Topic: Tax and Budget Policy

Chris Christie’s Fiscal Record

Chris Christie joins the Republican field for president with an announcement at his former high school. Christie, the current governor of New Jersey, has worked to improve New Jersey’s fiscal situation. Christie earned a respectable grade of “B” on both the 2012 and 2014 Cato’s Fiscal Policy Report Cards, partly due to his repeated vetoes of the legislature’s tax increases.

Christie has vetoed personal income tax increases five times in six years, including just last week. The 2015 version of the tax increase would have raised the top personal income tax bracket from 8.97 percent to 10.75 percent on income over $1 million. It was coupled with a 15 percent surcharge on corporate income taxes. Together, these two tax increases would have raised $1.1 billion, an enormous tax hike.

Christie has tried to lower taxes on New Jersey residents several times. In 2012, he proposed a 10 percent cut to personal income taxes. He also has signed into law some business tax cuts, including a large package in 2011 that featured  an energy tax cut.

However, Christie has promoted misguided tax policies as well. This year, he pushed to increase the state’s Earned Income Tax Credit to 30 percent, up from 20 percent. He pushed to increase taxes on e-cigarettes in 2014. He supported a number of targeted tax credits to encourage companies to stay in New Jersey. He created the “Grow New Jersey” tax credit which provides $5,000 to companies for each job created or retained in the state. Such tax provisions made the code more complex and do not generate broad-based growth.

Greece Is Being Taxed to Death

American news stories about the Greek financial collapse frequently echo complaints of government employees and their supplicants about “budget cuts.”  In reality, Greek government spending rose from 44.6 percent of GDP in early 2006 to 54 percent in 2010 and 59.2 percent in 2014 (although this is partly because private GDP fell even faster than government spending).  Military spending is particularly lavish in Greece, second only to the United States within NATO as a percentage of GDP.  

What is rarely mentioned in all the one-sided confusion about “austerity” is the other side of the budget–namely, taxes. 

As if Greece didn’t have enough troubles, the Troika (International Monetary Fund, European Commission and European Central Bank) has promoted capital flight and a brain drain (exodus of skill and talent) by offering more and more loans to Greece in exchange for an increasingly suicidal blend of brutal taxes on both labor and capital.  The table shows what happened to key Greek tax rates in the past few years. 

  Current Previous
Corporate Tax Rate 26.00 20.00
Personal Income Tax Rate 46.00 40.00
Sales Tax Rate (VAT) 23.00 18.00
Social Security Rate 42.01 29.05

Marriage Policy Is a Mess. Here’s How to Make Sense of It.

Give Rand Paul points for trying: His opinion piece about marriage policy in the wake of Obergefell did better than many other Republicans have done. He did not call for resurrecting the dead – and politically toxic – Federal Marriage Amendment. He would appear to be actually considering the issues at stake, which is a good start.

But contrary to the promise of the headline (which he probably didn’t write anyway), the measures that Senator Paul recommends would not get government “out of the marriage business altogether.” Judging by what he actually wrote, local government would still control entry and exit from civil marriage, and civil marriage itself would apparently still continue to exist. Many federal consequences, like Social Security survivorship and the ability to sponsor an immigrant spouse, would presumably continue to flow from marital status - and they’d still be unavailable in any other way.

This isn’t such a terrible thing, necessarily. Marriage policy is really, really complicated. As long as we have a government, and as long as it’s making important decisions about our families and property, at least some parts of civil marriage may actually be worth saving. Marriage can serve as a protection against the state, one that (among lots of other things) keeps families together and makes the Social Security system run marginally more justly: If anyone deserves to recoup some of what the government takes by way of the payroll tax, it’s the widow of the worker who “contributed.” And if anyone is competent to sponsor a new citizen, it must be that new citizen’s spouse.

Puerto Rico Edges to Default

Greece is expected to default on its government debts tomorrow as its bailout package from the European Union (EU) expires. The country will also hold a referendum on Friday on whether to accept the latest round of terms from its EU funders. Greece continues to grab all the headlines, but there is another government closer to home that is in a similar situation: Puerto Rico. Over the weekend, the governor of the island announced that Puerto Rico is unable to repay its $70 billion in debt.

