Biden’s “Stimulus” Failure

At the risk of understatement, economists are not good forecasters.

And they are especially incompetent when they make forecasts based on bad policy, such as when the Obama White House projected that his so-called stimulus would quickly lead to falling unemployment.

In reality, the jobless rate immediately increased and then remained much higher than projected for the remainder of the five-year forecast.

The failure of Obama’s stimulus should have been a learning moment for Washington politicians.

But Joe Biden must have slept through that lesson because his first big move after taking office was to saddle the nation with a $1.9 trillion “stimulus” package.

The White House claimed this orgy of new spending would lead to four million additional jobs in 2021, on top of the six million new jobs that already were expected.

So what happened? Matt Weidinger of the American Enterprise Institute looked at the final numbers for 2021 and discovered that employment actually fell compared to pre-stimulus baseline projection.

The nonpartisan Congressional Budget Office projected on February 1, 2021…a gain of 6.252 million jobs over…2021…we now know payroll employment in the fourth quarter of 2021 averaged 148.735 million — an increase of 6.116 million compared with the average of 142.619 million in the fourth quarter of 2020. That means the job growth the President praised this week has fallen 136,000 jobs short of what was expected under the policies he inherited. …President Biden and congressional Democrats promised their $1.9 trillion American Rescue Plan would create millions of additional new jobs this year — on top of what White House economists called the “dire” baseline of 6.252 million new jobs reflected in CBO’s projection without that enormous legislation. …House Speaker Nancy Pelosi (D-CA) repeated that claim, stating that “if we do not enact this package, the results could be catastrophic,” including “4 million fewer jobs.” Yet…not one of those four million additional jobs supposedly resulting from that $1.9 trillion spending plan has appeared, as job creation in 2021 did not even match CBO’s projection without that legislation.

Below you’ll see the chart that accompanied the article.

As you can see, the White House projected more than 10 million new jobs (right bar).

Yet we would up with 6.1 million new jobs (left bar), about 140,000 less than we were projected to get (center bar) without wasting $1.9 trillion.

If pressed, I’m sure the Biden Administration would use the same excuse that we got from the Obama White House (and from the Congressional Budget Office), which is that the initial forecast was wrong and that the so-called stimulus did create jobs.

In other words, the Biden economists now would say they should have projected 2 million new jobs, which means that the $1.9 trillion spending spree added 4 million jobs, for a net increase of 6 million.

You may think I’m joking, but that is exactly how the Keynesian economists tried to justify Obama’s stimulus failure.

The moral of the story is that the best way to really create jobs is to get government out of the way rather than adding new burdens.

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Hopes and Fears for 2022

It’s an annual tradition (2021, 2020, 2019, 2018, etc) to list a handful of things that I hope might happen in the upcoming year, as well as the things I fear may happen.

Sadly, since I understand the economics of “public choice” (something Thomas Jefferson also implicitly understood) it’s always easier to envision the latter category.

But it’s good to begin a new year with optimism, so here are the good things that hopefully will happen in 2022.

Biden’s So-Called Build Back Better Stays Dead – The President squandered money on a fake stimulus and an infrastructure boondoggle, but we dodged the biggest bullet when Democrats couldn’t get all 50 of their Senators to support a multi-trillion dollar, growth-sapping expansion in taxes and spending.

The Supreme Court Ends Civil Asset Forfeiture – This was on my list last year, but the odious practice of “theft by government” continues. That being said, I still think it won’t survive if the Supreme Court has a chance to make a ruling (especially since America’s best Justice is very aware of the problem).

Republicans Win Congress in 2022 – I don’t have much faith in Republicans to do the right thing (especially when a Republican is in the White House), but I hope they win the House and Senate in November because they will oppose big tax increases while Democrats control the White House – even if only for partisan reasons.

In the “honorable mention” or “runner-up” category, I also hope to see further progress for school choice in 2022.

And I used to list a collapse of Venezuela’s reprehensible socialist government as one of my annual “hopes,” but I’ve largely given up (particularly since Latin Americans seem foolishly susceptible to “leftist saviors“).

Now let’s shift to the bad things that I fear will happen over the next 365 days.

Biden’s BBB Budget Plan Springs Back to Life – The President’s “Build Back Better” plan may be on life support, but sadly it’s not quite dead. I fear a scaled-down (but still horrible) version of the legislation may get approved this year. Senator Manchin of West Virginia, for instance, says he is willing to support a $1.5 trillion package and I fear the left eventually will decide that 50 percent of a (moldy and weevil-ridden) loaf is better than none.

Biden’s Remains a Protectionist – I hoped last year that Biden would reduce government trade taxes. Not because he believes in economic liberty, but simply because he wouldn’t want to continue a Trump-era policy. But that didn’t happen, and I now fear he’ll continue with protectionism in 2022. I don’t even have much hope that he’ll resuscitate the World Trade Organization.

New Tax Cartels – One of last year’s big defeats was the creation of a global tax cartel by governments. Barring some sort of miracle that prevents implementation, greedy politicians have set up a system that will require all nations to have a minimum corporate tax of 15 percent. That’s very bad news for workers, consumers, and shareholders, but I’m even more worried about the precedent it creates for additional tax cartels and ever-higher tax rates.

I’ll close by noting that last year’s list included the possibility of Kamala Harris becoming president.

But Biden has been so bad that it’s unclear that Harris would make things worse.

P.S. For the “fears” category, I could – and probably should – list entitlements every single year. Simply stated, the country is in deep long-run trouble because of an aging population and poorly designed tax-and-transfer programs. Years ago, I was semi-hopeful that we would get Medicaid and Medicare reform.

Now that seems like a distant dream and the real battle is preventing further entitlement expansions such as Biden’s per-child handout.

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Best and Worst News of 2021

Per tradition (2020, 2019, 2018, etc), we highlight the best and worst developments of the year on December 31.

The choices are based on whether a particular policy increases or decreases individual liberty, either in a big way or a symbolic way.

Interestingly, the coronavirus pandemic doesn’t show up on either the good list or bad list.

Why? Because governments continue to make things worse, but not in ways that are significantly new or different.

With that in mind, let’s look at what happened in 2021, starting with the good news.

The Death of (the horribly misnamed) Build Back Better – President Biden somehow decided a very narrow victory over a very unpopular incumbent meant that he had a mandate for a radical expansion of the welfare state, accompanied by a plethora of class-warfare tax increases. Fortunately, Congress did not approve Biden’s growth-sapping plan.

School Choice Advances – Led by a sweeping plan to empower parents in West Virginia, there were many encouraging victories this year for school choice. And as teacher unions continue to mishandle the pandemic, there’s hope for continued progress next year.

Arizona Tax Reform – Several states lowered tax rates in 2021, but what happened in Arizona deserves special attention. Lawmakers reversed the outcome of a class-warfare referendum, meaning the state’s top tax rate on households will be 4.5 percent rather than 8 percent.

Speaking of referendum results, if we had an “honorable mention” or “runner-up” category, I would list three results from  2021

• Swiss voters rejected class-warfare tax increases.
• Voters in the state of Washington gave a big thumbs down to a proposed capital gains tax.
• Voters in Louisiana voted for lower tax rates.

