Topic: Tax and Budget Policy

Balanced-Budget Amendment to the Constitution

Presidential candidate Rand Paul has announced his support for a balanced-budget amendment (BBA) to the U.S. Constitution. This is an old idea, but a good idea. A BBA has been proposed in Congress as far back as 1936. In 1982 the Senate passed a BBA by a vote of 69-31, but it failed to get the needed two-thirds approval in the House. In 1995 a BBA passed the House by a 300-132 margin, but it fell one vote short of passage in the Senate.

Today we need a BBA more than ever. Historical budget data show that federal politicians have become increasingly irresponsible over the years. The bipartisan 19th century belief that balancing the budget was morally proper and economically prudent disappeared during the 20th century. As the chart below shows, from 1791 to 1929 the federal government balanced its budget in 68 percent of the years. But from 1930 to 2015, the government balanced its budget in just 15 percent of the years.

What changed in the 1930s? The unfortunate rise of Keynesian economics encouraged politicians to think that deficit spending helped the economy. Also, the 1935 creation of Social Security launched the government into the era of “entitlement” spending, which is spending that is on automatic pilot. Entitlement spending grows relentlessly year after year without politicians having to vote for the increases. It allows politicians to pretend that they are not responsible for the resulting deficits and debt.  

A legal cap on overall federal spending would be a better way to restrain the budget than a BBA. But either way, let’s hope that Paul can spur a renewed debate on fiscal control. We need it: despite today’s growing economy, the current administration recently proposed a budget that has half-trillion-dollar deficits as far as the eye can see. From a historical perspective, that sort of disregard for fiscal prudence is remarkable. In his 2014 book, America’s Fiscal Constitution, Democratic politician and financial executive Bill White argued that until recently, aiming for balanced budgets was part of an “informal constitution” that both parties understood.

Another 2014 book, A Nation Wholly Free, examined the drive to eliminate the federal debt under President Andrew Jackson in the 1830s. Author Carl Lane found,

Debt freedom, Americans in the Jacksonian era believed, would improve the material quality of life in the United States. It would reduce taxes, increase disposable income, reduce the privileges of the creditor class, and, in general, generate greater equality as well as liberty.

Those early Americans were right about debt freedom. A frugal government that balances its books helps to secure liberty and benefits average citizens. Hopefully, Paul and other reform-minded candidates can revive such sound fiscal thinking in Washington.

Republicans Are Poised to Raise Spending

Republicans control both chambers of Congress. Republicans trumpet their desire to cut federal spending and control the growth in entitlement programs, but a number of their actions over the last month suggest otherwise.  

First, Congress is supporting large increases to defense spending. The Budget Control Act (BCA) of 2011 sets defense spending at $523 billion for fiscal year 2016, but both chambers want to provide more funding while getting credit for honoring its previous promises. Each chamber authorized $96 billion in additional funding for 2016, using the Overseas Contingency Operations (OCO) slush fund to get around BCA spending caps. That exceeds the $58 billion requested by President Obama for OCO. It also exceeds the $74 billion spent in OCO for fiscal year 2015. In total, Congress will authorize $619 billion in defense spending for fiscal year 2016.

Second, Congress is set to increase spending with its repeal of the Sustainable Growth Rate (SGR). The SGR, passed in 1997, attempts to limit the growth in Medicare spending by cutting payments to doctors if Medicare grows too quickly. Historically, Congress has been hesitant to actually allow the payment cuts to go into effect, so it instead has delayed the cuts 17 times in 13 years.

House Speaker John Boehner and House Minority Leader Nancy Pelosi negotiated a deal in March to eliminate the SGR permanently. In exchange, small reforms to Medicare would be made. However, the deal would expands the deficit. The Congressional Budget Office estimated that the SGR repeal package would increase the deficit by $141 billion over 10 years.

The House  passed the deal with an overwhelming margin, 392–37, throwing fiscal restraint out the window. The Senate is expected to consider the legislation next week. Several senators are pushing for the Senate to pay for the bill before passing it, but their success is far from certain.

Third, Rep. Paul Ryan (R-WI), chairman of the House Ways and Means Committee, is suggesting that Congress could support higher spending than in its budget resolutions. Ryan voiced support for a deal between Congress and the president to hike spending. As then-chairman of the Budget Committee, he negotiated a similar deal in 2013 that increased spending for fiscal years 2014 and 2015, but promised that spending cuts would resume after that. At the time he said, “We are not turning the sequester [automatic spending cuts] off, we are just giving a little bit of short-term relief for the sequester.” Now, he is suggesting providing more sequester relief for fiscal year 2016, the first year following his original deal.

Ryan has a long history leading the House GOP Conference on budgetary issues. He likely represents the majority view on the issue. Further, the White House has said that it will not support spending bills that match the budget resolution amounts, suggesting that a deal needs to be struck. But Ryan’s statements basically concede the negotiations before they even begin. Higher spending is coming.

