example that makes use of recent federal public finance data. …The base scenario…shows revenues rising from…$292.6 billion to $437.7 billion—an increase of 50 percent. …Meanwhile, expenditures rise from $295.4 billion to $466 billion for an increase of 58 percent.

But what if spending was limited so it could only grow at the same rate as population plus inflation?

The spending burden would increase by just 33 percent.

The simulations in this paper…involves a fixed growth rule for expenditures so that they cannot exceed growth in population plus inflation… Under this approach, federal expenditures grow from $295.5 billion in 2015–16 to reach $393.2 billion by 2025–26, which is a much smaller increase in spending relative to the projections contained in Budget 2021. …Expenditures grow from $295.5 billion in 2015–16 to reach $393.2 billion by 2025–26, an
increase of 33 percent.

The report also looks at what would happen if there was an opt-out clause to allow emergency spending, specifically the outlays for Canada’s response to the COVID pandemic.

The net result is that spending climbs by 43 percent over the 10-year period.

…In figure 3, a…final scenario is presented that…assumes that the TEL was designed to accommodate the need for an emergency fiscal response… Expenditures are assumed to grow at 2.9 percent annually from 2015–16 to 2019–20 and then from 2023–24 onwards. …The results show that revenues rise from $292.6 billion in 2015–16 to $427.7 billion by 2025–26 for a total increase of 46 percent. Meanwhile, expenditures rise from $295.5 billion in 2015–16 to reach $423.7 billion by 2025–26 for an overall increase of 43 percent.

Here is the aforementioned Figure 3, for those interested.

The main takeaway is that a spending cap can be very successful, even if there’s a provision that allows emergency spending.

Total spending grows by less than total revenue, thus satisfying my Golden Rule. And, as a result, there’s far less government debt.

In other words, even with a TEL as structured under this scenario, it would have been possible for the federal government to deliver the exact same amount of COVID-19 fiscal support as laid out in the 2021 federal spring budget, balance the budget by 2025–26, and only accumulate half the deficits

P.S. Let’s look at a final excerpt from the study. We have reviewed a bunch of data showing how spending caps would be successful.

By contrast, balanced budget requirements do not have a good track record.

Balanced budget legislation is often perceived as a form of TEL but in practice it is considered different in that it simply attempts to achieve budget balance so that debt stops being accumulated. Such legislation is not necessarily designed to constrain the rate of growth of government spending—nor to limit the size of the public sector… Indeed, according to Clemens et al. (2003) the adoption of balanced budget laws in Canada, which by the early 2000s existed in eight out of ten provinces, coincided with increases in government spending and taxation as measured by real per-capita consolidated provincial and municipal spending.

This is not surprising. The cyclical nature of revenues means it is very difficult to maintain a balanced budget rule.

By contrast, the International Monetary Fund (twice!), the European Central Bank, and the Organization for Economic Cooperation and Development (twice!) have acknowledged that spending caps are the most, if not only, effective fiscal rule.

P.P.S. If you want some real-world evidence, Switzerland’s spending cap continues to produce strong outcomes.

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In my column yesterday about state tax systems, I specifically noted that North Carolina has been making big improvements.

Not only did the state shift to a flat tax a few years ago, it recently voted to lower the rate from 5.25 percent to 3.99 percent.

Why did this happen?

The easy answer is that Republicans gained control of the state legislature. But that’s – at best – only a partial answer. After all, there are plenty of places where Republicans gain power and don’t enact good fiscal policy.

So maybe a better answer is that Reagan-style Republicans took control.

I suspect that’s a far more accurate answer, but I want to dig deeper and look at a policy reform that made the tax cuts possible.

Simply stated, North Carolina politicians embraced the Golden Rule of spending restraint.

And by controlling the growth of spending, they created fiscal maneuvering room for lower tax rates.

In a column for a North Carolina newspaper, John Hood, a board member of the John Locke Foundation (the state’s pro-market think tank) explains what happened.

…in North Carolina, conservative governance has actually reduced the size of state government and significantly improved its fiscal condition. …As a share of the economy, state spending has averaged about 5.8% over the past 45 years. It was well over 6% as recently as 2009. Since fiscally conservative Republicans won control of the General Assembly in 2010, however, budgets have gone up every year in dollar terms but have gone down almost every year when expressed as a share of GDP. That’s because legislative leaders have stuck to their commitment to keep annual spending growth at or below the combined rates of inflation and population growth. …That has, in turn, allowed legislators to rebuild the state’s savings reserves, pay off state debt, and finance several rounds of growth-enhancing tax cuts.

I fully agree that the goal should be to reduce state spending as a share of GDP, so kudos to North Carolina lawmakers.

By limiting annual spending increases, they have strengthened the private sector.

Here’s a chart, based on data from the National Association of State Budget Officers, showing what has happened to state spending since 2010. For background, a simple rule of thumb is that the “general fund” is money a state raises and spends while “total spending” includes that spending plus money that comes from Washington.

By the way, population has increased by about 1 percent annually in North Carolina, so per-capita state spending is only growing by about 1.5 percent per year.

All things considered, a very good job. Too bad Republicans in Washington don’t push for similar policies (to be fair, they did restrain spending during the Tea Party era).

I’ll close with a worrisome observation that North Carolina does not not have a TABOR-style constitutional spending limit.

So while it’s admirable that state lawmakers have restrained spending over the past decade, there are no guarantees that the Tarheel State will enjoy spending restraint in the future.

So North Carolina should copy Colorado and adopt something like TABOR. Or, they can demonstrate their worldliness by copying Switzerland’s “debt brake,” which is another constitutional provision to limit spending.

The goal – for the state and the nation – should be some sort of spending cap.

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Motivated in part by an excellent graphic that I shared in 2016, I put together a five-column ranking of state personal income tax systems in 2018.

Given some changes that have since occurred, it’s time for a new version. The first two columns are self explanatory and columns 3 and 5 are based on whether the top tax rate on households is less than 5 percent (“Low Rate”) or more than 8 percent (“Class Warfare”).

Column 4, needless to say, is for states where the top tax rate in between 5-8 percent.

The good news is that the above table is better than the one I created in 2018. Thanks to tax competition between states, there have been some improvements in tax policy.

I recently wrote about Louisiana’s shift in the right direction.

Now we have some good news from the Tarheel state. The Wall Street Journal opined today about a new tax reform in North Carolina.

The deal phases out the state’s 2.5% corporate income tax between 2025 and 2031. …The deal also cuts the state’s flat 5.25% personal income tax rate in stages to 3.99% by July 1, 2027. …North Carolina ranks tenth on the Tax Foundation’s 2021 state business tax climate index, and these reforms will make it even more competitive. …North Carolina has an unreserved cash balance of $8.55 billion, and legislators are wisely returning some of it to taxpayers.

What’s especially noteworthy is that North Carolina has been moving in the right direction for almost 10 years.

P.S. Arizona almost moved from column 3 to column 5, but that big decline was averted.

P.P.S. There are efforts in Mississippi and Nebraska to get rid of state income taxes.

P.P.P.S. Kansas tried for a big improvement a few years ago, but ultimately settled for a modest improvement.

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First we got Biden’s $1.9 trillion so-called stimulus.

Then we got his $1 trillion-plus infrastructure boondoggle.

Now Congress may be on the verge of approving the President’s budget, which (if we use honest numbers) is a $5 trillion plan to expand the welfare state.

And…

So it’s hardly a surprise that recent changes will lead to a much-larger burden of government spending.

This is bad news for our economy, as measured by my recent study (with similar findings from a wide range of academics – as well as normally left-leaning bureaucracies such as the IMF, World Bank, and OECD).

For purposes of today’s column, let’s put America’s fiscal decline in global context.

Here are some excerpts from a very depressing article in the Economist, starting with some discussion of how Biden’s spending binge is similar to the mistakes made by other nations.

President Joe Biden is building on what started as emergency pandemic-related policy, expanding the child-tax credit, creating a universal federally funded child-care system, subsidising paid family leave and expanding Obamacare. America’s government spending remains somewhat below the developed-world average. But this change is not just a matter of catching up; the target is moving. Government spending as a share of gdp in the oecd as a whole has consistently inched higher in the six decades since the club was formed in 1961.

There’s then some discussion about how a few nations – most notably Sweden and New Zealand – enjoyed period of genuine spending restraint, but accompanied by depressing observations about how fiscal responsibility is very rare.

Examples of genuine state retrenchment in developed countries are few and far between. Sweden managed it in the 1980s. In the early 1990s Ruth Richardson, then New Zealand’s finance minister, cut the size of the state drastically. …State spending is now six percentage points lower as a share of gdp than it was in 1990. But this is a rare achievement, and perhaps one doomed to pass. …This is a sorry state of affairs if you believe that low taxes and small government are the right, and possibly the only, conditions for reliable, enduring economic growth. …an argument made by Friedrich Hayek, an Austrian philosopher, Milton Friedman, an American economist, and others in the mid-20th century.

There’s also some historical analysis showing how the burden of government used to be relatively minor.

From 1274 to 1691 the English government raised less than 2% of gdp in tax. …In the 1870s the governments of rich countries were spending about 10% of gdp. In 1920 it was nearer 20%. It has been growing ever since (see chart 2).

Here’s the aforementioned chart 2, and there are a lot of depressing numbers, though notice how Switzerland does better than other nations.

I’ve previously shared a version of this data, calling it the “world’s most depressing chart” – all of which was made possible by the imposition of income taxes.

But there is some good news. The ever-rising fiscal burden of government has been somewhat offset by reductions in other bad policies.

Governments have not grown more powerful by all measures. Bureaucrats no longer, as a rule, set wages or prices, nor impose strict currency controls, as many did in the 1960s or 1970s. In recent decades the public sector has raised hundreds of billions of dollars from privatisations of state assets such as mines and telecoms networks. If you find it faintly amusing to hear that, from 1948 to 1984, the British state ran its own chain of hotels, that is because the “neoliberal” outlook on the proper place of government has triumphed.

Last but not least, there’s some discussion of “public choice,” which explains why politicians and bureaucrats have incentives to expand the size and scope of government.

