Economics – On Liberty Watch

Progressive Good Crime

Coinciding with the Biden Administration’s push for higher taxes on wealthy individuals and a greatly expanded IRS, ProPublica published documents that purport to show private tax information of several high profile billionaires including Jeff Bezos, Bill Gates, Michael Bloomberg and others.

Leaking these documents is, of course, illegal. And just like the Lois Lerner episode, no one will be punished for committing this crime. That’s because in the progressive mind this is Good Crime. Chances are, the perpetrators will never be revealed.

ProPublica has said that it doesn’t know the source of the documents. Fat chance of that, by the way. If ProPublica doesn’t know its source, there is be no way they could have authenticated the documents or determined their accuracy. But they printed the documents anyway, undoubtedly because it furthers the story—fiction really—that the rich don’t pay their “fair share”.

Among other stunning revelations, the documents, if accurate, show that (1) wealthy individuals (like everybody else) didn’t pay income taxes when their reportable income was zero; (2) wealthy individuals (like everyone else) didn’t pay capital gains taxes in years when they didn’t realize any capital gains by selling assets, and (3) wealthy individuals used plenty of lawyers and accountants to make sure that they legally minimized their tax bills. Which is to say that the behavior of these individuals was both legal, proper and rational.

On the other hand, amid all the faux indignation, it should be noted that the documents that were leaked were leaked illegally. In so doing the leakers (1) violated the privacy of those whose documents were leaked and (2) demonstrated for the umpteenth time the gross incompetence of the IRS when it comes to guarding citizen privacy. More likely it is worse; the IRS simply followed the orders of its political masters to weaponize the agency, as in the recent case of Lois Lerner. Which is not to leave out Richard Nixon and Lyndon Johnson.

As to the substance of the matter: Congress is supposed to determine tax policy. For some reason or other all those lefties wailing about “saving our democracy” don’t seem to think much of our democratic processes. If they did they wouldn’t be cheering on the clearly illegal leaking of documents designed to gin up outrage against success while running around the legislative process.

As it turns out, progressives are at least half-right when they assert that the rich do not pay their fair share of the tax burden. The rich pay far too much. It is the middle class that is undertaxed.

Consider the following statistics, using the latest available data. In 2017 the top 50% of taxpayers paid 97% of all federal income taxes. They bottom 50% paid the remaining 3%. The top 1% paid 38.5% of individual income taxes; the bottom 90% paid only 29.9%. The top 5% paid 59%; the top 10% paid 70%. As these numbers make clear, the tax income burden is shouldered by the wealthy, not by the middle class. These data are available in greater detail here.

The middle class, as it turns out, is by far the greater net beneficiary of federal largesse. Lower income Americans on balance receive net cash benefits from the government. That is offset by the junky schools they have to put up with and inadequate police protection in poor neighborhoods. All the cash payments do is create a permanent dependent class. This is the vote buying operation that is the hallmark of progressive politics (tax, spend and vote). It remains firmly in place, and has so since the days when it was instituted by FDR.

If progressives were truly interested in tax fairness, which they manifestly are not, they would specify ahead of time what tax shares would constitute fairness for the different deciles of the income distribution. But of course they never do that. Moreover, there is a simple way to ensure that everybody pays the same tax rate. The tax code could be amended so that everyone earning $25,000 per year or more would be required to pay 17% of their income in tax. No exemptions, no deductions. Period.

The mere hint of a flat tax where everybody pays the same rate would have progressives screaming bloody murder along with tax lawyers, accountants and lobbyists. I should say other lobbyists. The reason is simple. Progressives are not interested in either tax fairness or tax efficiency. What they are really interested in is command-and-control of the nation’s economy. Progressives want to use the police power of the federal government to commandeer private resources so that they can regulate and transform America into a little socialist utopia. No matter how long they have to goose-step their way toward the goal.

JFB

Peak Biden?

When President Biden released his budget proposal this past Friday he listed his priorities in the following statement. (The budget document can be found here.)

Biden’s list of priorities is typical in that it studiously avoids talking about trade-offs. Everything is a priority. Not only that, the priorities are expressed in focus group tested aspirational language meant to please the progressive base while remaining vague enough to avoid measurable results. Biden will for instance, take action, control, provide, tackle, advance, reform and restore. From a policy perspective this is meaningless blather.

Which begs the question: Why did the Administration decide to release this on the Friday afternoon before Memorial day when it would receive minimal coverage? Larry Kudlow provides a plausible explanation. The accompanying numbers in the tables of the OMB budget release give away the game.

In its own budget documents the Biden Administration admits (1) that it is planning for an increase of $14.5 trillion in accumulated debt by the year 2031; (2) it assumes that federal government outlays will increase to 24.5% of GDP through 2031 versus a long term average of about 19.3%, and (3) after a Covid re-opening spurt, real GDP growth will range from 1.8% to 2% from 2023 through 2031.