Now let’s look at the three worst policy developments of 2021.

Biden’s Fake Stimulus and Infrastructure Boondoggle – Even though the so-called Build Back Better plan failed to advance, President Biden was able to significantly increase the burden of government spending with a supposed stimulus plan early in the year, followed by a grab-bag of special-interest handouts as part of “infrastructure” legislation later in the year.

Chile Elects a Hard-Core Leftist President – Much to my dismay, Chilean voters opted for a hard-core leftist president who wants to dismantle the nation’s very successful private social security system. The most economically successful nation in Latin America is now in danger of becoming another Argentina. Or worse.

Global Tax Cartel – While Biden’s proposal for a higher corporate tax rate in the United States did not succeed, he seems to have successfully paved the way for a global tax cartel that will require all nations to have a corporate tax rate of at least 15 percent. This is a victory for politicians over workers, consumers, and shareholders. And it creates a very dangerous precedent.

Let’s also have an honorable mention for bad news.

One positive development during the Trump years was the unwinding of regulations that forced Americans to use crummy, low-flow showerheads.

Well, that victory was short-lived, as captured by this headline from a Reason article.

For what it’s worth, I suspect this bit of bad news will be followed by some bad news on a related issue.

P.S. I thought about including inflation as one of the bad things that happened in 2021, but I think that’s the results of years of misguided monetary policy. Politicians from both parties seem perfectly happy with Keynesian policy from the Federal Reserve.

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The Two Most Important Things to Understand about Biden’s Budget

The fight over President Biden’s budget, the so-called Build Back Better plan, has revolved around very important issues.

• The adverse impact of expanding the welfare state, particularly the per-child handouts.
• The anti-growth effect of higher tax rates on work, entrepreneurship, saving, and investment.

For today’s column, let’s zoom out and look at two charts that highlight the big issue that should be getting more attention.

First, here’s a comparison of projected inflation with baseline spending (the current spending outlook) and Biden’s budget – all based on economic and fiscal estimates from the Congressional Budget Office.

As you can see, spending was growing far too fast even without Biden’s budget. And if Biden’s budget is enacted, the spending burden will rise more than twice the rate of inflation.

Now let’s look at a chart that illustrates why Biden’s spending spree is just a small part of the problem.

To be sure, it’s not good that the President is exacerbating America’s fiscal problems, but you can see that he’s simply adding a few more straws to the camel’s back.

You’ll also notice that I included both the amount of spending that technically is in Biden’s budget plan (the orange part), as well as CBO’s estimate of the additional spending (the gray part) that will happen if the budget gimmicks are removed.

The bottom line is that America’s fiscal problem is too much government spending.

And that spending burden is getting worse over time because spending is growing faster than the private sector, violating the Golden Rule, which is bad news for jobs and growth.

Making the problem worse, as Biden proposes, will further hurt American prosperity.

P.S. Biden’s plan will increase the deficit, which also is not good, but keep in mind that tax-financed spending is no better than debt-financed spending. In either case, you wind up with the same bad result.

P.P.S. This column has two serious visuals to help understand Biden’s fiscal policy. If you prefer satire, here are two other images.

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Should We Celebrate Joe Biden’s Economic “Achievements”?

I’m not a fan of Joe Biden’s economic policy, particularly his tax-and-spend agenda.

I also don’t approve when the Biden Administration uses phony numbers and phony arguments.

But what’s really baffling is the use of accurate numbers to make dumb arguments.

What do I mean by that? Well, here’s a tweet from the Democratic Congressional Campaign Committee celebrating a 2¢-per-gallon reduction in gas prices over a two-week period.

There’s only one problem with this tidbit of data.

If you look at what’s happened to gas prices during Biden’s time in office, the recent 2¢ reduction is swamped by $1 increase over the past year.

Thanks, @JoeBiden. Gas costs over $1/gallon more today than it did a year ago. https://t.co/xa4yeCy0B6 pic.twitter.com/38z3EVnrjB

— Sean Davis (@seanmdav) December 2, 2021

So how and why did the White House screw up?

Tim Carney of the Washington Examiner wrote about this strange episode.

The Democratic Congressional Campaign Committee has just produced and tweeted the worst chart of 2021. It is a line graph of gas prices with three data points covering a two-week time span. The absurd dishonesty comes when you look at the y-axis. Each horizontal line represents half of a cent. …Gas prices have nearly doubled over the past 18 months, and Biden’s allies are holding a parade for a less-than-1% drop over two weeks. Thanks, Joe Biden! …So, how did this horrible chart happen? It seems someone at the DCCC took seriously a joke made by liberal blogger Matt Yglesias. …Ron Klain, White House chief of staff (presumably not understanding the tweet was a joke), liked the tweet before the DCCC put it out sincerely.

This is the political equivalent of leading with your chin.

And it’s not the only example.

Here’s a retweet from the White House Chief of Staff, Ronald Klain, celebrating a very tiny improvement in the labor force participation rate.

In this case, there’s nothing disingenuous about the chart. We actually get to see several years of data.

But does this small uptick in the labor force participation rate actually mean that “America is back at work”?

Call me crazy, but it seems that the main takeaway from the chart is that the country is still way short of getting back to pre-pandemic levels of employment.

Which raises the obvious question of whether Biden’s redistribution agenda is making it easier for people to live off the government rather than be part of the workforce.

P.S. My criticisms of Biden are not driven by partisanship. I’m also not a fan when Republicans enact bad policy.

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Updated Estimate: The Economic Effect of Biden’s Fiscal Agenda

Earlier this year, extrapolating from a study by the nonpartisan Congressional Budget Office, Robert O’Quinn (former Chief Economist at the Department of Labor) and I authored a study on the economic impact of Biden’s fiscal plan.

The results are not pretty.

Lost jobs, lost wages, lower living standards, and lost competitiveness.

But those estimates were based on the parameters of Biden’s economic plan in the summer.

His agenda has since been modified, which raises the question of how the current proposal would affect economic performance.

In a piece for Canada’s Fraser Institute (publishers of Economic Freedom of the World and Economic Freedom of North America), Robert and I updated our numbers and explained the implications of Biden’s tax-and-spend agenda.

According to independent experts at the Committee for a Responsible Federal Budget, the actual cost of the president’s policies is closer to $4.9 trillion. Some of this new spending will be financed with red ink, but President Biden also has embraced higher tax rates on work, saving, investment and entrepreneurship. Indeed, if his plan were enacted, the United States would have both the highest corporate tax rate and the highest capital gains tax rate in the developed world. …But how much would the economy be hurt? There are groups such as the Tax Foundation that do excellent work measuring the adverse effects of higher tax rates. But it’s also important to measure the harmful impact of a bigger welfare state. …Based on that CBO study, and using the CBO fiscal and economic baselines, we calculated the following unpalatable outcomes if Build Back Better bill (pushed by the president and Democrats in Congress) becomes law and growth is reduced by 2/10ths of 1 per cent per year.

And here are the results.

The good news is that the latest version of Biden’s plan doesn’t do quite as much damage as what was being discussed earlier this year.