Governments and bureaucrats are at least partly self-interested: “public-choice theory” says that unrestrained bureaucracies will defend their turf and seek to expand it. …Politicians have their own incentives to expand the state. It is generally more rewarding for a politician to introduce a new programme than it is to close an old one down; costs are spread across all taxpayers while benefits tend to be concentrated, thus eliciting gratitude from interest groups

I’ll close by reiterating my warning that ever-rising spending burdens not only lead to less growth, but they also will lead to Greek-style fiscal crises.

Europe will get hit first, but it’s just a matter of time before the United States suffers a similar fate.

P.S. There is a simple solution to avoid such crises, and a specific policy to achieve that solution. But don’t hold your breath waiting for politicians to tie their own hands.

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It’s impossible to predict when another pandemic will strike.

But there’s one future crisis that we already know about, and I recently spoke about that issue to the Liberty International World Conference in Medellin.

At first, I wasn’t planning to share this video, particularly since I covered much of the same material in a speech back in January.

But then I saw a story in Yahoo Finance that includes this very sobering chart about how the burden of government spending will climb in G-7 nations over the next four decades.

The main takeaway is that aging populations and poorly designed tax-and-transfer programs (entitlements) are a recipe for long-run fiscal crisis in almost all developed nations.

That includes the United States. The four-decade outlook for America isn’t as bad as it is in nations such as France and Japan, but government will grow more than the fiscal burdens in Canada, Germany, and the United Kingdom.

And here are some details from the story.

The Covid-19 pandemic may have bloated public debt…, but that’s nothing compared to the fiscal difficulties brewing in the coming decades, the OECD said. …states will face rising costs, particular from pensions and health care. To maintain public services and benefits while stabilizing debt in that environment, governments would have to raise revenues by nearly 8% of gross domestic product, the OECD said. In some countries, including France and Japan, the size of the challenge would amount to more than 10% of output, and the economists didn’t even account for new expenditures such as climate change adaptation.

If you want to dig into the details, you can click here to read the underlying report from the Organization for Economic Cooperation.

I think the following excerpts are particularly relevant. As you can see, the problem is demographics, which leads to more spending for entitlement programs such as health and pensions.

And, assuming politicians decide to address the issue with revenues, this implies massive tax increases.

Public health and long-term care expenditure is projected to increase by 2.2 percentage points of GDP in the median country between 2021 and 2060… These projections are based on a pre-pandemic spending baseline, so any permanent increase in health spending in response to experience with COVID-19…would come in addition. Public pension expenditure is projected to increase by 2.8 percentage points of GDP in the median country between 2021 and 2060… Other primary expenditures are projected to rise by 1½ percentage points of GDP… This projection excludes potential new sources of expenditure pressure, such as climate change adaptation. …OECD governments would need to raise taxes in this scenario to prevent gross government debt ratios from rising over time… The median country would need to increase structural primary revenue by nearly 8 percentage points of GDP between 2021 and 2060, but the effort would exceed 10 percentage points in 11 countries.

Most interesting, the two authors of the OECD study point out that are some major problems with the tax “solution.”

The results of this section do not imply that taxes will, or even should, rise in the future. The fiscal pressure indicator is simply a metric serving to quantify and illustrate the fiscal challenge facing OECD governments. Raising taxes is only one of many possible avenues to meet this challenge. …Pushing mainstream taxes on incomes or consumption further up, even by only a few percentage points of GDP, may be politically difficult and fiscally counter-productive if it means reaching the downward-sloping segment of the Laffer curve.

I’m especially impressed that they acknowledge the Laffer Curve (the nonlinear relationship between tax rates and tax revenue that the Biden Administration wishes away).

P.S. The real solution is entitlement reform, and here’s the explanation for how to do it in the United States.

P.P.S. As I’ve regularly noted, the economists who work at the OECD often produce very solid analysis. The problem with that bureaucracy is that it has very statist leadership, which is why the OECD’s policy agenda includes anti-growth policies such as big tax increases and tax harmonization.

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The good news is that President Biden wants the United States to be at the top. The bad news is that he wants America to be at the top in bad ways.

  • The highest corporate income tax rate.
  • The highest capital gains tax rate.
  • The highest level of double taxation.

We can now add another category, based on the latest iteration of his budget plan.

According to the Tax Foundation, the United States would have the develop world’s most punitive personal income tax.

Worse than France and worse than Greece. How embarrassing.

In their report, Alex Durante and William McBride explain how the new plan will raise tax rates in a convoluted fashion.

High-income taxpayers would face a surcharge on modified adjusted gross income (MAGI), defined as adjusted gross income less investment interest expense. The surcharge would equal 5 percent on MAGI in excess of $10 million plus 3 percent on MAGI above $25 million, for a total surcharge of 8 percent. The plan would also redefine the tax base to which the 3.8 percent net investment income tax (NIIT) applies to include the “active” part of pass-through income—all taxable income above $400,000 (single filer) or $500,000 (joint filer) would be subject to tax of 3.8 percent due to the combination of NIIT and Medicare taxes. Under current law, the top marginal tax rate on ordinary income is scheduled to increase from 37 percent to 39.6 percent starting in 2026. Overall, the top marginal tax rate on personal income at the federal level would rise to 51.4 percent. In addition to the top federal rate, individuals face taxes on personal income in most U.S. states. Considering the average top marginal state-local tax rate of 6.0 percent, the combined top tax rate on personal income would be 57.4 percent—higher than currently levied in any developed country.

Needless to say, this will make the tax code more complex.

Lawyers and accountants will win and the economy will lose.

I’m not sure why Biden and his big-spender allies have picked a complicated way to increase tax rates, but that doesn’t change that fact that people will have less incentive to engage in productive behavior.

What matters is the marginal tax rate on people who are thinking about earning more income.

And they’ll definitely choose to earn less if tax rates increase, particularly since well-to-do taxpayers have considerable control over the timing, level, and composition of their income.

P.S. Based on what happened in the 1980s, we can safely assume that Biden’s class-warfare plan won’t raise much money.

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President Biden’s fiscal agenda of higher taxes and bigger government is not a recipe for prosperity.

How much will it hurt the economy?

Last month, I shared the results of a new study I wrote with Robert O’Quinn for the Club for Growth Foundation.

We based our results on a wide range of economic research, especially a scholarly study from the Congressional Budget Office, and found a big drop in economic output, employment and labor income.

Most troubling was the estimate of a long-run drop in living standards, which would be especially bad news for young people.

Today, I want to share some different estimates of the potential impact of Biden’s agenda.

A study for the Texas Public Policy Foundation, authored by  E. J. Antoni, Vance Ginn, and Stephen Moore, found even higher levels of economic damage. Here are some main excerpts.

President Biden and congressional Democrats seek to spend another $6.2 trillion over the next decade, spread across at least two bills that comprise their “Build Back Better” plan. This plan includes heavy taxing, spending, and debt, which contributes to reducing growth rates for GDP, employment, income, and capital stock.  Compared to baseline growth over the next decade, this plan will result in estimated dynamic economic effects of 5.3 million fewer jobs, $3.7 trillion less in GDP, $1.2 trillion less in income, and $4.5 trillion in new debt. …There are many regulatory changes and transfer payments in current legislation whose effects have not been included in this paper but are worth mentioning in closing since they will have many of the same effects as the tax increases discussed in this paper. Extending or expanding the enhanced Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Tax Credit, and more, disincentivizes working, reducing incomes, investment, and GDP. Just the changes to these three tax credits alone are expected to cause a loss of 15,000 jobs… Permanently expanding the health insurance premium tax credits would similarly have a negative effect… Regulatory changes subsidizing so-called green energy while increasing tax and regulatory burdens on fossil fuels also result in a less efficient allocation of resources.

If we focus on gross domestic product (GDP), the TPPF estimates a drop in output of $3.7 trillion, which is higher than my study, which showed a drop of about $3 trillion.

Part of the difference is that TPPF looked at the impact of both the so-callled infrastructure spending package and Biden’s so-called Build Back Better plan, while the study for the Club for Growth Foundation only looked at the impact of the latter.

So it makes sense that TPPF would find more aggregate damage.

And part of the difference is that economists rarely agree on anything because there are so many variables and different experts will assign different weights to those variables.

So the purpose of sharing these numbers is not to pretend that any particular study perfectly estimates the effect of Biden’s agenda, but rather to simply get a sense of the likely magnitude of the economic damage.

Speaking of economic damage, here’s a table from the TPPF showing state-by-state job losses.

I’ll close by noting that you can also use common sense to get an idea of what will happen if Biden’s agenda is approved.

He wants to make the United States more like Western Europe’s welfare states, so all we have to do is compare U.S. living standards and economic performance to what’s happening on the other side of the Atlantic Ocean.

And when you do that, the clear takeaway is that it’s crazy to “catch up” to nations that are actually way behind.

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Having been in Washington for close to 40 years, I’ve seen lots of budget dishonesty, but nothing compares to Joe Biden’s claim that his profligate budget proposals have zero cost.

According to the official numbers, that’s a $3.5 trillion lie.

In reality, as I noted in July, it’s much bigger.

Let’s investigate this issue. I’ll start by noting that I have mixed feelings about the Committee for a Responsible Federal Budget (CRFB). They think controlling red ink should be the main focus of fiscal policy, whereas I think controlling spending should be the top goal.

That being said, CRFB’s staff have a well-deserved reputation for being thorough and careful when producing fiscal analysis.

So it’s worth noting that the group estimates that the Biden’s fiscal agenda would actually cost between $5 trillion and $5.5 trillion over 10 years, much higher than the “official” estimate of $3.5 trillion.

Here are some of the bottom-line numbers from their report.

That’s a truncated version of their table. If you want to see all the gory details, click here.

You’ll also be able to read the group’s analysis, including these key excerpts.

While the actual cost of this new legislation will ultimately depend heavily on details that have yet to be revealed, we estimate the policies under consideration could cost between $5 trillion and $5.5 trillion over a decade, assuming they are made permanent. In order to fit these proposals within a $3.5 trillion budget target, lawmakers apparently intend to have some policies expire before the end of the ten-year budget window, using this oft-criticized budget gimmick to hide their true cost. …To fit $5 trillion to $5.5 trillion…into a $3.5 trillion budget, background documents to reporters explain that “the duration of each program’s enactment will be determined based on scoring and Committee input.”  In other words, tax credits and spending programs will be set to expire at some point before the end of the decade, in the hope that future lawmakers will extend these programs. …This budget gimmick…would obscure the true cost of the legislation

The Wall Street Journal opined about Biden’s gimmickry.