Let’s think about the implications of all this. The Biden Administration intends to spend gargantuan amounts of money, in the process greatly expand the size and scope of both the federal government and the national debt. For its efforts the Biden Administration projects that it will match the Obama Administration recovery. So how does the Obama record stack up?

1.Measured by real GDP growth, job creation or wage expansion, the Obama record was somewhere between subpar and pretty miserable.

2. From the expansion that began in June 2009, real GDP grew at only 2.1% per annum, the slowest growth rate during an expansion since 1949.

3. Net job creation grew by 8.6% during the Obama years. Total employment grew by more than that, and sometimes substantially more, in 5 of the prior 10 expansions since 1949.

4. Similarly, inflation-adjusted wages increased by more in 5 of 10 prior recoveries since 1949. More detailed data is available here.

So here we have a situation in which the Biden Administration intends to upend much of American society by (1) significantly raising marginal tax rates, (2) substantially re-regulating great swaths of the economy, (3) launching new fronts in the culture wars and (4) using federal power in an attempt to equalize outcomes across groups defined by race and sex rather than by effort and opportunity in complete contravention of the bedrock Constitutional principle of equality before the law.

And for all this, by its own admission, the Biden Administration expects the results to be mediocre at best. Actually, the Administration’s policy agenda virtually guarantees poor results if the Congress is foolish enough to pass it.

The likely result of all this is that economic performance will fall short of even the low expectations of the Administration. Add to that a widening gap between promises and results and the stage is set for rising populist discontent, increased racial tensions, decreasing civility and further erosions of individual freedom.

But think of the bright side. This could be Peak Biden.

JFB

The Tax Reform That Isn’t

It is now tax reform season, which means that politicians are poised to unleash even more nonsense on the public than is customary. So perhaps it makes sense to frame some of the underlying issues that are involved. First and foremost: There is not a snowball’s chance in hell that taxes—properly understood—are going to be reduced. I repeat: there is no chance—none, nada, zero—that the total tax burden is going to be reduced. It is merely going to be redistributed, and to boot the total burden next year will be larger than this year, and the same condition will hold the year after that, and the year after that. Until the unavoidable default.

To see this it is imperative to define terms and do it properly because words that politicians and their sycophants use are designed to obfuscate rather than clarify. This, by the way, is not unique to arguments about the tax code. They do it all the time, pretty much about everything. So: how should we define the tax burden?

Definition: The tax burden is equal to the resources that government commands that would otherwise have remained in the private sector. That means that the real tax burden is not simply equal to the cash government collects from income taxes, sales taxes, other excise taxes, user fees, payroll taxes and various other sources. The real tax is equal to the total amount of money government spends plus the cost of regulatory compliance. This definition differentiates between the government’s demand for economic resources and how it finances the demand.

The Income Statement: Revenues are equal to the cash taxes government collects directly plus the regulatory compliance costs it imposes on business that government would otherwise have to bear if it did the job itself. Expenses are cash disbursements. But government spends far more cash than it collects in direct taxes, so it has to make up the difference, which it does by borrowing the difference.

The Balance Sheet: Here is where it gets exceptionally tricky, because the government doesn’t publish a balance sheet. And it doesn’t do so for a very good reason. The Government is insolvent and doesn’t care to admit it.

Let’s consider: conceptually speaking what would the government’s balance sheet look like if it published one?

Assets = Implied taxing power, otherwise known as the tax base.

Liabilities = All the payments it has promised to make in the future. These include debt service and transfer payments, the largest being Social Security, Medicare and Medicaid. The present value of these unfunded liabilities (plus accumulated debt on the books) ranges from a relatively modest estimate of $100 trillion (from the optimists) to about $200 trillion from the not-so-optimistic. According to the Fed, total net worth of U.S. households is about $85 trillion. That leaves us short somewhere between $15 trillion and $115 trillion. (Corporate assets are largely included in household wealth through stock ownership.)

Since U.S. GDP is about $20 trillion, there is no possible way that the U.S. can grow its way out of this. In fact, its liabilities in the form of promised entitlement payments are growing at an increasing rate of speed, so the situation is getting worse rather than better.

The only reasonable conclusion is that the U.S. is inevitably going to default on its promises. The only question is when and to whom.

This conclusion is both inescapably correct and studiously avoided. Progressives have spent the last 100 years or so building a welfare state that is careening toward default by obfuscating the nature of the problem, which is, as Margaret Thatcher put it, Socialists eventually run out of other people’s money to spend.

Consider the current discussion over “tax reform” currently taking place. The discussion will carefully ignore the indisputable fact that total government spending and therefore the tax burden, is going to rise. The entire discussion about tax reform / tax relief is entirely distributional without so much as a nod to the underlying structural problem.