The bad news is that our economy will be much weaker (and our results are in line with other estimates, including those done before the election and since the election).

Not that we should be surprised. If the United States becomes more like Europe, we’ll be more likely so suffer from European-style anemia.

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Biden’s Trumpian Trade Policy

For self-interested reasons, I obviously like my video on the merits of free trade and the downside of protectionism.

But now I’ll also be recommending this new video from Liberty International.

It has some great examples, such as Washington’s corrupt trade barriers to sugar (as well as other examples of foolish agriculture subsidy programs).

And there’s some excellent analysis of how developing nations are hurt by the double-edged sword of protectionism and foreign aid.

What happened to Haiti is especially tragic.

My only criticism (and this is a sin of omission) is that there wasn’t enough time to explain why people shouldn’t fixate on the trade deficit – which is, after all, simply the flip side of a capital surplus.

For purposes of today’s column, though, I want to focus more on the politics of trade rather than the economics of trade.

That’s because Trump and Biden are basically the Bobbsey Twins of protectionism.

In his New York Times column, Binyamin Appelbaum explains why Trump’s China tariffs backfired.

I obviously agree, but Appelbaum only mentions in passing that Biden has not done much to reverse that policy.

Tariffs on imports from China have refilled the employee parking lot at Stoughton Trailers in Evansville, Wis. …the rest of us are paying for those jobs. The tariffs have contributed to a shortage of chassis in the middle of an import boom, one reason that American ports are gridlocked. Tariffs also drive up prices. American chassis are beginning to roll off production lines, but they cost more than pretariff Chinese chassis, which raises the price of everything that travels by chassis. …the government has decided to limit competition, a lazy approach that is both expensive and counterproductive. Taxing imports from China gives the appearance of punishing China, but the cost of the tariffs is paid by Americans. …Mr. Biden should make a clean break with Mr. Trump’s destructive tariffs. The right recipe is simple…, maintain an environment in which companies can flourish, ensure workers reap the benefits.

So at what point do Trump’s tariffs become Biden’s tariffs?

Technically, we hit that point in late January of 2021.

To make matters worse, Biden is also imposing new trade taxes on American consumers and businesses.

The Wall Street Journal opined today on Biden’s latest protectionist initiative.

President Biden says he feels your pain regarding inflation… Too bad his Administration’s policies reveal different priorities. Witness the Commerce Department’s decision to raise tariffs on lumber, which will raise building costs in an already strained housing market. The Commerce Department said last week that it will double the average tariff on Canadian softwood lumber to 17.9% from 8.99%. …There’s rarely a good time for trade restrictions, but the timing of this one is tragicomical. The same month Commerce revealed its tariff plan, lumber hit a record price of $1,650 per thousand board-feet, more than three times the level before pandemic supply shortages began. …The Biden Administration’s tariff resumes the U.S.-Canada lumber war where President Trump left off. …President Biden campaigned against his predecessor’s tariffs, but his trade policy in office has been nearly as protectionist. He’s kept most tariffs in place.

Kept most in place…and now adding more.

This is very sad, particularly since I had hoped that was one area where Biden might actually move policy in the right direction.

No, I didn’t think Biden actually understood why free trade is good (he’s always been a proponent of bigger government, after all).

But I hoped he would do the right thing simply to show he differed from Trump. Those hopes have been dashed.

P.S. If you want more reasons to be concerned, Biden also hasn’t done much to resuscitate the World Trade Organization and he isn’t pushing back on his party’s embrace of carbon protectionism.

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Biden’s Boondoggle(s) and the Burden of Government Spending

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…

• Keep in mind that Biden’s orgy of new spending is on top of record spending increases that occurred when Republicans were in charge.
• Keep in mind that Biden’s orgy of new spending is on top of built-in spending increases because of poorly designed entitlement programs.

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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Linda and Leo, Wards of the State

During his 2012 reelection campaign, Barack Obama created a fictional character named Julia and showed how she could mooch off taxpayers from cradle to grave.

Given Biden’s reputation as a plagiarizer, I guess we shouldn’t be surprised that the White House has reincarnated Julia as part of a push to trap more people in government dependency.

Here is the story of Linda and Leo.

The shocking part of the story, right at the start, is that Linda actually has a job in the private sector.

But Linda soon figures out that she can use the coercive power of government to take money from her neighbors.

She starts with Biden’s per-child handout.

She then puts her son into government-subsidized child care (with no discussion, of course, of how third-party payer causes prices to skyrocket).

I can only imagine the nursery rhymes he’ll hear in that setting.

She then enrolls him in a “free” pre-K program, presumably unaware that such programs have no evidence of success (but at least Biden will be happy that this program creates more unionized teachers to fight against quality education).

Next, her son enters taxpayer-funded community college (another third-party payer problem).

After college, he gets a job, which is nominally in the private sector, but which largely exists because of government distortions (all jobs are not created equal).

Last but not least, Linda gets to rely on taxpayers in her old age, thanks to other programs that are designed to produce additional overpaid government employees.

Let’s close this depressing celebration of dependency by shifting to humor.

Here’s a tweet about Biden’s people plagiarizing Obama’s people.

While I appreciate the satire, I’m quite worried about the long-run impact of Biden’s agenda (i.e., becoming Greece).

P.S. Regarding Obama’s Julia, here’s a great Michael Ramirez cartoon and here’s some clever Iowahawk satire.

P.P.S. And here’s my two-cartoon set on what happens as more and more people are lured into the wagon of government dependency.

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Biden Wants the U.S. to Be #1…in a Bad Way

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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Biden’s Befuddlement on Corporate Taxation

Let’s look today at the wonky issue of “book income” because it’s an opportunity to point out that there are three types of leftists.

1. Honest leftists who understand economics and recognize tradeoffs (I think of them as “Okunites“).
2. Dishonest leftists who understand economics but pretend that tradeoffs don’t exist (the “demagogues“).
3. Leftists who have no idea what they’re saying or thinking (I think of them as, well, Joe Biden).

I’m being snarky about the President because of this recent tweet, which contains a couple of big, glaring mistakes.

What are the mistakes (I’m not calling them lies because I don’t think Biden has the slightest idea that he is wrong, much less why he’s wrong).

• The first mistake is that corporations pay a lot of tax (payroll tax, property tax, etc) even if they are losing money and don’t owe any corporate income tax.
• The second mistakes is that Biden is relying on a report about corporate income taxes that has been debunked because it relied on book income rather than taxable income.
• The third mistake is that the President implies that his plan force all big companies to pay the corporate tax when that’s obviously not true.

Regarding that third mistake, Kyle Pomerleau of the American Enterprise Institute explains why there will still be companies paying zero corporate income tax.

While the Biden administration’s proposals would increase the tax burden on corporations by about $2 trillion over the next decade, they would not change the basic structure of the corporate income tax. The Democrats’ proposal would not end corporations paying zero federal income tax in certain years. Corporations will still be able to carryforward losses, and credits will still be available for corporations to offset their tax liability. The administration has proposed a minimum tax to address these headlines by tying federal tax liability to book income. The minimum tax would require corporations with net income over $2 billion to pay the greater of their ordinary corporate tax liability or 15 percent of their book or financial statement income. Corporations would still be able to offset the book minimum tax with losses and general business credits.