Democrats are grasping for ways to finance their cradle-to-grave welfare state, with the left demanding what they claim is $3.5 trillion over 10 years. The truth is that even that gargantuan number hides the real cost of their plans. The bills moving through committees are full of delayed starts, phony phase-outs, and cost shifting to states designed to fit $3.5 trillion into a 10-year budget window… Start with the child allowance… Democrats have hidden the real cost by extending the allowance only through 2025. Even if Republicans gain control of Congress and the White House in 2024, Democrats and their media allies will bludgeon them to extend the payments… Democrats are using a different time shift to disguise the cost of their Medicare expansion…delaying the phase-in of the much more expensive dental benefit to 2028. This “saves” $420 billion over 10 years, but the costs explode after that. …the new universal child-care entitlement…gives $90 billion to the states—but only from 2022 to 2027. …The bottom line: $3.5 trillion is merely the first installment of a bill that would put government at the commanding heights of family life and the economy for decades to come. Tax increases will follow as far as the eye can see.

Regarding the final sentence of the above excerpt, the tax increases in Biden’s budget are merely an appetizer.

Ultimately, a European-sized welfare state requires European-style taxes on lower-income and middle-class households.

In other words, a value-added tax, along with higher payroll taxes, higher energy taxes, and higher income tax rates on ordinary workers (with this unfortunate Spaniard being a tragic example).

But we do have a tiny bit of good news.

A small handful of Democrats are resisting Biden’s budget, which means the package presumably will have to shrink in order to get sufficient votes.

But this good news may be fake news if Biden and his allies in Congress simply expand the use of dishonest accounting.

Brian Riedl of the Manhattan Institute documents some of this likely dishonesty in a column for the New York Post.

How does Congress cut a $3.5 trillion spending bill down to $1.5 trillion? By using gimmicks to hide its true cost. …Progressives have been abusing these gimmicks from the start. They began with a reconciliation proposal that would cost nearly $5 trillion over the decade. Then, in order to cut the bill’s “official” cost closer to $4 trillion, the bill’s authors included a December 2025 expiration of the $130 billion annual expansion of the child tax credit… Of course, no one believes that Congress will actually allow the child tax credit to be reduced at the end of 2025… Democrats purposely selected for “expiration” a popular middle-class benefit that they know even a future Republican Congress or president would not dare take away from voters. …expensive child care subsidies, family leave, and “free” community college benefits may also have their full cost hidden with fake expiration dates early into the 10-year scoring window. Lawmakers fully expect to extend these policies later, ultimately raising the cost of the total reconciliation bill closer to the $3.5 trillion target (or even higher). …Progressives are also discussing delaying the proposed new Medicare dental benefits until 2028, which legitimately saves money within the 10-year scoring window but also hides a larger long-term cost.

I realize that it’s not a big revelation to write that politicians are dishonest (Washington, after all, is a “wretched hive of scum and villainy“).

And I also realize that that the main problem with Biden’s plan is the economic damage it will cause, not the reliance on phony accounting.

But truth should matter a little bit, even in a town where lying about fiscal policy is a form of art.

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There are lots of reasons (here are five of them) to dislike the version of the Biden tax hike that was approved by the tax-writing committee in the House of Representatives.

From an economic perspective, it is bad for prosperity to penalize work, saving, investment, and productivity.

So why, then, do politicians pursue such policies?

Part of the answer is spite, but I think the biggest reason is they simply want more money to spend.

And if the economy suffers, they don’t worry about that collateral damage so long as their primary objective – getting more money to buy more votes – is achieved.

But the rest of us should care, and a new report from the Tax Foundation offers a helpful way of showing why pro-tax politicians are misguided.

Here’s a table showing that the economy will lose almost $3 of output for every $1 that politicians can use for vote buying.

I added my commentary (in red) to the table.

My takeaway is that it is reprehensible for politicians to cause nearly $3 of foregone prosperity so that they can spend another $1.

Garrett Watson, author of the report, uses more sedate language to describes the findings.

Using Tax Foundation’s General Equilibrium Model, we estimate that the Ways and Means tax plan would reduce long-run GDP by 0.98 percent, which in today’s dollars amounts to about $332 billion of lost output annually. We estimate the plan would in the long run raise about $152 billion annually in new tax revenue, conventionally estimated in today’s dollars, meaning for every $1 in revenue raised, economic output would fall by $2.18. When the model accounts for the smaller economy, it estimates that the plan’s dynamic effects would reduce expected new tax collections to about $112 billion annually over the long run (also in today’s dollars), meaning for every $1 in revenue raised, economic output would fall by $2.96.

This is excellent analysis.

But I think it’s important to specify that political cost-benefit analysis (from the perspective of politicians) is not the same as economic cost-benefit analysis.

From an economic perspective, the foregone economic growth is a cost and the additional tax revenue for politicians also is a cost.

And I’ve augmented the table (again, in red) to show that the additional spending is yet another cost.

In other words, politicians are the main winners from Biden’s tax hike, and some of the interest groups getting additional handouts also might be winners (though I’ve previously pointed out that many of them wind up being losers as well in the long run).

P.S. The Tax Foundation model only measures the economic damage of higher taxes. If you also measure the harmful impact of more spending, the estimates of foregone economic output are much bigger.

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Last week, I wrote about a new study which estimates that Biden’s fiscal agenda of bigger government and higher taxes would reduce economic output by about $3 trillion over the next decade.

Perhaps more relevant, that foregone economic growth would translate into more than $10,000 of lost compensation per job. And a lifetime drop in living standards of more than 4 percent for younger people.

And these numbers are based on research by the Congressional Budget Office, which is hardly a bastion of libertarian analysis.

The Biden White House has a different perspective.

How different? Well, the President actually claims that expanding the burden of government won’t cost anything.

I’m not joking. Here are some excerpts from an article in the Washington Post by Seung Min Kim and Tony Romm.

President Biden promised Friday that his sweeping domestic agenda package will cost “nothing” because Democrats will pay for it through tax hikes on the wealthy and corporations… The remarks were an attempt by Biden to assuage some of the cost concerns pointedly expressed by the moderate Democrats about the size of the legislation… The total spending outlined in the plan is $3.5 trillion… “It is zero price tag on the debt we’re paying. We’re going to pay for everything we spend,” Biden said in remarks from the State Dining Room at the White House.

Biden’s strange analysis has generated some amusing responses.

For instance, Gerard Baker opined in the Wall Street Journal about Biden’s magical approach.

…this is a novel way of estimating the cost of something. That eye-wateringly expensive dinner you had last week didn’t really cost you anything because you paid for it. …You could have used the money to invest in your children’s college fund. You could have paid off some of your credit card bill, the debt on which has quadrupled in the last year. But you chose instead to blow it on a few morsels of raw fish and a couple of bottles of 1982 Château Lafite Rothschild. Don’t worry, It didn’t cost you anything.

Biden and his team definitely deserve to be mocked for their silly argument.

For all intents and purposes, they want us to believe that there’s no downside if you combine anti-growth spending increases with anti-growth tax increases – so long as there’s no increase in red ink.

But there’s actually a fiscal theory that sort of supports what the White House is saying.

  • Capital (saving and investment) is a key driver of productivity and long-run growth.
  • Budget deficits divert capital from the economy’s productive sector to government.
  • Budget deficits raise interest rates, reducing incentives for investment.
  • Therefore, budget deficits are bad for prosperity.

For what it’s worth, all four of those statements are correct.

But the theory is nonetheless wrong because it elevates one variable – fiscal balance – while ignoring other variables that have a much bigger impact on economic performance.

For instance, the Congressional Budget Office at one point embraced this approach – even though it led to absurd implications such as growth being maximized with tax rates of 100 percent.

For further background, here’s a table I prepared back in 2012.

The White House today is basically embracing the IMF’s “austerity” argument that deficits/surpluses are the variable that has the biggest impact on growth.

P.S. Folks on the left must get whiplash because some days they embrace the Keynesian argument that deficits are good for growth and other days they argue that a big expansion of government will have zero cost because there is no increase in the deficit.

P.P.S. The folks on the right who focus solely on tax cuts also are guilty of elevating one variable while ignoring others (humorously depicted in this cartoon strip).

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More than 12 years ago, I shared this video containing lots of data and research on the negative relationship between government spending and economic performance.

Since then, I’ve share numerous additional studies showing that bigger government dampens growth, mostly from scholars in academia.

Now it’s time for me to directly contribute to this debate.

In a study just published by the Club for Growth Foundation, co-authored with Robert O’Quinn (former Chief Economist at the Department of Labor), we estimated the likely economic impact of President Biden’s so-called Build Back Better plan to expand the welfare state.

Here are our main findings.

What’s especially noteworthy about our study is that we based our analysis on research published earlier this year by the Congressional Budget Office. In other words, a very establishment source.

And here are some excerpts from what we wrote.

President Biden has proposed to increase the burden of federal spending substantially over the next 10 years, diverting nearly $5.5 trillion from the private sector to the government… Most, but not all, of this new spending would be financed with higher tax rates on work, saving, investment, and entrepreneurship. …Based on scholarly academic research, including new findings from the nonpartisan Congressional Budget Office, Biden’s tax-and-spend agenda contained in his reconciliation bill will accelerate America’s fiscal decline and undermine economic performance. …the Biden’s reconciliation bill, which increases the spending burden by 1.9 percent of GDP, will reduce the economy’s growth rate by about 0.2 percent each year. That…translates into more than $3 trillion less national income over the next decade. And the nation’s economic output will be $613 billion lower in 2031 compared to what it would be in the absence of President Biden’s fiscal agenda. …The cumulative loss of employee income over the next 10 years will exceed $1.6 trillion. Some of that will be in the form of lower wages and some of that will be a consequence of lost jobs. On average, each worker in a nonfarm job will lose $10,391 in total compensation.

These results shouldn’t be a surprise.

Biden’s fiscal agenda would made the United States more like Europe and the economic data unambiguously demonstrate that Europeans suffer from significantly lower living standards.