The Washington Post describes the situation:

A U.S. commonwealth with a population of 3.6 million, Puerto Rico carries more debt per capita than any state in the country. The island has been staggering under the increasing weight of those obligations for years as its economy has tanked, triggering an exodus of island residents to the mainland not seen since the 1950s.

Meanwhile, the government has raised taxes, cut government employment and slashed pensions in a futile effort to get its debt burden under control. Those actions have only slowed the acceleration of debt creation, while harming efforts to reignite the economy.

The island has several sources of debt comprising the $70 billion. Its debt-to-GDP ratio is 70 percent. The average U.S. state is closer to 15 percent. Rhode Island, the state with the highest debt-to-GDP ratio, is just under 20 percent. This infographic from the Wall Street Journal shows the magnitude of Puerto Rico’s outstanding debt.

The Washington Post reports that its debt is compromised of several large types:

The island’s web of debt includes general-obligation bonds, which Puerto Rico’s constitution says must be repaid even before government workers receive their pay.

But billions of dollars more in bonds were floated by public corporations that provide critical services on the island, including providing electric power, building roads and running water and sewer authorities. Beyond the bond debt, the island owes some $37 billion in pension obligations to workers and former workers.

The island’s electricity company is expected to miss a payment this week, according to the Wall Street Journal.

A larger challenge for Puerto Rico is that federal bankruptcy code prevents the island (and states) from filing bankruptcy. That gives Puerto Rico two choices. It can continue to work out a deal with creditors to refinance its outstanding debts, or it could push Congress to provide some sort of bailout.

The idea of state bailouts was discussed some in Congress in 2010 and 2011 as state budgets struggled to handle the effects of the Great Recession. The idea is just as bad now as it was then. Providing a bailout would reward Puerto Rican policymakers for their years of irresponsible choices and should be a non-starter in Congress.

Instead, Puerto Rico should continue to limit its spending to help lower its outstanding debt obligations. It will be an incredibly tough road to manage, but that is the cost of years of mismanagement and failing to acknowledge the realities of the island’s fiscal situation.

Bobby Jindal’s Fiscal Record

Bobby Jindal, Governor of Louisiana, will officially announce his run for the White House this afternoon, joining the ever-growing Republican field. Jindal hopes his experience cutting state spending and shrinking the state’s workforce will help propel him to the presidency. However, like the other governors whose records we have highlighted, Jindal’s fiscal record is not without faults.

Jindal took office in January of 2008, and 2015 will be his last year in office. He has scored well on the Cato Fiscal Policy Report Card on America’s Governors earning an “A” in 2010, and a “B” in both 2012 and 2014. All three report cards commend Jindal’s resolve to cut Louisiana state spending.

Since fiscal year 2009, the first full fiscal year of Jindal’s term, state general fund spending has decreased by 7 percent. Per capita state spending has fallen from $2,089 in 2009 to $1,883 in 2015, a decrease of 10 percent. This spending restraint is quite remarkable. For comparison, per capita state spending grew nationally by 8.5 percent during the same time period.

America’s Greek Fiscal Future

Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

House Budget Committee Testimony on Debt

I testified to the House Budget Committee yesterday on the history of federal debt and reasons to balance the budget. John Taylor, Jared Bernstein, and Ryan Silvey also testified.

The ratio of federal debt to the size of the economy has never been anywhere near as high during peacetime as it is today. Federal debt has often spiked during wars, but has always been reduced afterwards.

Before the 1930s, policymakers believed that high debt was immoral and bad for the economy. Those beliefs restrained the basic political instinct to spend more than the available revenue. Unfortunately, in recent decades, Keynesian theory has informed policymakers that deficit spending is beneficial. That has led to the “modern era of profligacy,” noted economist James Buchanan.

Federal borrowing imposes an unfair and damaging burden on future generations, and it should be avoided except during major crises such as wars. Paul Krugman and Steve Landsburg are completely mistaken when they urge people not to worry about government debt because we “owe it to ourselves.”

Cutting spending to balance the budget would reduce the damage from future taxes, increase macroeconomic stability, and potentially increase capital formation. Requiring the government to balance its budget would also curtail spending on lower-valued activities, create incentives to prune waste, and thus spur greater economic growth. 

The video and written testimony is here.