Topic: Tax and Budget Policy

Leon Trotsky on the Weapon of Taxation

“You ought not to forget that the credit system and the tax apparatus remain in the hands of the workers’ state and that this is a very important weapon in the struggle between state industry and private industry….

The pruning knife of taxation is a very important instrument.  With it the workers’ state will be able to clip the young plant of capitalism, lest it thrive too luxuriously.”

–Leon Trotsky, The First 5 Years of the Comintern, Vol 2 (London, New Park, 1945) p. 341

Scott Walker’s Fiscal Record

Monday is Scott Walker’s turn to join the crowded presidential field. Walker has served as Wisconsin’s Governor since 2011. He rose to prominence quickly after the State Capitol in Madison was overtaken by protesters opposing his labor reforms. Walker has passed a number of government-limiting measures, earning a “B” on Cato’s Governor Report Card in both 2012 and 2014, but he continues to support higher spending.

When Walker took office Wisconsin had a $3.6 billion budget deficit and needed urgent reform. His first big legislative achievement was Act 10 which overhauled the state’s collective bargaining rules and benefit programs for state employees. Under Act 10, state employees must contribute 12 percent of premium costs to their state-provided health insurance plan. In addition, pension contributions are now split evenly between the employee and the employer. In 2015 that contribution was 6.8 percent of income.

Act 10 also limited collective bargaining subjects to base wages, removing the ability to negotiate on overtime, pension, and health benefits. It has saved taxpayers in Wisconsin $3 billion since its passage in 2011.

Walker has also passed several tax cuts while in office. In 2013 Walker signed a plan that cut the state’s personal income tax by almost $500 million a year. The plan consolidated the state’s five income tax brackets into four brackets, with the larger cuts skewed towards the lower end of the income scale. In 2014 the state made further cuts to the lowest income tax bracket. In total, the lowest bracket fell from 4.60 percent to 4 percent. Work is still needed. Wisconsin’s total income tax rate of 7.65 percent is still one of the highest in the country, and its Business Tax Climate is a discouraging 43rd in the nation, according to the Tax Foundation. 

Walker has had success on labor and tax issues, but spending continues to grow rapidly in Wisconsin. From fiscal year 2012 to fiscal year 2015, Wisconsin state spending grew 15 percent. For comparison, state spending grew by 8 percent nationally during this period.  So while Walker turned a $3.6 billion deficit when he took office into an $800 million surplus by June 2013, he has continued to spend excessively.  His budget for fiscal years 2016 and 2017 included another $1 billion in increased spending. 

Walker’s policies have targeted numerous areas of Wisconsin’s budget. He reformed the state’s labor laws as they related to state employees and saved $3 billion in four years. He cut personal income taxes. Overall, his actions have helped restore fiscal sanity to Wisconsin. But voters concerned about Washington’s debt and profligacy should be aware Walker’s record of increasing state spending even while cutting taxes.

Washington Helped Create Puerto Rican Crisis

On Monday, I highlighted the fiscal crisis in Puerto Rico. The island’s governor announced that it cannot fully pay back its $70 billion in outstanding debt. Much of the attention this week has focused on how Puerto Rico has mismanaged its finances. San Juan has delayed necessary reforms. But missing in most news articles is the role that Washington, D.C. has played in creating the mess.

Over at Fox News, I have a new piece describing how the federal government has contributed to the island’s problems.

For instance, the federal minimum wage contributes to Puerto Rico’s challenges:

The federal minimum wage of $7.25 an hour applies on the island. The minimum wage’s effects are well-known, but it has disproportionate influence in Puerto Rico. The island’s median income is only 40 percent of the mainland. Twenty-eight percent of Puerto Rico residents earn $8.50 an hour or less, compared to 3 percent on the mainland. So the minimum wage has greater impact in Puerto Rico. It would be like if the mainland had a $19 an hour minimum wage. The high minimum wage raises the cost of employment and prices many employers out of the market, causing unemployment to rise and thus tax revenue to dry up.  The minimum wage is a partly why the island’s unemployment rate is almost three times that of the mainland.

Similarly, the 1920 Jones Act limits Puerto Rico’s ability to import and export goods efficiently:

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.