P.S. I especially like the CBO study because it shows the amount of damage caused by more spending varies based on how the outlays are financed.

As this chart illustrates, class-warfare taxation is the worst way of financing a bigger burden of government.

P.P.S. The good news is that Biden probably won’t be able to convince Congress to approve all of his proposals for new spending and higher tax rates. The bad news is even approving half of the Biden’s plan would cause considerable damage to American prosperity and competitiveness.

P.P.P.S. For policy wonks, there are two main types of research involving the economic impact of government spending. For those focusing on short-run economic results, there’s a debate about Keynesian economics – whether more government spending can artificially generate some growth, particularly if the outlays are financed with debt.

I’m skeptical of the Keynesian argument, but it’s not relevant for today’s column, which focuses on how government spending impacts long-run economic results. And when looking at long-run data, most of the research suggests that government is too big. Indeed, it’s worth noting that there’s even research supporting my view from generally left-leaning international bureaucracies such as the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development, and the European Central Bank.

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With regards to fiscal policy, part of my mission is to proselytize in favor of lower tax rates and a smaller burden of government spending.

But another goal is simply to make sure people understand basic facts about the budget.

For instance, how many people know that Republican presidents (notwithstanding their rhetoric) generally increase spending at a faster rate than Democrats?

Not many.

And ever fewer people know that Republican presidents even increase domestic spending (discretionary outlays plus entitlements) faster than Democrats.

The only exception to this rule is Ronald Reagan.

Which explains why folks on the left don’t like him, which is a perfectly reasonable reaction from their perspective.

But what’s not reasonable is the way some of them butcher facts in pursuit a big-government agenda.

For instance, Paul Waldman of the Washington Post has a column claiming that Joe Biden is finally, after 40 years, ending the Reagan revolution.

…the old-school plutocrats who have long controlled the party’s policy agenda…are getting very frightened of the reconciliation bill Democrats are negotiating. …The reconciliation bill really does represent an undoing of Reaganism. …The bill would reverse what Ronald Reagan wrought on government spending… Reagan famously said that “government is not the solution to our problem; government is the problem.” His great achievement was to make that the default assumption of public debate, the paradigm under which the country would operate for decades. It held sway even during periods of Democratic rule. Bill Clinton embraced the Reagan paradigm… the Democratic reconciliation bill is most revolutionary. It would reinforce the safety net — largely temporary programs such as unemployment insurance and food stamps, meant to help when you experience a crisis — but it would also create a new system of social infrastructure… All of which would go far beyond what was in place before Reagan. …it really is a threat to the legacy of Reaganism.

Some of what Waldman wrote is correct.

Reagan did point out that “government is the problem.”

And we did get a bit of Reagan-style spending restraint under Bill Clinton (though one can certainly argue that the post-1994 GOP Congress deserves some or all of the credit).

But he is wildly wrong in his main point about a dominant Reagan-inspired paradigm on government spending.

Let’s go to the Historical Tables of the Budget, published by the Office of Management and Budget.

Here’s a chart based on Table 8.2, which shows total domestic spending (column E + column H) in inflation-adjusted dollars. As you can see, outlays have exploded in the post-Reagan years (and I included both 2019 and 2020 data to show that it’s not just the coronavirus-related spending increases from last year).

Now let’s look at Table 8.4, which allows us to show domestic spending (also column E + column H) as a share of economic output.

We see that the burden of such outlays declined significantly under Reagan. Sadly, all that progress evaporated (and then some) by 2019.

The bottom line is that Biden does have a big-government agenda.

But that’s not exactly a new paradigm. Every other president in the post-Reagan era has sided with government over taxpayers.

I miss the Gipper.

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The Biden Administration’s approach to tax policy is awful, as documented here, here, here, and here.

We’ve now reached the stage where bad ideas are being turned into legislation. Today’s analysis looks at what the House Ways & Means Committee (the one in charge of tax policy) has unveiled. Let’s call this the Biden-Pelosi plan.

And we’re going to use some great research from the Tax Foundation to provide a visual summary of what’s happening.

We’ll start with a very depressing look at the decline in American competitiveness if the proposal becomes law (the good news is that we’ll still be ahead of Greece!).

Next, let’s look at the Tax Foundation’s map of capital gains tax rates if the plan is approved.

Unsurprisingly, this form of double taxation will be especially severe in California.

Our third visual is good news (at least relatively speaking).

Biden wanted the U.S. to have the developed world’s highest corporate tax rate. But the plan from the House of Representatives would “only” put America in third place.

Here’s another map, in this case looking at tax rates on non-corporate businesses (small businesses and other entities that get taxed by the 1040 form).

This is not good news for America’s entrepreneurs. Especially the ones unfortunate enough to do business in New York.

Last but not least, here’s the Tax Foundation’s estimate of what will happen to the economy if the Biden-Pelosi tax plan is imposed on the nation.

There are two things to understand about these depressing growth numbers.

  • First, small differences in growth rates produce very large consequences when you look 20 years or 30 years into the future. Indeed, this explains why Americans enjoy much higher living standards than Europeans (and also why Democrats are making a big economic mistake to copy European fiscal policy).
  • Second, the Tax Foundation estimated the economic impact of the Biden-Pelosi tax plan. But don’t forget that the economy also will be negatively impacted by a bigger burden of government spending. So the aggregate economic damage will be significantly larger when looking at overall fiscal policy.

One final point. In part because of the weaker economy (i.e., a Laffer Curve effect), the Tax Foundation also estimated that the Biden-Pelosi tax plan will generate only $804 billion over the next 10 years.

P.S. Here’s some background for those who are not political wonks. Biden proposed a budget with his preferred set of tax increases and spending increases. But, in America’s political system (based on separation of powers), both the House and Senate get to decide what they like and don’t like. And even though the Democrats control both chambers of Congress, they are not obligated to rubber stamp what Biden proposed. The House will have a plan, the Senate will have a plan, and they’ll ultimately have to agree on a joint proposal (with White House involvement, of course). The same process took place when Republicans did their tax bill in 2017.

P.P.S. It’s unclear whether the Senate will make things better or worse. The Chairman of the Senate Finance Committee, Ron Wyden, has some very bad ideas about capital gains taxation and politicians such as Elizabeth Warren are big proponents of a wealth tax.

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When I discuss class-warfare tax policy, I want people to understand deadweight loss, which is the term for the economic output that is lost when high tax rates discourage work, saving, investment, and entrepreneurship.

And I especially want them to understand that the economic damage grows exponentially as tax rates increase (in other words, going from a 30 percent tax rate to a 40 percent tax rate is a lot more damaging than going from a 10 percent tax rate to a 20 percent tax rate).

But all of this analysis requires a firm grasp of supply-and-demand curves. And most people never learned basic microeconomics, or they forgot the day after they took their exam for Economics 101.

So when I give speeches about the economics of tax policy, I generally forgo technical analysis and instead appeal to common sense.

Part of that often includes showing an image of a “philoso-raptor” pondering whether the principle that applies to tobacco taxation also applies to taxes on work.

Almost everyone gets the point, especially when I point out that politicians explicitly say they want higher taxes on cigarettes because they want less smoking.

And if you (correctly) believe that higher taxes on tobacco lead to less smoking, then you also should understand that higher taxes on work will discourage productive behavior.

Unfortunately, these common-sense observations don’t have much impact on politicians in Washington. Joe Biden and Democrats in Congress are pushing a huge package of punitive tax increases.

Should they succeed, all taxpayers will suffer. But some will suffer more than others. In an article for CNBC, Robert Frank documents what Biden’s tax increase will mean for residents of high-tax states.

Top earners in New York City could face a combined city, state and federal income tax rate of 61.2%, according to plans being proposed by Democrats in the House of Representatives. The plans being proposed include a 3% surtax on taxpayers earning more than $5 million a year. The plans also call for raising the top marginal income tax rate to 39.6% from the current 37%. The plans preserve the 3.8% net investment income tax, and extend it to certain pass-through companies. The result is a top marginal federal income tax rate of 46.4%. …In New York City, the combined top marginal state and city tax rate is 14.8%. So New York City taxpayers…would face a combined city, state and federal marginal rate of 61.2% under the House plan. …the highest in nearly 40 years. Top earning Californians would face a combined marginal rate of 59.7%, while those in New Jersey would face a combined rate of 57.2%.

You don’t have to be a wild-eyed “supply-sider” to recognize that Biden’s tax plan will hurt prosperity.

After all, investors, entrepreneurs, business owners, and other successful taxpayers will have much less incentive to earn and report income when they only get to keep about 40 cents out of every $1 they earn.

Folks on the left claim that punitive tax rates are necessary for “fairness,” yet the United States already has the developed world’s most “progressive” tax system.

I’ll close with the observation that the punitive tax rates being considered will generate less revenue than projected.

Why? Because households and businesses will have big incentives to use clever lawyers and accountants to protect their income.

Looking for loopholes is a waste of time when rates are low, but it’s a very profitable use of time and energy when rates are high.

P.S. Tax rates were dramatically lowered in the United States during the Reagan years, a policy that boosted the economy and led to more revenues from the rich. Biden now wants to run that experiment in reverse, so don’t expect positive results.

P.P.S. Though if folks on the left are primarily motivated by envy, then presumably they don’t care about real-world outcomes.

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In an ideal world, Americans would have personal retirement accounts, just like workers in Australia, Sweden, Chile, Hong Kong, Israel, Switzerland, and a few dozen other nations.

But we’re not in that ideal world. We are forced to participate in a Ponzi Scheme known as Social Security.

By the way, that’s not necessarily a disparaging description. A Ponzi Scheme can work if there are always enough new people in the system to pay off the old people.

But because of demographic changes (increasing lifespans and decreasing birthrates), that’s not what we have in the United States.

And this is why Social Security faces serious long-run problems.

How serious? The Social Security Administration finally released the annual Trustees Report. This document has a wealth of data on the program’s financial condition, and Table VI.G9 is where the rubber meets the road.

As you can see from this chart, there will be an ever-increasing burden of Social Security taxes and spending over the next 75 years. And these numbers are adjusted for inflation!

The good news (relatively speaking) is that the economy also will be growing over the next 75 years, both in nominal terms and inflation-adjusted terms.

The bad news is that spending on Social Security will grow at a faster rate, so the program will consume a larger share of the economy’s output.