Glenn Kessler of the Washington Post tried to defend Biden’s tweet as part of his misnamed “Fact Checker.”

He had to acknowledge Biden was using a made-up number, but nonetheless concluded that the President’s assertion was “probably in the ballpark.”

This is one of Biden’s favorite statistics. …the president has used it in speeches or interviews 10 times since April. Normally he is careful to refer to “federal income taxes” so the tweet is little off by referring just to “taxes.” …Let’s dig into this statistic. It’s not necessarily wrong but there are some limitations. …The number comes from…the left-leaning Institute on Taxation and Economic Policy (ITEP). …Company tax returns generally are not made public, so ITEP’s numbers are the product of its own research and analysis of public filings. But it is an imperfect measure. …the information in the filings may not reflect what is in the tax returns. …Nevertheless, the notion that 10 to 20 percent of Fortune 500 companies do not pay federal income taxes is consistent with a 2020 report by the nonpartisan Joint Committee of Taxation. …This “55 corporations” number is probably in the ballpark.

For what it’s worth, I don’t care that Kessler gave Biden a pass for writing “taxes” instead of “federal income taxes.”

After all, that’s almost surely what he meant to write (just like Trump almost surely meant “highest corporate tax rate” when complaining about America being the “highest taxed nation”).

But I’m not in a forgiving mood about the rest of Biden’s tweet (or Kessler’s biased analysis) for the simple reason that there is zero recognition that companies occasionally don’t pay tax for the simple reason that they sometimes lose money.

I’ve made this point when writing about boring issues such as depreciation, carry forwards, and net operating losses.

At the risk of stating the obvious, companies shouldn’t pay any corporate income tax in years when they don’t have any corporate income.

P.S. I’m not mocking Biden’s tweet for partisan reasons. I was similarly critical of one of Trump’s tweets that was glaringly wrong on the issue of trade.

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Biden’s Plan to Have the IRS Spy on Your Bank Account

Biden’s tax-and-spend budget plan is based on dishonesty, and I’m just talking about his preposterous claim that a massive expansion of government has “zero cost.”

• On the outlay side of the fiscal ledger, he’s actually proposing to increase the nation’s already-excessive spending burden by more than $5 trillion over the next ten years, not $3.5 trillion.
• Based on dishonest estimates of the “tax gap,” he claims that a massive expansion of IRS staff will allow enough new audits to generate hundreds of billions of extra revenue in the next decade.
• Most shocking, Biden’s budget even tries to mislead people by classifying some expanded welfare payments as tax cuts, simply because the IRS is the bureaucracy redistributing the money.

Today, let’s review another example of Biden’s dodgy approach to budgeting.

If you look at page 53 of his budget, you’ll see that the White House claims it can generate nearly $463 billion of tax revenue by having banks automatically share account information with the IRS.

Which bank accounts?

Well, almost all of them. The original proposal would give the IRS automatic access to accounts with as little as $600 of annual turnover.

That number is apparently going to increase, but even a limit of $10,000 would let the IRS snoop on almost every American’s private financial affairs.

At the risk of understatement, the proposal has generated a lot of pushback.

National Review editorialized against the scheme.

…the House reconciliation bill would let the Internal Revenue Service peer into the bank account of virtually every American. …Here’s the proposition: You permanently sacrifice your financial privacy, and the Democrats get a small step closer to funding their agenda. …Treasury secretary Janet Yellen claims the IRS will overcome perennial bureaucratic incompetence and track down “opaque income streams that disproportionately accrue to the top.” …If it’s high earners we’re worried about, why spy on everyone? …The administration is seriously arguing for a new oversight regime that would gather data on nearly every American on the off chance that a billionaire opens several thousand bank accounts. …this move on bank accounts would represent a new, jaw-dropping level of federal intrusiveness and is a power no government should have. Biden officials from Yellen on down have had trouble defending it — because it is literally indefensible.

Writing for the Hill, Thomas Hoenig and Brian Knight of the Mercatus Center pour cold water on the idea of expanding IRS snooping.

…the Biden administration is proposing requiring banks to report individual account transaction flows above $600 to the Internal Revenue Service (IRS). …a significant intrusion of consumer privacy. It’s also cumbersome, unlikely to achieve whatever legitimate goal the administration may have… the breadth of intrusion into the citizenry’s personal accounts is excessive and unwise. …Such a rule would also likely limit people’s access to banks. …Increasing compliance costs for banks will likely lead them to increase minimum balance requirements and fees to keep accounts economically viable, which could in turn force more people outside the banking system.

Here are excerpts from a Wall Street Journal editorial, which expresses similar concerns.

On your next trip to the ATM, imagine that Uncle Sam is looking over your shoulder. As if your annual tax filing wasn’t invasive enough, the Biden Administration would like a look at your checking account. …Ms. Yellen says the reporting will help to catch wealthy tax dodgers. …Casting a wide net over personal finances is a longstanding aim for Democrats and the political left. …the bigger threat of giving the IRS access to the details of your bank account is that politicians will eventually find a way to control how you save and spend your own money. This is a bad idea that deserves to die. …A group of 41 industry groups recently warned congressional leaders that the plan “is not remotely targeted” to detect major tax avoidance. …Twenty-three state treasurers and auditors signed a letter last month opposing the plan, calling it “one of the largest infringements of data privacy in our nation’s history.”

And let’s not forget that the IRS has shown that it is untrustworthy.

The bureaucracy repeatedly has leaked information and used its power to advance the leftist policy agenda.

All of which probably helps to explain why polling data shows overwhelming opposition to this Orwellian scheme.

Let’s close by debunking the White House claim that more IRS snooping on bank accounts will collect more revenue from the rich.

Simply stated, rich people are very clever about legal tax avoidance. They do things like invest in tax-free municipal bonds (which is not good for the economy, but it’s a very effective way of escaping tax).

Or they rely on building wealth with investments, since only the most crazy leftists (like Elizabeth Warren) would support taxes on unrealized capital gains.

So who would be targeted if Congress approves this plan to let the IRS snoop on bank accounts?

Primarily owners of small businesses. The IRS basically adopts the view that all entrepreneurs under report cash income and deduct personal expenses on their business tax returns.

Some of that actually happens, of course, but the best way to improve compliance is lower tax rates, not a massive expansion of the surveillance state.

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What Lessons Can We Learn by Comparing U.S. and European Economic Performance?

I freely admit that I don’t like President Biden’s fiscal agenda in part because of my libertarianism. Simply stated, I’m instinctively skeptical when someone wants to expand government.

But I’m also an economist who believes in cost-benefit analysis. Moreover, I recognize that there are “public goods” that the private sector can’t – or isn’t allowed to – provide.

So I’m a big believer in looking at evidence to see if a proposed expansion of government makes sense.

As such, if we review the economic performance of nations that have already adopted Biden-type policies – such as Western Europe’s welfare states, that should tell us whether those policies are a good idea for the United States.

Well, if that kind of evidence matters, the answer surely is negative.