It is less than 100 days into the new Republican Congress, and Republicans are already disappointing fiscally conservative voters on spending restraint. Multiple actions over the last month suggest that Republicans may be no more committed to spending restraint than President Obama and the Democrats.

IRS Budget Cuts and Tax Filing

For taxpayers needing IRS help, this year’s filing season could be a nightmare. The Washington Post today reports on the long lines at IRS offices. The newspaper suggests that five years of Republican budget cuts are to blame, even though Democrats control the White House and, until recently, the Senate. But, whoever is at fault, the IRS commissioner is correct that his agency’s service is “abysmal.”

Let’s take a closer look at those alleged budget cuts. Using data from the OMB budget database, I split total IRS outlays into two activities: administration and handouts. Administration includes tax return processing, taxpayer help, enforcement, and other bureaucratic functions. Handouts are mainly refundable tax credits, particularly the earned income tax credit, child credit, and Obamacare exchange subsidies, which began in 2014.

The chart shows that the IRS budget for handouts has skyrocketed (red line). The IRS has become a huge welfare agency. Handouts quadrupled from $30 billion in 2000 to an estimated $121 billion in 2015. Handouts have spiked the past two years because of Obamacare exchange subsidies of $13 billion in 2014 and an estimated $29 billion in 2015. (Data for 2015 are the president’s estimates).

How about IRS administration costs? They have been relatively flat (blue line). They grew from $8.4 billion in 2000 to a peak of $12.3 billion in 2011, and then they dipped to an estimated $11.3 billion in 2015.

Familiar Yet Forgotten Tax Lessons from Ancient Greece and Rome

In Ancient Greece, “The politicians strained their ingenuity to discover new sources of public revenue… . The results of these imposts was a wholesale hiding of wealth and income, Evasion became universal, goods were seized, men were thrown into jail. But the wealth still hid itself, or melted away.”

–Will Durant The Life of Greece, Simon and Schuster, 1939. P. 66.

 In ancient Rome; “taxation rose to such heights that men lost incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. The government issued decrees binding the peasant to his field and the worker to his shop until all his debts and taxes had been paid. In this and other ways medieval serfdom began.”

–Will, and Durant, Ariel. The Lessons ofHistory, Simon and Schuster, 1968.

Over-Budget Hospitals

The Veterans Health Administration (VHA) is plagued with problems. Veterans wait months for medical care and have few options for accessing non-VHA providers. In addition to all of the issues relating to providing health care, construction of VA medical facilities is mismanaged, which burdens taxpayers with billions of dollars in extra costs.

However, the VHA might be trying to change direction. Glenn Haggstrom, the individual who oversees VHA construction, “stepped down” last week after being put under internal investigation. Hopefully, he will be replaced by a reform-minded leader. In 2013 the Government Accountability Office (GAO) found a host of problems at the four largest VHA construction projects, which are located in Denver, Orlando, New Orleans, and Las Vegas. All four projects had major cost overruns and schedule delays.

If Poor Nations Want Economic Convergence and Capital Accumulation, They Need Good Policy

There’s a “convergence” theory in economics that suggests, over time, that “poor nations should catch up with rich nations.”

But in the real world, that seems to be the exception rather than the rule.

There’s an interesting and informative article at the St. Louis Federal Reserve Bank which explores this theory. It asks why most low-income and middle-income nations are not “converging” with countries from the developed world.

…only a few countries have been able to catch up with the high per capita income levels of the developed world and stay there. By American living standards (as representative of the developed world), most developing countries since 1960 have remained or been “trapped” at a constant low-income level relative to the U.S. This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence. Specifically, the Solow growth model suggests that income levels in poor economies will grow relatively faster than developed nations and eventually converge or catch up to these economies through capital accumulation… But, with just a few exceptions, that is not happening.

Here’s a chart showing examples of nations that are – and aren’t – converging with the United States.

Restoring the Old-Fashioned Budget Virtue of … FDR and Truman?!?

This is a column I never expected to write. That’s because I’m going to applaud Presidents Franklin Roosevelt and Harry Truman.

This won’t be unconstrained applause, to be sure. Roosevelt, after all, pursued awful policies that lengthened and deepened the economic misery of the 1930s. And, as you can see from this video, the “economic bill of rights” that he wanted after WWII was downright malicious.

Truman, meanwhile, was a less consequential figure, but it’s worth noting that he wanted a restoration of the New Deal after WWII, which almost certainly would have hindered and perhaps even sabotaged the recovery.

But just as very few policymakers are completely good, it’s also true that very few policymakers are totally bad. And a review of fiscal history reveals that FDR and Truman both deserve credit for restraining domestic spending during wartime.

In a new column I wrote for The Hill, I specifically responded to the cranky notion, pursued by Bernie Sanders, the openly socialist U.S. senator from Vermont, that there should be tax hikes on the rich to finance military operations overseas.

The idea has a certain perverse appeal to libertarians. We don’t like nation-building and we don’t like punitive tax policy, so perhaps mixing them together would encourage Republicans to think twice (or thrice) before trying to remake the world.

But “perverse appeal” isn’t the same as “good policy.”