And because Social Security spending is growing faster than the economy (and also faster than tax revenue), this next chart shows there is going to be more and more red ink in the future. Once again, you’re looking at inflation-adjusted data.

As indicated by the chart’s title, the cumulative shortfall over the next 75 years is nearly $48 trillion. That’s a lot of money, even by Washington standards.

And with each passing year, the problem seems to worsen. The 75-year shortfall was $44.7 trillion according to the 2020 report and $42.1 trillion according to the 2019 report.

I’ll conclude by observing that today’s column focuses on the big-picture fiscal problems with Social Security.

But let’s not forget the program’s second crisis, which is the fact that Americans are deprived of the ability to enjoy much higher levels of retirement income.

Certain groups are particularly harmed by this aspect of the current program, including minorities, women, older workers, and low-income workers.

P.S. Our friends on the left argue that the program’s fiscal problems (the first crisis) can be solved with tax increases. Perhaps that is true, but it will mean a weaker economy and it will exacerbate the second crisis by forcing workers to pay more to get less.

P.P.S. I once made a $16 trillion dollar mistake on national TV when discussing Social Security’s shaky finances.

P.P.P.S. Much of the news coverage about the Trustees Report has focused on the year the Social Security Trust Fund supposedly runs out of money. But this is sloppy journalism since the Trust Fund has nothing but IOUs (as illustrated by this joke).

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Public finance theory teaches us that the capital gains tax should not exist. Such a levy exacerbates the bias against saving and investment, which reduces innovation, hinders economic growth, and lowers worker compensation.

All of which helps to explain why President Biden’s proposals to increase the tax burden on capital gains are so misguided.

Thanks to some new research from Professor John Diamond of Rice University, we can now quantify the likely damage if Biden’s proposals get enacted.

Here’s some of what he wrote in his new study.

We use a computable general equilibrium model of the U.S. economy to simulate the economic effects of these policy changes… The model is a dynamic, overlapping generations, computable general equilibrium model of the U.S. economy that focuses on the macroeconomic and transitional effects of tax reforms. …The simulation results in Table 1 show that GDP falls by roughly 0.1 percent 10 years after reform and 0.3 percent 50 years after reform, which implies per household income declines by roughly $310 after 10 years and $1,200 after 50 years. The long run decline in GDP is due to a decline in the capital stock of 1.0 percent and a decline in total hours worked of 0.1 percent. …this would be roughly equivalent to a loss of approximately 209,000 jobs in that year. Real wages decrease initially by 0.2 percent and by 0.6 percent in the long run.

Here is a summary of the probable economic consequences of Biden’s class-warfare scheme.

But the above analysis should probably be considered a best-case scenario.

Why? Because the capital gains tax is not indexed for inflation, which means investors can wind up paying much higher effective tax rates if prices are increasing.

And in a world of Keynesian monetary policy, that’s a very real threat.

So Prof. Diamond also analyzes the impact of inflation.

…capital gains are not adjusted for inflation and thus much of the taxable gains are not reflective of a real increase in wealth. Taxing nominal gains will reduce the after-tax rate of return and lead to less investment, especially in periods of higher inflation. …taxing the nominal value will reduce the real rate of return on investment, and may do so by enough to result in negative rates of return in periods of moderate to high inflation. Lower real rates of return reduce investment, the size of the capital stock, productivity, growth in wage rates, and labor supply. …Accounting for inflation in the model would exacerbate other existing distortions… An increase in the capital gains tax rate or repealing step up of basis will make investments in owner-occupied housing more attractive relative to other corporate and non-corporate investments.

Here’s what happens to the estimates of economic damage in a world with higher inflation?

Assuming the inflation rate is one percentage point higher on average (3.2 percent instead of 2.2 percent) implies that a rough estimate of the capital gains tax rate on nominal plus real returns would be 1.5 times higher than the real increase in the capital gains tax rate used in the standard model with no inflation. Table 2 shows the results of adjusting the capital gains tax rates by a factor of 1.5 to account for the effects of inflation. In this case, GDP falls by roughly 0.1 percent 10 years after reform and 0.4 percent 50 years after reform, which implies per household income declines by roughly $453 after 10 years and $1,700 after 50 years.

Here’s the table showing the additional economic damage. As you can see, the harm is much greater.

I’ll conclude with two comments.

P.S. If (already-taxed) corporate profits are distributed to shareholders, there’s a second layer of tax on those dividends. If the money is instead used to expand the business, it presumably will increase the value of shares (a capital gain) because of an expectation of higher future income (which will be double taxed when it occurs).

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Back in 2019, I listed “Six Principles to Guide Policy on Government Spending.”

If I was required to put it all in one sentence (sort of), here’s the most important thing to understand about fiscal policy.

This does not mean, by the way, that we should be anarcho-capitalists and oppose all government spending.

But it does mean that all government spending imposes a burden on the economy and that politicians should only spend money to finance “public goods” that generate offsetting benefits.

Assuming, of course, that the goal is greater prosperity.

I’m motivated to address this topic because Philip Klein wrote a column for National Review about Biden’s new spending. He points out that this new spending is bad, regardless of whether it is debt-financed or tax-financed.

As Democrats race toward squandering another $4.1 trillion — perhaps with some Republican help — we are being told over and over how the biggest stumbling block is figuring out how the new spending will be “paid for.” …Senator Joe Manchin (D., W.Va.), who is trying to maintain his image as a moderate, insisted that he doesn’t believe the spending should be passed if it isn’t fully financed. “Everything should be paid for,” Manchin has told reporters. …Republican members of the bipartisan group have also made similar comments. …But it is folly to consider massive amounts of new spending to be “responsible” as long as members of Congress come up with enough taxes to raise… At some point in the next few weeks, Democrats (and possibly Republicans) will announce that they have reached a deal on some sort of major spending compromise. They will claim that it is fully paid for, and assert that it is fiscally responsible. But there is nothing responsible about adding trillions in new obligations at a time when the nation is already heading for fiscal catastrophe.

Klein is correct.

Biden’s spending binge will be just as damaging to prosperity if it is financed with taxes rather than financed by debt.

The key thing to realize is that we’ll have less growth if more of the economy’s output is consumed by government spending.

Giving politicians and bureaucrats more control over the allocation of resources is a very bad idea (as even the World Bank, OECD, and IMF have admitted).

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Back in 2009, there was strong and passionate opposition to Bush’s corrupt TARP scheme and Obama’s fake stimulus boondoggle – both of which had price tags of less than $1 trillion.

Today, Biden has already squandered $1.9 trillion on his version of “stimulus” and has asked Congress to expand the federal government’s budgetary burden by another $3.5 trillion (plus about $600 billion for so-called infrastructure).

Yet there doesn’t seem to be the same intensity of opposition, even though Biden is proposing policies that are far more costly.

Is this simply because Republicans were corrupted by Trump’s profligacy and are now comfortable with big government?

Or are they distracted by cultural battles over issues such as critical race theory?

I don’t know, but I’m very worried that insufficient opposition may result in Biden’s dependency agenda getting enacted.

And I’m even more worried because we now know that the left intends to increase the spending burden by a lot more than $3.5 trillion. Especially since Bernie Sanders is Chairman of the Senate Budget Committee.

The Wall Street Journal opined on this topic a couple of days ago.

Democrats have provided few details of what they plan to include in Sen. Bernie Sanders’s $3.5 trillion budget proposal, and now we know why. The real cost is $5 trillion or more… Their plan is to include every program but start small and pretend they’re temporary. This will let them skirt the budget-reconciliation rule that spending can’t add to the deficit outside a 10-year budget window without triggering a 60-vote threshold to pass. The nonprofit Committee for a Responsible Federal Budget examined the budget outline… Assuming the major provisions will be made permanent and continue through the 10-year budget window, the group says, the “policies under consideration could cost between $5 trillion and $5.5 trillion over a decade.” …All of this false accounting will let Democrats pretend the overall cost of their budget spending is lower than it really is… Any way you add it up, Democrats are attempting to pass the biggest expansion of government since the 1960s with narrow majorities and no electoral mandate. No wonder they want to disguise its real cost.

By the way, it’s not just Democrats who play this game. Some provisions of the Trump tax cut expire in 2025 because Republicans also finagled to get around restrictions that govern the 10-year budget process.

That being said, I don’t think there’s moral equivalency between proposals to let people keep their own money and the Biden-Bernie scheme to buy votes with other people’s money.

Anyhow, here’s the relevant table from the Committee for a Responsible Federal Budget’s report.

P.S. This battle is not just an issue of dollars and cents. Some of the Biden-Bernie proposals, such as per-child handouts, would increase dependency by undoing Bill Clinton’s welfare reform.

P.P.S. Don’t forget all the debilitating taxes that will accompany all the new spending.

P.P.P.S. But at least we’ll “catch up” with Europe if Biden-Bernie agenda is enacted.

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President Biden pushed through $1.9 trillion of new spending earlier this year, but that so-called stimulus plan was mostly for one-time giveaways. As I warn in this recent discussion on Denver’s KHOW, we should be much more worried about his proposals to permanently expand the welfare state.

When I first got to Washington, I would be upset that politicians wanted to add billions of dollars to the burden of government.

Well, those were the good ol’ days. Biden is proposing to divert trillions of dollars from the private sector to expand the welfare state.

Even worse, he wants to make more Americans dependent on the federal government.

Maybe that’s a smart way of buying votes, but it will erode societal capital.

John Cogan and Daniel Heil of the Hoover Institution warned about the consequences of this dependency agenda in a column for the Wall Street Journal.

The federal government’s system of entitlements is the largest money-shuffling machine in human history, and President Biden intends to make it a lot bigger. His American Families Plan—which he recently attempted to tie to a bipartisan infrastructure deal—proposes to extend the reach of federal entitlements to 21 million additional Americans, the largest expansion since Lyndon B. Johnson’s Great Society. …more than half of working-age households would be on the entitlement rolls if the plan were enacted in its current form. …57% of all married-couple children would receive federal entitlement benefits, and more than 80% of single-parent households would be on the entitlement rolls.

Many of the handouts would go to people with middle-class incomes.

And higher.