The Wall Street Journal editorialized on this topic a few days ago and reached a similar conclusion.

Here are some key excerpts.

“To oppose these investments is to be complicit in America’s decline,” Mr. Biden said Tuesday, adding that “other countries are speeding up and America is falling behind.” …You have to admire the audacity of pitching higher taxes and more social welfare as the path to national revival, especially when the global evidence is the opposite. The result of Mr. Biden’s expanded entitlements is likely to be reduced incentives to work and invest, slower economic growth, lower living standards.

The editorial is filled with hard data on the sub-par performance of various European nations.

That’s the lesson from Europe’s cradle-to-grave welfare states… European jobless rates tend to be much higher than in the U.S., especially for the young. In 2019 labor participation was 62.6% in the U.S. versus 49.7% in Italy, 55% in France, 57.7% in Spain, 59.3% in Portugal and 61.3% in Germany. …U.S. GDP growth still averaged 2.3% from 2010 to 2019, surpassing Italy (0.27%), Portugal (0.86%), Spain (1.07%), France (1.42%) and Germany (1.97%). …Mr. Biden’s plan would empower the government, pile burdens on the private economy, and erode upward mobility by encouraging people not to work. That’s the real recipe for decline.

And let’s not forget that scholarly research also shows that bigger government leads to economic weakness.

P.S. the WSJ editorial also made a very important point that European-style welfare expansions necessarily require huge tax increases on lower-income and middle-class households.

Europe’s little-discussed secret is that its cradle-to-grave welfare states are financed by the middle class via value-added and payroll taxes. The combined employer-employee social security tax rate is 36% in Spain, 40% in Italy and 65% in France. Value-added taxes in most European economies are around 20%. There simply aren’t enough rich to finance their entitlements.

For what it’s worth, Biden wants people to believe that all his new entitlement expansions can be financed with class-warfare taxes on upper-income households.

Even Paul Krugman admits that is preposterously false.

P.P.S. What’s especially revealing is that European nations have been falling further behind the United States, making them members of the “Anti-Convergence Club.”

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The Economic Damage of Biden’s Fiscal Agenda

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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Biden’s Dishonest Budget Gimmickry

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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Biden’s Tax Hike: The Political Calculus and Economic Cost

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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Biden’s Budget: Affordable Isn’t Sensible

A couple of days ago, I shared the most-recent data about “actual individual consumption” in nations that are part of the Organization for Economic Cooperation and Development.

My goal was to emphasize my oft-stated point about people in the United States enjoying higher living standards – in large part because European nations are saddled with a bigger fiscal burden of government.

President Biden, however, wants to make the United States more like Europe.

• More taxes
• More spending

What’s happening this week in Congress may determine whether he succeeds.

Since I’m policy wonk rather than a political pundit, I don’t pretend to have any great insight on matters such as vote counting.

But I feel compelled to warn that adoption of Biden’s plan would have a negative economic impact.

And I’m not the only one raising alarm bells.

Professor Greg Mankiw of Harvard opined for the New York Times about Biden’s fiscal plan. He starts be noting that Biden’s plan is affordable.

President Biden and many congressional Democrats aim to expand the size and scope of government substantially. …People of all ages are in line to get something… If there is a common theme, it is that when you need a helping hand, the government will be there for you. …Western European nations have more generous social safety nets than the United States. The Biden plan takes a big step in that direction. Can the United States afford to embrace a larger welfare state? From a narrow budgetary standpoint, the answer is yes.

But affordable is not the same as sensible.

He points out that a bigger government will mean a smaller economy.

The costs of an expanded welfare state…extend beyond those reported in the budget. There are also broader economic effects. Arthur Okun, the former economic adviser to President Lyndon Johnson, addressed this timeless issue in his 1975 book, “Equality and Efficiency: The Big Tradeoff.” …As policymakers attempt to rectify the market’s outcome by equalizing the slices, the pie tends to shrink. …Which brings us back to Western Europe. Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 percent lower in France and 26 percent lower in the United Kingdom. …In other words, most European nations use that leaky bucket more than the United States does and experience greater leakage, resulting in lower incomes. By aiming for more compassionate economies, they have created less prosperous ones.

And less prosperous economies mean lower living standards, as honest folks on the left (such as Okun) openly admit.

That’s bad news for everyone, including lower-income people who theoretically are supposed to benefit from the various new and expanded redistribution programs in Biden’s fiscal plan.

Yes, they may get money from government in their pockets in the short run, but even a small reduction in economic growth will lead to larger income losses in the long run.

The bottom line is that the American experiment has been successful. Why put it at risk by copying nations that aren’t as successful.

After all, you don’t want to “catch up” to countries that are lagging.

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The Big Takeaway from a Look at Comparative Living Standards

A very persuasive argument against Biden’s fiscal agenda is that it makes no sense to copy the fiscal policies of European welfare states.

Indeed, I routinely share this column from January, which looks at three different measures of comparative prosperity – all of which show the United States is way ahead of nations on the other side of the Atlantic Ocean.

One of the three data sources is this comparison of “actual individual consumption” (AIC) in the member nations of the Organization for Economic Cooperation and Development.

We now have updated AIC numbers. Here’s a look at the OECD’s latest data. As you can see, people in the United States enjoy levels of consumption 50 percent above the average for developed nations.

The U.S. is even way ahead of oil-rich Norway and the tax havens of Luxembourg and Switzerland.

By the way, if you look at the OECD’s technical definition, AIC includes “government expenditure on individual consumption goods and services,” so the gap between the United States and other nations is not a statistical quirk based on whether government is (or is not) paying for things.

P.S. I can’t resist a couple of closing observations. If you click on the OECD’s link for AIC, you’ll notice that there are seven years of data, thus showing which nations are moving in the right direction or wrong direction (relative to other OECD countries).

• Eastern European nations tend to have the largest increases, as one might expect based on convergence theory (these nations fell way behind because of communist mismanagement). But the biggest increase was enjoyed by Lithuania, which also is very highly ranked for economic liberty. Not a coincidence.
• Nations that suffered noticeable declines include Japan (no surprise), along with Italy and Greece (even less of a surprise).

The moral of the story is that smaller government is part of the recipe for greater prosperity, even if that’s not the approach preferred by vote-buying politicians.

P.P.S. Click here is you want an estimate of how much economic damage would be caused by Biden’s fiscal agenda.

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The Negative Relationship between Welfare and Work

Ten days ago, I shared some data and evidence illustrating how redistribution programs result in high implicit tax rates and thus discourage low-income people from climbing the economic ladder.

Simply stated, why work harder or work more when an additional dollar of income only leads to a net benefit of 10 cents or 20 cents? Or why work harder or work more when you can actually wind up being worse off?

Or why work at all if the governments provides enough goodies?

But don’t ask such questions if you’re in the same room as Helaine Olen of the Washington Post. She is very upset that some people think welfare payments discourage work.