The Republicans will claim, as they always do, that reducing marginal tax rates a few percentage points will lead to an increase in economic growth sufficient to offset the loss from lower rates. They will propose taking a smaller piece of a much bigger pie. The problem is that there is scant evidence that the modest Republican reforms will have the desired effect because they are not going to address the underlying entitlements beast, which is in the process of devouring everything in its path.

For their part, the Democrats are still intent on increasing spending for entitlements and “paying” for it by taxing “the rich”. Here we note in passing that Progressives have exactly two solutions for all problems. Tax the rich, and appeal to “the international community”.

But let’s go on from here. The great project of building the welfare state, seemingly paid for by taxing the rich, has created a situation in which the financing of the welfare state is divorced from the actual cost of running the welfare state, at least in the public mind. And inevitably that means the public will insist on getting more and more “free” stuff. And because Progressives have convinced otherwise sensible people that they are victims of corporations and the rich, they will continue to demand all this apparently free stuff as a matter of right. It will not end well. They are rapidly running out of other people’s money to spend.

JFB

The Trump Tax Plan

As promised, the Trump Administration released the outline of its tax plan. Predictably and amusingly enough, it was greeted by cries of horror and anguish by Progressives. It would appear that the Trump plan would allow American taxpayers to keep more of their own money. This simply will not do. Bernie Sanders, Chuck Schumer and Tom Perez have made much better plans for it. Look at the job they have done already.

Before addressing the plan, let’s take a look at some facts, to put all this in context. First, let’s define the word “tax”. As Milton Friedman never tired of saying, federal taxes are not simply the checks that taxpayers send to the government. Taxes are equal to the resources that the government consumes. That is best measured, however imperfectly, by government spending. Taxpayer checks are merely part of the financing package. Borrowing to cover deficits is another. The real tax burden is a combination of the two. (It’s actually more, when you toss in unfunded mandates and regulatory compliance, but let’s leave that aside).

As the chart illustrates, spending is far more variable than tax receipts. In fact the standard deviation of receipts as a percent of GDP is 1.1% around a mean of 17.4%. That compares to a standard deviation for spending of 1.6% around a mean of 20.3%.

This still underestimates government resource use because it does not adequately capture things like regulatory compliance costs. Nor does it include loan guarantees or unfunded liabilities like Social Security.

This brings two subsidiary questions to the fore. Who pays the taxes (defined narrowly in terms of revenue collections), and where is the money spent? The answer to the question of who pays the taxes is easy. It is the much-maligned rich. In 2013 (using the latest data available) the upper 1% of pre-tax income earners paid 38% of all federal income taxes; the upper 10% paid about 63%, and the upper quintile paid 88%. By contrast the bottom quintile paid a negative rate of 4%. In fact the bottom 40% got more back from refunds and “refundable credits” than they paid in.

These data are available from the Joint Economic Committee of Congress at this link.

So where does all that money go? Transfer payments and interest on the debt. In 2014, the government spent $3,883 trillion. Of that, $2,420 trillion (62%) went to transfer payments, mostly for Social Security ($834 billion) and Medicare ($587 billion). Interest payments on the debt amounted to $442 billion. All told transfer payments and interest on the debt captured about 74% of all federal dollars. These data are available at this link at the Bureau of Labor Statistics.

For all the talk about investing in infrastructure, the reality is that the modern Administrative state is really about income redistribution. Specifically what we are dealing with is an extraordinarily progressive tax-spend-and-vote regime that has created an entitlement culture that is all too ready to punish success and reward failure. And it has produced plenty of policy failure.

The Trump Administration proposes to cut both individual and corporate tax rates. Individual rates would go to a 3-bracket system (10%, 25% and 35%), and the corporate rate would go to 15%. The Trump plan would eliminate most deductions, except for the mortgage deduction and charitable giving. The plan also eliminates the inheritance tax.

Democrats are up in arms because the Party of Science refuses to acknowledge that flattening and simplifying the tax code has the potential to produce enormous gains in the private sector through greater efficiency, investment and innovation. They would rather continue to subsidize the failing models of the early 20^th century—like the public school system and its teachers unions, for instance. But as tax reform goes, the Trump plan gets only a B minus. That is because the Trump plan—outline really—is a change on the margin when radical surgery is needed. A much better plan would be a flat rate of about 18% for all with incomes over something like $30, 000, with no deductions or exemptions at all, including the home mortgage deduction and charitable giving. Nor should the federal government be in the business of subsidizing child care through the tax code, as the Trump plan promises to do.

But the Trump plan is better than nothing. That said, among the worst arguments against the proposal is that the plan has to be “paid for”. Taxes represent government’s use of what would otherwise be private resources. The phrase “paying for” a change in tax rates under static analysis (which is what the CBO is required to do) is simply an attempt to redistribute the burden without addressing the underlying problem. A real reform of public finances would reduce the total amount of government spending, privatize Social Security and Medicare, and reduce and flatten tax rates.

That’s what real change would look like. Absent that, we are still headed down the path chosen by Greece.

JFB