…The American Families Plan proposes several new entitlement programs. One promises students the government will pick up the entire cost of community-college tuition; another promises families earning 1.5 times their state’s median income that Washington will cover all daycare expenses above 7% of family income for children under 5; still another promises workers up to 12 weeks of federally financed wage subsidies to take time off to care for newborns or sick family members. …Two-parent households with two preschool-age children and incomes up to $130,000 would qualify for federal cash assistance for daycare. Single parents with two preschoolers and incomes up to $113,000 would qualify. And some families with incomes over $200,000 would be eligible for health-insurance subsidies. Other parts of the plan, such as paid leave and free community college, have no income limits at all.

The Wall Street Journal opined on this issue last month. Here are the key passages from their editorial.

The entitlements are by far the biggest long-term economic threat from the Biden agenda. …entitlements that spend automatically based on eligibility are nearly impossible to repeal, or even reform, and they represent a huge tax-and-spend wedge far into the future. …We’d highlight two points. First is the dishonesty about costs. Entitlements always start small but then soar. The Biden Families Plan is even more dishonest than usual. For example, it pretends the child tax credit ends in 2025, so its cost is $449 billion over the 10-year budget window that is used for reconciliation bills that require only 51 votes to pass the Senate. But a future Congress will never repeal the credit. …Second, these programs aren’t intended as a “safety net” for the poor or those temporarily down on their luck. They are explicitly designed to make the middle class dependent on government handouts.

The editorial explicitly warns that the United States will economically suffer if politicians copy Europe’s counterproductive redistributionism.

…on present trend the U.S. is falling into the same entitlement trap as Western Europe. Entitlement spending requires higher taxes, which grab 40% or more of GDP. Economic growth declines as more money flows to transfer payments instead of investment. The entitlement state becomes too large to afford but also too politically entrenched to reform. …Only a decade ago the Tea Party fought ObamaCare. Now most Beltway conservatives worry more about Big Tech than they do Big Government. If the Biden Families Plan passes, these conservatives will find themselves spending the rest of their careers as tax collectors for the entitlement state.

Amen. I’m baffled when folks on the left argue that we should “catch up” with Europe.

Are they not aware that American living standards are far higher? Do they not understand that low-income people in the United States often have more income than middle-class people on the other side of the Atlantic Ocean?

P.S. As I mentioned in the interview, the 21st century has been bad news for fiscal policy, with two big-government Republicans and two big-government Democrats.

For what it’s worth, the $3,000-per-child handouts are Biden’s most damaging idea. In one fell swoop, he would create a trillion-dollar entitlement program and repeal the successful Clinton-Gingrich welfare reform.

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I’m not optimist about America’s fiscal future. Thanks primarily to entitlement programs, the long-run outlook shows an ever-increasing burden of government spending.

And rather than hit the brakes, Biden wants to step on the gas with new giveaways, especially his plan to gut Bill Clinton’s welfare reform by creating new per-child handouts that would subsidize idleness and family dissolution.

But that doesn’t mean the problems can’t be fixed. We simply need to replace fiscal profligacy with spending restraint.

To set the stage for this discussion, here’s a look at what’s happened to the budget over the past several decades.  You can see how the burden of federal spending has steadily increased, with noticeable one-time bumps in 2008-2009 (TARP and Obama’s so-called stimulus) and 2020-2021 (coronavirus).

The chart also includes projections between 2021 and 2031, based on new numbers from the Congressional Budget Office.

For today’s column, I want to focus on the next 10 years and show how the current fiscal mess can be averted with some modest spending restraint.

This second chart shows that spending actually drops over the next two years as coronavirus-related spending comes to an end. But once we get to 2023, the orange line shows that “baseline” spending (what happens to the budget if things are left on autopilot) climbs rapidly, more than twice the rate needed to keep pace with inflation.

But if there’s any sort of fiscal restraint (a freeze or some sort of spending cap), then the numbers look much better.

More specifically, a freeze or a 1-percent spending cap would actually produce a budget surplus by the year 2031.

But I’m not fixated on getting to a balanced budget. What’s more important is that the burden of government spending shrinks when the budget grows slower than the private sector.

In other words, we get good results when policy makers follow fiscal policy’s Golden Rule.

P.S. While it’s difficult to convince politicians to support spending restraint, it’s worth noting that the nation enjoyed a five-year spending freeze between 2009-2014.

P.P.S. In the long run, a spending freeze almost certainly requires genuine entitlement reform.

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Almost everybody (even, apparently, Paul Krugman) agrees that you don’t want to be on the downward-sloping part of the Laffer Curve.

That’s where higher tax rates do so much economic damage that government collects even less revenue.

But I would argue that tax increases that produce more revenue also are a bad idea.

Sometimes they are even a terrible idea. For instance, there are tax increases that would destroy $5 of private income for every $1 of revenue they collect.

That would not be a good deal, at least for those of us who aren’t D.C. insiders.

Heck, according to research from economists at the University of Chicago and Federal Reserve, there are some tax increases that would destroy even greater levels of private income for every additional dollar that politicians got to spend.

The simple way of thinking about this is that you don’t want to be at the revenue-maximizing point of the Laffer Curve.

Because the closer you get to that point, the greater the damage to the private sector compared to any revenue collected.

To help understand this key point, let’s review a new study from Spain’s central bank. Authored by Nezih Guner, Javier López-Segovia and Roberto Ramos, it investigates the impact of higher tax rates.

They first look at what happens when progressivity (τ) is increased.

In the first experiment, we…change…the entire tax schedule, so that all households below the mean labor income face lower average taxes, while those above the mean income face higher average taxes. Since…richer individuals face higher taxes, all else equal, the government collects more taxes. All else, however, is not equal since more progressive taxes lower incentives to work and save. As a result, a higher τ might result in lower, not higher, revenue. The question is where the top of the Laffer curve is. We find that the tax revenue from labor income is maximized with τ = 0 .19. The increase in tax collection is, however, very small: the tax revenue from labor income increases only by 0.82% (or about 0.28% of the GDP). The tax revenue from labor income is, however, only one part of the total tax collection. There are also taxes on capital and consumption. With τ = 0 .19, while the tax collection from labor income is maximized, the total tax collection declines by 1.55%. This happens since with a higher τ, the aggregate labor, capital and output decline significantly. Indeed, the total tax collection falls for any increase in τ, and the level of τ that maximizes total tax revenue is much lower, τ = 0 .025, than its benchmark value.

The key takeaway is that more progressivity puts Spain on the wrong (downward-sloping) side of the Laffer Curve.

Here’s Table 6, which shows big declines in output, labor supply, and investment as progressivity increases.

Here’s some of the accompanying explanation.

The upper panel of Table 6 shows that capital, effective labor and output decline monotonically with τ. Hence, as the economy moves from τ = 0 .1581 to τ = 0 .19, the government is collecting higher taxes from labor, but the aggregate labor supply and output decline. For τ higher than 0.19, the decline in labor supply dominates and tax collection from labor income is lower. …The level of τ that maximizes the total tax collection is 0.025, which implies significantly less progressive taxes than in the benchmark economy. …In the economy with τ = 0 .025, the aggregate capital, labor and output increase significantly. The steady state output, for example, is almost 11 percentage points higher than the benchmark economy. As a result, the government is able to collect higher taxes despite lowering taxes on the top earners.

The authors also put together an estimate of Spain’s Laffer Curve, with the red-dashed line showing total tax revenue.

The authors also looked at what happens if politicians simply increase top tax rates.

They found that there are scenarios that would enable the Spanish government to collect more revenue.

We find that it is possible to generate higher total tax revenue by increasing taxes on the top earners.The main message of our quantitative exercises is that…the extra revenue is not substantial. Higher progressivity has significant adverse effects on output and labor supply, which limits the room for collecting higher taxes. As a result, the only way to generate substantial revenue is with significant increases in marginal tax rates for a large group

But notice that those higher taxes would have “significant adverse effects on output and labor supply.”

Which brings us back to the earlier discussion about the desirability of causing a lot of damage to the private economy in order to give politicians a bit more money to spend.

The authors have a neutral tone, but the rest of should be able to draw the logical conclusion that higher taxes would be a big mistake for Spain.

And since the underlying economic principles apply in all nations, we also should conclude that higher taxes would be a big mistake for the United States.

P.S. We conducted a very successful experiment in the 1980s involving lower tax rates. Biden now wants to see what happens if we try the opposite approach.

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The best referendum result of 2020 (indeed, the best policy development of the year) was when the people of Illinois voted to preserve their flat tax, thus delivering a crushing defeat to the Prairie State’s hypocritical governor, J.B. Pritzker.

The worst referendum result of 2020 was when the people of Arizona voted for a class-warfare tax scheme that boosted the state’s top tax rate from 4.5 percent to 8 percent.

In one fell swoop, Arizona became a high-tax state for investors, entrepreneurs, innovators, and business owners. That was a very dumb choice, especially since there are zero-income tax states in the region (Nevada, Texas, and Wyoming), as well as two flat-tax states (Utah and Colorado).

You can see Arizona’s problem in this map from the Tax Foundation. It’s great to be grey and good to be yellow, but bad to be orange (like Arizona), red, or maroon.

That’s the bad news.

The good news is that lawmakers in have just approved a plan that will significantly lower tax rates and restore the state’s competitiveness.

The Wall Street Journal opined this morning about this positive development.

Arizona currently taxes income under a progressive rate structure, starting at 2.59% up to 4.5%. The ballot last November carried an initiative to add a 3.5% surtax on earnings above $250,000 for single filers. It narrowly passed, meaning the combined top rate was set to hit 8%, higher than all of Arizona’s neighbors except California. …Mr. Ducey’s budget will cut rates for all taxpayers. The Legislature can’t repeal the voter-approved surtax, so above the 2.5% flat rate, there will still be a second bracket on income over $250,000. But the budget also has a provision adjusting the flat tax downward for those Arizonans, so no one will pay a top rate above 4.5%. …the same as today. …No Arizonan will have to pay the threatened 8% rate, since the provisions forestalling it are immediate. …“Every Arizonan—no matter how much they make—wins with this legislation,” Mr. Ducey said. “It will protect small businesses from a devastating 77 percent tax increase…and it will help our state stay competitive so we can continue to attract good-paying jobs.” That’s worth celebrating.