It’s a dangerous myth, this idea that government help causes some people to just loaf off. It’s also untrue. Reminder: Before the pandemic, most working-age people receiving benefits like food stamps worked. They just didn’t earn enough money. …the temporary child tax credit signed into law this year by President Biden demonstrates the opposite. It is an extraordinary success. Almost 90 percent of families with children under age 18 are eligible to receive a monthly check from the federal government through the end of the year. …Many other developed nations offer almost all residents a child allowance of some sort.

If you read the entire column, you’ll notice that she provides very little evidence, particularly considering her very bold assertion that a negative link between redistribution and labor supply is “a dangerous myth.”

Yet we know from the experience of welfare reform in the 1990s that work requirements did boost labor supply.

And don’t forget about the very recent evidence that turbo-charged unemployment benefits encouraged more joblessness.

We also have evidence from overseas showing that there’s a negative relationship between handouts and idleness.

Including research from the Netherlands and the Nordic nations such as Denmark. And the same is true in Canada. And the United Kingdom.

Ms. Olen seems primarily motivated by her support for permanent per-child handouts, as President Biden has proposed.

And she wants us to believe that everyone will continue to work, even if they can get $3000-plus for each kid, along with all the other goodies that are provided by Uncle Sam (often topped up by state governments).

For what it’s worth, I think she admits her real agenda toward the end of her column.

…an argument can be made that the children of the irresponsible deserve more support from us, not less. Children can’t push their parents to get with the work-and-education program. As a result, you’re not “helping” children if you insist on financially punishing their parents for not making an “effort.” …human infrastructure matters too.

In other words, Ms. Olen seems to share Rep. Ocasio-Cortez’s view that money should be given to people “unwilling to work.”

Which is how some of our friends actually view the world. They think there is a right to other people’s money. Which is why they support big handouts, including so-called basic income.

The bottom line is that Biden’s per-child handouts and other expansions of the welfare state clearly would make work less attractive for some people.

Not all people, of course, because it takes time to erode societal capital.

But why would we want a society where a growing number of people think it’s okay to live off of others?

P.S. There is scholarly research that redistribution programs lure older people out of the workforce.

P.P.S. There is also scholarly research showing redistribution programs discourage households from building wealth.

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Five Visuals to Understand the Biden-Pelosi Tax Plan

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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Biden and Pelosi’s Tax Plan Will Penalize Success

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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Quantifying the Damage of Biden’s Plan for Higher Taxes on Capital Gains, Part II

Yesterday’s column cited new scholarly research about the negative economic impact of Biden’s plans to increase capital gains taxation.

In today’s column, let’s start with a refresher on why this tax shouldn’t exist.

But if you don’t want to spend a few minutes watching the video, here are the six reasons why the tax shouldn’t exist.

I highlighted the final reason – fairness – because this is not simply an economic argument.

Yes, it’s foolish to penalize jobs and investment, but I also think it’s morally wrong to impose discriminatory tax rates on people who are willing to defer consumption so that all of us can be richer in the long run.

By the way, I should have included “Less Common Sense” as a seventh reason. That’s because the capital gains tax will backfire on Biden and his class-warfare friends.

To be more specific, investors can choose not to sell assets if they think the tax rate is excessive, and this “lock-in effect” is a big reason why higher rates almost surely won’t produce higher revenues.

In a column earlier this year for the Wall Street Journal, former Federal Reserve Governor Lawrence Lindsey explained this “Laffer Curve” effect.

…43.4% is well above the rate that would generate the most revenue for the government. Congress’s Joint Committee on Taxation, which does the official scoring and is no den of supply siders, puts the revenue-maximizing rate at 28%. My work several decades ago puts it about 10 points lower than that. That means President Biden is willing to accept lower revenue as the price of higher tax rates. The implications for his administration’s economic thinking are mind-boggling. Even the revenue-maximizing rate is higher than would be optimal. As tax rates rise, the activity being taxed declines. The loss to the private side of society increases at a geometric rate (proportional to the square of the tax rate) as rates rise. … The Biden administration is blowing up one of the key concepts that has united the economics profession: maximizing social welfare. It now believes in taxation purely as a form of punishment and is even willing to sacrifice revenue to carry it out.

By the way, Biden’s not the first president with this spiteful mindset. Obama also said he wanted to raise the tax rate on capital gains even if the government didn’t get any more revenue.

Democrats used to be far more sensible on this issue. For instance, Bill Clinton signed into a law a cut in the tax rate on capital gains.

And, as noted in this Wall Street Journal editorial on the topic, another Democratic president also had very sensible views.

Even in the economically irrational 1970s the top capital-gains rate never broke 40%… A neutral revenue code would tax all income only once. But the U.S. also taxes business profits when they are earned, and President Biden wants to raise that tax rate by a third (to 28% from 21%). When a business distributes after-tax income in dividends, or an investor sells the shares that have risen in value due to higher earnings, the income is taxed a second time. …The most important reason to tax capital investment at low rates is to encourage saving and investment. …Tax something more and you get less of it. Tax capital income more, and you get less investment, which means less investment to improve worker productivity and thus smaller income gains over time. As a former U.S. President once put it: “The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital from static to more dynamic situations, the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth of the economy.” That wasn’t Ronald Reagan. It was John F. Kennedy.

For what it’s worth, JFK wasn’t just sensible on capital gains taxation. He had a much better overall grasp of tax policy that many of his successors.

Especially the current occupant of the White House. The bottom line is that Biden’s agenda is bad news for American prosperity and American competitiveness.

P.S. If you’re skeptical about my competitiveness assertion, check out this data.

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Quantifying the Damage of Biden’s Plan for Higher Taxes on Capital Gains, Part I

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.

• He wants a radical increase in the tax rate on capital gains – from 23.8 percent to 43.4 percent, the highest burden in the world.
• He wants to impose capital gains tax on assets when people die, even if assets aren’t sold and there are not any actual capital gains.

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.

• First, inflation is obviously bad for citizens. But as I wrote more than 10 years ago, it’s profitable for governments.
• Second, even seemingly small differences in economic growth produce big differences in long-run living standards.

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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The Case Against Biden’s Per-Child Handouts

Joe Biden wants to dramatically expand the welfare state (more than $5 trillion of new spending over the next 10 years).

In this discussion with Ross Kaminsky of KHOW in Denver, I warn that the President’s proposal for per-child handouts is an especially bad idea.

In part, my opposition to per-child handouts is motivated by a desire to protect the welfare reform law enacted in the 1990s.

As I noted in the interview, that reform reduced dependency and it reduced poverty. And Biden’s plan, for all intents and purposes, will repeal that law since it will be possible to get big chunks of money while not working, simply by having kids.

But since I’m a public finance economist, I’m also motivated by opposition to a massive new entitlement program.

At the risk of understatement, we don’t need to spend another $1.1 trillion when we can’t even afford all the programs that already are burdening taxpayers.

Others share my concern about the impact of Biden’s plan.

Matt Weidinger dissects per-child handouts in an article for National Review.