A story from the Associated Press gave the development a much more negative spin.

After slashing $1.9 billion in income taxes mainly benefiting upper-income taxpayers and shielding them from higher taxes approved by voters in an initiative last year, the Republican-controlled House returned Friday and passed more legislation targeting Proposition 208. The House approved the creation of a new tax category for small business, trusts and estates that will eliminate even more of the money that the measure approved by voters in November was designed to raise for schools. The proposal passed despite unified opposition from minority Democrats. …The governor has expressed disdain for the voter-approved tax, saying it would hurt the state’s economy and vowing in March to see it gutted either though Legislation or the courts. …The budget-approved tax cuts set a flat 2.5% tax on all income levels that will be phased in over several years once revenue projections are met, with those subject to the new education tax paying 4.5% at most.

If nothing else, an amusing example of bias from AP.

I have two modest contributions to this discussion.

First, it’s not accurate to say that Arizona adopted a flat tax. Maybe I’m old fashioned, but a flat tax has to have only one rate. Arizona’s reform is praiseworthy, but it doesn’t fulfill that key equality principle.

Second, the main takeaway is not that lawmakers did something good. It’s more accurate to say that they protected the state from something bad.

I’ve updated this 2018 visual to show how the referendum would have pushed Arizona into Column 5, which is the worst category, but the reform keeps the state in column 3.

P.S. North Carolina made the biggest shift in the right direction in recent years, followed by Kentucky, while Kansas flirted with a big improvement and settled for a modest improvement. Meanwhile, Mississippi is thinking about making a huge positive jump.

P.P.S. Since Arizona voters made a bad choice and Arizona lawmakers made a wise choice, this is evidence for Prof. Garett Jones’ hypothesis that too much democracy is a bad thing.

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I’ve been arguing against Biden’s proposed increase in business taxation by pointing out that higher corporate taxes will be bad news for workers, consumers, and shareholders.

Everyone agrees that shareholders get hurt. After all, they’re the owners of the businesses. Higher corporate taxes directly reduce the amount of money available to be paid as dividends.

But we also should recognize that higher corporate taxes can be passed along to consumers, so they also lose. Even more important, we should recognize that higher tax burdens also reduce incentives for business investment, and this can have a negative impact on worker compensation.

A 2017 study from the Tax Foundation, authored by Steve Entin, thoroughly explored this question and included a table summarizing the academic research.

Alex Durante updated the Tax Foundation’s summary of the research in a just-released report.

Here are the results of two new studies.

In a large study of German municipalities over a 20-year period, Fuest et al. (2018) find that slightly more than half of the corporate tax burden falls on workers. …Baker et al. (2020) find that consumers could also be impacted by corporate tax changes. Looking at specific product prices with linked survey and administrative data at the state level, the authors found that a 1 percentage-point increase in the corporate tax rate increased retail prices by 0.17 percent. Combining this estimate with the wage response estimated in Fuest et al., the authors calculated that 31 percent of the corporate tax incidence falls on consumers, 38 percent on workers, and 31 percent on shareholders.

If you want more information about the German study, I wrote about it a couple of years ago. Solid research.

Here’s my two cents on the issue: Shareholders pay 100 percent of the direct costs of the corporate tax. But we need to also consider the indirect costs, most notably who bears the burden when there’s less investment and slower wage growth.

If you ask five economists for their estimates of indirect costs, you’ll probably get nine different answers. So it’s no surprise that there’s no agreement about magnitudes in the academic research cited above.

But they all agree that workers lose when corporate rates increase, and that’s a big reason why we can confidently state that Biden’s class-warfare agenda is bad for ordinary people.

The bottom line is that the person (or business) writing a check to the IRS isn’t the only person who suffers because of a tax.

And the lesson to learn is that we should be lowering the corporate, not increasing it.

P.S. Here’s my primer on the overall issue of corporate taxation.

P.P.S. Here’s some research about the link between corporate tax and investment.

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Back in 2009 and 2010, when I had less gray hair, I narrated a four-part series on the economic burden of government spending.

Here’s Part II, which discusses the theoretical reasons why big government reduces prosperity.

I provide eight examples to illustrate how and why government spending can hinder economic growth.

The last item is what I called the “stagnation cost,” which is the tendency of politicians and bureaucrats to throw good money after bad because there is no incentive to adapt.

When giving speeches, I usually refer to this as the “inertia cost.”

But, regardless of what I call it, I explain that every government program has a group of beneficiaries that are strongly motivated to keep their gravy train moving even if money is being wasted.

And since politicians like getting votes from those beneficiaries, it’s very difficult to derail programs.

In an article for National Review, Sean-Michael Pigeon offers one very plausible explanation for why this happens.

He says politicians fall victim to the fallacy of sunk costs.

…we need an understanding of government inefficiency… One reason government spending is so needlessly costly is somewhat paradoxical: The state is wasteful precisely because people are so concerned about wasting money. …This is a classic sunk-cost fallacy: Costs that can’t be recovered are “sunk,” and therefore irrelevant for future decision-making. But while this fallacy is well known in economics, sunk costs are a big deal in the practical world of politics. Nobody wants to waste money, and politicians don’t want to cause waste directly. No member of Congress wants to be publicly responsible for a half-built bridge, especially when they have to tell taxpayers they still have to foot the bill for it. …Congress’s unwillingness to cut the funding of poorly run projects is a significant reason government projects always spend too much. …Politicians are nervous about cutting ongoing projects because they don’t want to leave taxpayers empty-handed, but stomaching sunk costs is worth it. Not only is it economically sound to stop government agencies from bleeding money, but it also sets the precedent that shoddy work will be held accountable. …to save money, sometimes you have to lose money.

In other words, it would be good to stop the bleeding.

But that’s not politically easy. Mr. Pigeon has examples in his column, but he should have included California’s (supposed) high-speed rail project.

That boondoggle has been draining money from state and federal coffers for about a decade. Cost estimates have exploded (something that almost always happens with government projects), yet construction has barely started.

Yet now Biden wants to increase federal subsidies for that money pit, along with other long-distance rail schemes.

And you won’t be surprised that a big argument from supporters is that we’ve already wasted billions and billions of dollars on the project, so therefore we should continue to waste even more money (sort of like hitting yourself on the head with a hammer because it feels good when you stop).

The big-picture bottom line is that the burden of federal spending should be reduced so that politicians have less ability to waste money.

And that also means that Americans will be able to enjoy more growth and more prosperity.

The targeted bottom line is that we should get Washington out of infrastructure.

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While Paul Krugman sometimes misuses and misinterprets numbers for ideological reasons (see his errors regarding the United States, France, Canada, the United States, Estonia, Germany, the United States, and the United Kingdom), he isn’t oblivious to reality.

At least not totally.

He’s acknowledged, for instance, that there is a Laffer Curve and that tax rates can become so onerous that tax revenues actually decline.

Now he’s had another encounter with the real world.

In a column that was mostly a knee-jerk defense of Biden’s class-warfare tax policy, Krugman confessed yesterday that big government ultimately means big tax increases for lower-income and middle-class people.

…is trying to “build back better” by taxing only the very affluent feasible? Is it wise? …There’s a good case that the kind of society progressives want us to become, with a very strong social safety net, can’t be paid for just by taxing the rich. A country like Denmark, for example, does have a high top tax rate… But Denmark also has very high middle-class taxation, in particular a 25 percent value-added tax, effectively a national sales tax. …the fact that even the Nordic countries feel compelled to raise a lot of money from the middle class suggests that there are limits…to how much you can raise just by taxing the rich. So if you want Medicare for all, Nordic levels of support for child care and families in general, and so on, just raising taxes on the 400K-plus elite won’t get you there.

It may not happen often, but Krugman is completely correct.

European-sized government requires European-style taxes on everyone. And that means a big value-added tax, as Krugman notes. And it almost certainly also means big energy taxes, higher payroll taxes, and much higher income tax rates on middle-class taxpayers.

This chart from Brian Riedl shows that government spending already was on track to become a bigger burden for the American economy, and Biden is proposing to go even faster in the wrong direction.

The growing gap between the blue lines and red lines implies giant tax increases. At the risk of understatement, there’s no way to finance that ever-expanding government by just pillaging upper-income taxpayers.

By the way, Krugman is right about big government leading to higher taxes on ordinary people, but he’s wrong about the desirability of that outcome.

He wants us to think that big government means a “better America,” but all the economic data tells a different story. A bigger fiscal burden means much lower living standards.

P.S. If you want another example of Krugman being right on a fiscal issue, click here.

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In the world of public finance, Ireland is best known for its 12.5 percent corporate tax rate.

That’s a very admirable policy, as will be momentarily discussed, but my favorite Irish policy was the four-year spending freeze in the late 1980s.

I discussed that fiscal reform in a video about 10 years ago, and I subsequently shared data on how spending restraint reduced the overall burden of government in Ireland and also lowered red ink.

It’s a great case study showing the beneficial impact of my Golden Rule.

Spending restraint also paved the way for better tax policy, and that’s a perfect excuse to discuss Ireland’s pro-growth corporate tax system. The Wall Street Journal opined last week about that successful supply-side experiment.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger. …in the late 1990s …an EU mandate led Dublin to…pioneer…a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform… Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. …Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

That’s a lot of great information, particularly the last couple of sentences about how Ireland collected more revenue when the corporate tax rate was slashed.

Indeed, I discussed that remarkable development in Part II of my video series on the Laffer Curve (and it’s not just an Irish phenomenon since both the IMF and OECD have persuasive global data on lower corporate tax rates and revenue feedback).

Though higher revenue is not necessarily a good thing.

I complained back in 2011, for example, about how Irish politicians began to spend too much money once a booming economy began to generate a lot of tax revenue.

Which is a good argument for a Swiss-style spending cap in Ireland.

Let’s wrap up by considering some fiscal lessons from Ireland. Here are four things everyone should know.

  1. Spending restraint is a powerful tool to achieve smaller government..
  2. Lower tax rates on productive behavior lead to jobs and prosperity.
  3. Lower corporate tax rates can generate substantial revenue feedback.
  4. A spending cap is needed to maintain long-run fiscal discipline.

Good rules for Ireland. Good rules for any nation.

P.S. Ireland has definitely prospered in recent decades, but GNI data gives a more accurate picture than GDP data.

July 29, 2021 Addendum: This chart shows the growth Ireland has experienced since starting to adopt pro-market policies in the mid-1980s.

Even though the nation got hit hard by the financial crisis, it is still far ahead of where it was before reforms.

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There are many things to dislike about President Biden’s budget plan to expand the burden of government.

There will be ample opportunity to write about these issues in the coming weeks. For today, however, let’s identify and highlight the biggest problem.

Simply stated, Biden wants to permanently and significantly increase the burden of government spending. Here’s a chart, based on data from Table S.1 of the President’s budget, augmented by data from Table 1.3 of the Budget’s Historical Tables.

The budget had reached $4 trillion before the pandemic. It then skyrocketed for coronavirus-related spending.

But now that the emergency is receding, Biden is not going to let the burden of government fall back to prior levels. Instead, he’s proposing a $6 trillion budget for the upcoming fiscal year.

And that’s just the starting point. He wants spending to then climb rapidly – at almost twice the rate of inflation – up to $8 trillion by 2031.

By the way, this horrifying data doesn’t tell the entire story.

Biden’s budget doesn’t include some of his new spending giveaways. Brian Riedl addressed this fiscal gimmickry in a column for today’s New York Post.

…this budget does not even include additional spending and debt proposals that are coming later. …They account only for the recently-enacted “stimulus,” a massive discretionary spending hike, and the trillions in (creatively-defined) “infrastructure” spending proposed by the President over the past two months. However, during last fall’s campaign, Biden also proposed trillions in new spending for health care, Social Security, Supplemental Security Income, climate change, college aid, and other priorities. The White House has signaled that these new spending initiatives are still in the pipeline. Including these forthcoming proposals, the President would push spending and deficits far above any levels that have ever been sustained.

And don’t forget all this spending, both proposed and in the pipeline, is in addition to all the entitlement spending that is going to burden the economy over the next several decades.

Here’s one final point to underscore and emphasize the radical nature of Biden’s budget.

I’ve taken the previous chart and added a trendline showing what spending would be if Biden has simply followed the trajectory based on the actual spending levels of every President from Carter to Trump.

In other words, we’re looking at trillions of dollars of additional money being diverted from the productive sector of the economy and being put under the control of politicians and bureaucrats.

That does not bode well for American prosperity. Even the Congressional Budget Office recognizes this means lower living standards for our nation.

The bottom line is that if you adopt European-style fiscal policy, you get anemic European-style levels of income.

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I’ve shared all sorts of online quizzes that supposedly can detect things such as whether you’re a pure libertarian.

Or even whether you’re a communist.

Today, courtesy of the folks at the Committee for a Responsible Budget, you can agree or disagree with 24 statements to determine your “budget personality.”

I have some quibbles about some of the wording (for instance, I couldn’t answer “neither” when asked to react to: “The government should spend more money on children than on seniors”).

But I can’t quibble with the results. Given the potential outcomes, I’m glad to be a “Minimalist” who is “in favor of smaller government.”

Though I’m disappointed that I apparently didn’t get a perfect score on “Size of Government.”

And I need to explain why I got a mediocre score on the topic of “Fiscal Responsibility.”

The budget geeks at the Committee for a Responsible Federal Budget (CRFB) have a well-deserved reputation for rigorous analysis. I regularly cite their numbers and appreciate the work that they do.

That being said, they mistakenly focus on deficits and debt when the real problem is too much government.

I agree with Milton Friedman, who wisely observed that ““I would rather have government spend one trillion dollars with a deficit of a half a trillion dollars than have government spend two trillion dollars with no deficit.”

The folks at CRFB would disagree.

Indeed, they are so fixated on red ink that they would welcome tax increases.

At the risk of understatement, that would be a very bad approach.

The evidence from Europe shows that higher taxes simply lead to higher spending. And more debt.

Indeed, Milton Friedman also commented on this issue, warning that, “History shows that over a long period of time government will spend whatever the tax system raises plus as much more as it can get away with.”

The bottom line is that CRFB not only has the wrong definition of “Fiscal Responsibility,” but they also support policies that would make matters worse – even from their perspective!

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About one week ago, I shared some fascinating data from the Tax Foundation about how different nations penalize saving and investment, with Canada being the worst and Lithuania being the best.

I started that column by noting that there are three important principles for sensible tax policy.

  1. Low marginal tax rates on productive behavior
  2. No tax bias against capital (i.e., saving and investment)
  3. No tax preferences that distort the economy

Today, we’re going to focus on #1, specifically the tax burden on the average worker.

And, once again, we’ll be citing some of the Tax Foundation’s solid research. Here are their numbers showing the tax burden on the average worker in OECD nations. As you can see, Belgium is the worst place to be, followed by Germany, Austria, and France.

Colombia has the lowest tax burden on average workers, though that’s mostly a reflection of low earnings in that relatively poor nation.

Among advanced nations, Switzerland has the lowest tax burden when value-added taxes are part of the equation, while New Zealand is the best when looking just at income taxes and payroll taxes.

Here’s some of what the Tax Foundation wrote in its report, which was authored by Cristina Enache.

Average wage earners in the OECD have their take-home pay lowered by two major taxes: individual income and payroll (both employee and employer side). …The average tax burden among OECD countries varies substantially. In 2020, a worker in Belgium faced a tax burden seven times higher than that of a Chilean worker. …Accounting for VAT and sales tax, the average tax burden on labor in 2020 was 40.1 percent, 5.5 percentage points higher than when only income and payroll taxes are considered. …The tax burden on labor is referred to as a “tax wedge,” which simply refers to the difference between an employer’s cost of an employee and the employee’s net disposable income. …Tax wedges are particularly high in European countries—the 23 countries with the highest tax burden in the OECD are all European. …Chile and Mexico are the only countries that do not provide any tax relief for families with children but they keep the average tax wedge low.

Here’s a look at which countries in the past two decades that have made the biggest moves in the right direction and wrong direction. Kudos to Hungary and Lithuania.

And you can also see why I’m not overly optimistic about the long-run outlook for Mexico and South Korea.

The report also has a map focusing on tax burdens in Europe. The darker the nation, the more onerous the tax (notice how Switzerland is a light-colored oasis surrounded by dark-colored tax hells).

The report also notes that average tax wedges only tell part of the story. If you want to understand a tax system’s impact on incentives for productive behavior, it’s important to look at marginal tax rates.

The average tax wedge is…the combined share of labor and payroll taxes relative to gross labor income, or the tax burden. The marginal tax wedge, on the other hand, is the share of labor and payroll taxes applicable to the next dollar earned and can impact individuals’ decisions to work more hours or take a second job. The marginal tax wedge is generally higher than the average tax wedge due to the progressivity of taxes on labor across countries—as workers earn more, they face a higher tax wedge on their marginal dollar of earnings. …a drastic increase in the marginal tax wedge…might deter workers from pursuing additional income and working extra hours.

And here’s Table 1 from the report, which shows that marginal tax rates can be very high, even at relatively modest levels of income.

In what could be a world record for understatement, this data led Ms. Enache to conclude that Italy’s tax system “might” deter workers.

In 2020 an Italian worker making €38,396 (US $56,839) faced a marginal tax wedge as high as 117 percent on a 1 percent increase in earnings. Such marginal tax wedges might deter workers from pursuing additional income and working extra hours.

Though that’s not the most absurd example of over-taxation. Let’s not forget that thousands of French taxpayers have had tax bills that were greater than their entire income.

Sort of like an Obama-style flat tax, but in real life rather than a joke.

P.S. As I’ve previously noted, Belgium is an example of why a country can’t simultaneously have a big government and a good tax system.

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Tax increases are bad fiscal policy, but that doesn’t necessarily mean that they are politically unpopular.

Indeed, many voices in the establishment press are citing favorable polling data in hopes of creating an aura on inevitably for President Biden’s proposed tax hikes.

That’s a very worrisome prospect. If Biden succeeds, the United States could wind up toppling Canada for the dubious honor of having the world’s highest tax burden on saving and investment.

That would be bad news for American workers.

But are Biden’s media cheerleaders correct? Are tax increases popular?

According to a new scholarly working paper from the Federal Reserve (authored by Andrew C. Chang, Linda R. Cohen, Amihai Glazer, and Urbashee Paul), the answer is no.

At least if we judge politicians by what they do in election years. Here’s part of the study’s abstract.

We use new annual data on gasoline taxes and corporate income taxes from U.S.states to analyze whether politicians avoid tax increases in election years. These data contain 3 useful attributes: (1) when state politicians enact tax laws, (2) when state politicians implement tax laws on consumers and firms, and (3) the size of tax changes. Using a pre-analysis research plan that includes regressions of tax rate changes and tax enactment years on time-to-gubernatorial election year indicators, we find that elections decrease the probability of politicians enacting increases in taxes and reduce the size of implemented tax changes relative to non-election years. We find some evidence that politicians are most likely to enact tax increases right after an election. These election effects are stronger for gasoline taxes than for corporate income taxes and depend on no other political, demographic, or macroeconomic conditions.

For wonkier readers, Figure 7 has some of the major results of their statistical analysis. I’ve highlighted (in red) the most important conclusion of the research.

For regular readers, the main takeaway is that politicians almost always want more tax revenue. That’s what gives them the ability to distribute goodies and buy votes.

But notwithstanding their never-ending hunger to grab more money, they are very likely to reject tax increases in election years. They even reject higher corporate taxes, which are supposed to be popular (at least according to some in the establishment media).

Yet if tax increases were politically popular, we should see the opposite result.

I’ll close with the somewhat depressing observation that these results do not imply that voters want libertarian policy. It’s probably more accurate to say that people want goodies from the government, but they don’t want to pay for them. Politicians simply respond to those preferences (which brings to mind Garett Jones’ hypothesis that we have too much democracy).

Which is how Greece became a basket case. Which is why Italy is in the process of becoming a basket case. And it’s why the United States may not be that far behind (with states such as Illinois serving as early-warning signs).

P.S. The above-cited research should be a reminder of why a no-tax-hike pledge is important. Voters seem to be on the right side on the big-picture question of “Should taxes be higher?”, but if they think tax increases are going to happen, it’s quite likely that they will support the most economically damaging types of class-warfare levies.

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