This year, parents don’t need to have paid taxes at all to collect an annual allowance of up to $3,600 per child. …According to the New York Times, “more than 93 percent of children — 69 million” will benefit from the new federal giveaway. …No work is expected from parents collecting them. That’s reminiscent of welfare programs before bipartisan 1996 reforms that required parents to work or attend training in order to receive government checks. In fact, the biggest beneficiaries of the new child allowance will be parents who earn less than $2,500 per year — including those who don’t work or pay taxes at all. …As explained in a 2019 report proposing child allowances in the U.S., the idea comes “from other countries.” …American policy-makers could merely be following suit. But it seems more likely that they’re just searching for a palatable way to package their current explosion of new spending, a spin on a return to the failed policies of the past: bigger benefits, for more people, funded by others’ tax dollars. After all, calling such payments “welfare” just wouldn’t do, would it?

David Henderson of the Hoover Institution also explains why Biden’s scheme is misguided.

Child allowances are a bad idea. It’s wrong to forcibly take money from some and give to others simply because they have children. Moreover, child allowances would create increased dependence, are not targeted at the needy, could reduce the work effort of lower-income women, and would add to the already huge federal budget… Scott Winship, the director of poverty studies at the American Enterprise Institute…worries that child allowances will undercut the successful welfare reform of the mid-1990s and thereby cause a substantial number of unmarried low-income mothers to stop working. …in the 1990s he thought welfare reform would increase child poverty and he now admits that he was wrong. He writes that in the United States, “Poverty among the children of single parents fell from 50 percent in the early 1980s to 15 percent today, with an especially sharp decline during the 1990s.” …the urgent need is to get federal spending under control. This means slowing the growth of Medicare, Medicaid, and Social Security, the three programs most responsible for the coming federal deficits. But it also means not adding major new programs.

By the way, Henderson’s column focuses on Mitt Romney’s plan, but his criticisms apply equally (actually, even more) to Biden’s proposal.

I’ll close with some encouraging polling data that was shared by G. Elliott Morris of the Economist.

Biden’s plan has only 29 percent support (versus 43 percent opposition).

I suspect that polling data would look even better if the pollsters had been honest and asked whether people favored expanded redistribution payments based on number of kids (“refundable” tax credits are simply spending that gets laundered through the tax code).

The bottom line is that the United States already has a big problem with government dependency. Per-child handouts will make a bad situation even worse.

P.S. Some advocates of the handouts say we need to copy Europe, but they never explain why “catching up” is a good idea when Europeans have much lower living standards.

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The Biden-Bernie Budget Blowout

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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Biden’s Awful Plan for a Hybrid Death Tax/Capital Gains Tax

More than 10 years ago, I narrated this video explaining why there should be no capital gains tax.

The economic argument against capital gains taxation is very simple. It is wrong to impose discriminatory taxes on income that is saved and invested.

It’s bad enough that government gets to tax our income one time, but it’s even worse when they get to impose multiple layers of tax on the same dollar.

Unfortunately, nobody told Biden. As part of his class-warfare agenda, he wants to increase the capital gains tax rate from 23.8 percent to 43.4 percent.

Even worse, he wants to expand the capital gains tax so that it functions as an additional form of death tax.

And that tax would be imposed even if assets aren’t sold. In other words, it would a tax on capital gains that only exist on paper (a nutty idea associated with Sens. Ron Wyden and Elizabeth Warren).

I’m not joking. In an article for National Review, Ryan Ellis explains why Biden’s proposal is so misguided.

The Biden administration proposes that on top of the old death tax, which is assessed on estates, the federal government should add a new tax on the deceased’s last 1040 personal-income-tax return. This new, second tax would apply to tens of millions of Americans. …the year someone died, all of their unrealized capital gains (gains on unsold real estate, family farms and businesses, stocks and other investments, artwork, collectibles, etc.) would be subject to taxation as if the assets in question had been sold that year. …In short, what the Biden administration is proposing is to tax the capital gains on a person’s property when they die, even if the assets that account for those gains haven’t actually been sold. …to make matters worse, the administration also supports raising the top tax rate on long-term capital gains from 23.8 percent to 43.4 percent. When state capital-gains-tax rates are factored in, this would make the combined rate at or above 50 percent in many places — the highest capital-gains-tax rate in the world, and the highest in American history.

This sounds bad (and it is bad).

But there’s more bad news.

…that’s not all. After these unrealized, unsold, phantom gains are subject to the new 50 percent double death tax, there is still the matter of the old death tax to deal with. Imagine a 50 percent death tax followed by a 40 percent death tax on what is left, and you get the idea. Karl Marx called for the confiscation of wealth at death, but even he probably never dreamed this big. …Just like the old death tax, the double death tax would be a dream for the estate-planning industry, armies of actuaries and attorneys, and other tax professionals. But for the average American, it would be a nightmare. The death tax we have is bad enough. A second death tax would be a catastrophic mistake.

Hank Adler and Madison Spach also wrote about this topic last month for the Wall Street Journal.

Here’s some of what they wrote.

Mr. Biden’s American Families Plan would subject many estates worth far less than $11.7 million to a punishing new death tax. The plan would raise the total top rate on capital gains, currently 23.8% for most assets, to 40.8%—higher than the 40% maximum estate tax. It would apply the same tax to unrealized capital gains at death… The American Families Plan would result in negative value at death for many long-held leveraged real-estate assets. …Scenarios in which the new death tax would significantly reduce, nearly eliminate or even totally eliminate the net worth of decedents who invested and held real estate for decades wouldn’t be uncommon. …The American Families Plan would discourage long-term investment. That would be particularly true for those with existing wealth who would begin focusing on cash flow rather than long-term investment. The combination of the new death tax plus existing estate tax rates would change risk-reward ratios.

The bottom line is that it is very misguided to impose harsh and discriminatory taxes on capital gains. Especially if the tax occurs simply because a taxpayer dies.

P.S. Keep in mind that there’s no “indexing,” which means investors often are being taxed on gains that merely reflect inflation.

P.P.S. Rather than increasing the tax burden on capital gains, we should copy Belgium, Chile, Costa Rica, Czech Republic, Hungary, Luxembourg, New Zealand, Singapore, Slovenia, Switzerland, and Turkey. What do they have in common? A capital gains tax rate of zero.

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Biden’s Misguided Plan for a Bigger Welfare State

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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Tax Cartels Mean Ever-Higher Tax Rates

When President Biden proposed a “global minimum tax” for businesses, I immediately warned that would lead to ever-increasing tax rates.

Ross Kaminsky of KHOW and I discussed how this is already happening.

I hate being right, but it’s always safe to predict that politicians and bureaucrats will embrace policies that give more power to government.

Especially when they are very anxious to stifle tax competition.

For decades, people in government have been upset that the tax cuts implemented by Ronald Reagan and Margaret Thatcher triggered a four-decade trend of lower tax rates and pro-growth tax reform.

That’s the reason Biden and his Treasury Secretary proposed a 15 percent minimum tax rate for businesses.

And it’s the reason they now want the rate to be even higher.

Though even I’m surprised that they’re already pushing for that outcome when the original pact hasn’t even been approved or implemented.

Here are some passages from a report by Reuters.

Treasury Secretary Janet Yellen will press G20 counterparts this week for a global minimum corporate tax rate above the 15% floor agreed by 130 countries last week…the global minimum tax rate…is tied to the outcome of legislation to raise the U.S. minimum tax rate, a Treasury official said. The Biden administration has proposed doubling the U.S. minimum tax on corporations overseas intangible income to 21% along with a new companion “enforcement” tax that would deny deductions to companies for tax payments to countries that fail to adopt the new global minimum rate. The officials said several countries were pushing for a rate above 15%, along with the United States.

Other kleptocratic governments naturally want the same thing.

A G7 proposal for a global minimum tax rate of 15% is too low and a rate of at least 21% is needed, Argentina’s finance minister said on Monday, leading a push by some developing countries… “The 15% rate is way too low,” Argentine Finance Minister Martin Guzman told an online panel hosted by the Independent Commission for the Reform of International Corporate Taxation. …”The minimum rate being proposed would not do much to countries in Africa…,” Mathew Gbonjubola, Nigeria’s tax policy director, told the same conference.

Needless to say, I’m not surprised that Argentina is on the wrong side.

And supporters of class warfare also are agitating for a higher minimum rate. Here are some excerpts from a column in the New York Times by Gabriel Zucman and Gus Wezerek.

In the decades after World War II, close to 50 percent of American companies’ earnings went to state and federal taxes. …it was a golden period. …President Biden should be applauded for trying to end the race to the bottom on corporate tax rates. But even if Congress approves the 15 percent global minimum corporate tax, it won’t be enough. …the Biden administration to give working families a real leg up, it should push Congress to enact a 25 percent minimum tax, which would bring in about $200 billion in additional revenue each year. …With a 25 percent minimum corporate tax, the Biden administration would begin to reverse decades of growing inequality. And it would encourage other countries to do the same, replacing a race to the bottom with a sprint to the top.

I can’t resist making two observations about this ideological screed.

1. Even the IMF and OECD agree that the so-called race to the bottom has not led to a decline in corporate tax revenues, even when measured as a share of economic output.
2. Since companies legally avoid rather than illegally evade taxes, the headline of the column is utterly dishonest – but it’s what we’ve learned to expect from the New York Times.

The only good thing about the Zucman-Wezerek column is that it includes this chart showing how corporate tax rates have dramatically declined since 1980.

P.S. For those interested, the horizontal line at the bottom is for Bermuda, though other jurisdictions (such as Monaco and the Cayman Islands) also deserve credit for having no corporate income taxes.

P.P.S. If you want to know why high corporate tax rates are misguided, click here. And if you want to know why Biden’s plan to raise the U.S. corporate tax rate is misguided, click here. Or here. Or here.

P.P.P.S. And if you want more information about why Biden’s global tax cartel is bad, click here, here, and here.

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Deconstructing Biden’s Corporate Tax Cartel, Part II

Yesterday’s column explained why Biden’s proposed global cartel for corporate taxation was a bad idea.

In this clip from a recent panel hosted by the Austrian Economics Center in Vienna, I speculated on whether the plan would become reality.

I encourage you to watch the 4-minute video, but all you really need to know is that there are lots of obstacles to a cartel. Most notably, countries with pro-growth business tax regimes (such as Ireland, Estonia, and Switzerland in Europe) have big incentives to say no.

And if legislation is required in the United States, I assume that won’t be an easy sell, at least for GOP members.

But, as I warn in the video, the other side has hundreds of bureaucrats at the OECD and various finance ministries and treasury departments. And these taxpayer-financed mandarins have both the time and patience to chip away until they achieve their goals.

So it is critical that economists such as myself do a good job of educating policy makers about the adverse consequences of a tax cartel.

Which is why people should read this column by Veronique de Rugy of the Mercatus Center. Here are some key excerpts.

For several decades now, politicians around the world have tried to curtail tax competition to make it easier for them to increase the tax burdens on their citizens without them fleeing to other lower-tax jurisdictions. The best way to achieve their goal is to create a global high-tax cartel. …It’s no mystery why politicians don’t like tax competition. …The ability to shift residences and operations from country to country puts pressure on governments to keep taxes on income, investment, and wealth lower than politicians would like. Politicians in each country fear that raising taxes will prompt high-income earners and capital to move away. …Academic research shows that the imposition of higher corporate taxes is a highly destructive way to collect revenue because it lowers investment and, in turn, workers’ wages. It also increases consumer prices. Also, let’s face it, no nation has ever become wealthier and better through higher taxes and wealth redistribution.

This column for Prof. Bruce Yandle also is very informative. Here’s some of what he wrote.

It was with a feeling of deep disappointment…that I read Treasury Secretary Janet Yellen is…pushing to form an international cartel of governments that would implement a minimum corporate income tax rate across borders. …Efforts to cartelize taxation among nations will…, all else equal, lead to a higher-cost world economy. …Instead of searching high and low for ways to raise costs in the hope that more federal revenue and spending will follow, we should hope that our national leaders work harder to find better, more efficient ways to govern and serve the people. Doing so will give more people a much better chance at prosperity.

Amen. Tax harmonization was most accurately described by a former member of the European Parliament, who said it was a “thieves’ cartel.”

P.S. One of the worst aspects of the proposed tax cartel is that it will make it more difficult for poor countries to use good policy to improve living standards for their people.

P.P.S. Click here for my primer on tax competition.

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Deconstructing Biden’s Corporate Tax Cartel, Part I

When governments have to compete with each other, we get lower tax rates. That’s good for taxpayers and good for growth.

But politicians hate limits on their taxing power, which is why Biden has proposed a global tax cartel. Here are some of my remarks made yesterday on this topic.

If you don’t have time to watch the video, here are the key points I made when asked about the impact of Biden’s scheme.

• The tax cartel is a naked grab for more revenue.
• Higher taxes on businesses arguably are the worst way to collect more tax revenue. Indeed, both the IMF and OECD have research showing the destructive impact of higher corporate tax burdens.
• The global minimum tax will lead to a couple of additional bad consequences. 1) The 15 percent rate will be increased, and 2) Cartels will be created for other taxes.

I was then asked about whether there are better ways of generating revenue, particularly by having economic policies that lead to more growth.

This presumably was an opportunity for me to pontificate about the Laffer Curve, but I decided to make a more fundamental point about how politicians should not have more money.

• The burden of government spending already is excessive.
• The Rahn Curve shows that spending levels should be reduced.
• More taxes will lead to more spending.

I closed my remarks by pointing out that the world enjoyed an era of falling tax rates, which began when Reagan and Thatcher slashed tax rates about 40 years ago.

The average top personal tax rate in the developed world dropped from nearly 70 percent to just a bit over 40 percent.

The average corporate tax rate in industrialized nations dropped from nearly 50 percent to less than 25 percent.

Other nations didn’t copy the U.S. and U.K. because politicians were reading my boring articles about marginal tax rates. Instead, they only did the right thing because they were worried about losing jobs and investment.

One point I forgot to make (particularly in response to the second question) is that I should have explained that tax revenues as a share of GDP did not fall when tax rates were reduced.

Indeed, OECD data shows that tax revenues on income and profits (as a share of GDP) actually have risen during the period of falling tax rates.

The bottom line is that we need tax competition to protect us from “stationary bandits” who would produce “goldfish government.”

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