How do the U.S. public’s beliefs about the federal debt affect their attitudes to government spending and taxation?
That is the question a new paper by economists Christopher Roth, Sonja Settele, and Johannes Wohlfart seek to answer, using a range of online experiments for a representative sample of the population. Using four different experiment designs, they first elicit people’s beliefs about the debt‐to‐GDP ratio compared to various historical or international averages. Then they tell a sub‐sample what the actual debt‐to‐GDP ratio is and compare this treatment group’s attitudes towards government spending and tax with a control group, as well as assessing the treatment group’s relative propensity to donate to Cato or sign a petition for a balanced budget amendment.
The results are interesting:
- Most people underestimate the degree of indebtedness of the US government. The median estimate is around 60 percent, far below the actual debt‐to‐GDP (104 percent at the time). More than 90 percent of respondents understated the level of debt, even when given a historical or international “anchor.”
- People who are told the true level of debt become more likely to consider current government debt too high and be supportive of cutting it. The relative preference for debt reduction in the treatment group compared to the control group is equivalent to 91 percent of the greater support for debt reduction among Republicans than among Democrats.
- Respondents with prior beliefs of a low debt‐to‐GDP ratio below 50 percent respond most strongly to the information in terms of their views on debt reduction and government spending.
- Data from a four‐week follow up survey suggests that people update their beliefs about the debt given the information: the median belief in the treatment group is that the debt‐to‐GDP ratio is 75 percent. What’s more, beliefs are more precise for both people that under‐ and over‐estimated the debt, suggesting genuine learning.
- The treatment group which learns about the true level of government debt becomes significantly less supportive of government spending, including in all subcategories – defense, infrastructure, schooling, social security, social insurance, health and the environment. Looking at a joint spending index, the information shifts policy preferences by one third of the preference gap for overall spending between Republicans and Democrats.
- Though people who learn about the debt become more likely to back higher taxes in theory, support for specific tax increases – income tax, wealth tax, and estate tax – are weaker and less robust. The authors conclude that the extra knowledge does not strongly change support for tax increases.
- The treatment group are more likely to donate a higher amount to the Cato Institute from an endowment of funds they are given. But treated respondents do not become significantly more willing to sign a petition in favor of introducing a balanced budget rule.
- The treatment group’s beliefs about the amount of government debt and their attitudes towards debt reduction and government spending persist in a four‐week follow up to the study.
- Respondents who receive information about the level of government debt become significantly more likely to agree that the current public finances are not sustainable.
The authors conclude:
our findings indicate that information about statistics that are relevant for future government spending and taxation can persistently change people’s attitudes towards current levels of spending…our finding that voters demand higher levels of spending when they underestimate the level of debt suggests that biased beliefs could contribute to the accumulation of high levels of debt as observed in many industrial countries. Finally, our results suggest that support for spending increases could diminish during times in which voters update their beliefs about government debt…
This might explain one puzzle from recent years. The results suggest that the decline in the salience of the debt issue doesn’t so much reflect an ease among the public with increased borrowing as the opposite: a lack of focus on the high relative level of debt has fed through into beliefs about debt levels that are biased downwards, making people tolerant of higher spending.
President Trump came into office promising spending cuts and debt reduction, but so far he has delivered the opposite. His new budget promises cuts, but his record over the first four years is fairly spendthrift compared to past presidents.
The chart shows the total real (inflation‐adjusted) spending increase over the first four years of each president. For Trump, I’ve assumed he gets the 2021 spending he proposes in his new budget. Thus, Trump’s spending increases are fiscal 2021 divided by fiscal 2017.
The nondefense figures include discretionary and entitlement spending.
Here’s a quick take on the presidential records:
Carter and Bush II were big spenders across the board.
Reagan was fairly successful at limiting nondefense spending increases.
Bush I and Clinton benefited from defense spending falling after the Cold War. Bush I was a big spender on nondefense programs.
Obama pushed to pass $800 billion in stimulus spending his first year. Luckily, most of it was temporary and petered out in subsequent years. Thus, Obama’s nondefense looks frugal in the chart, but it mainly excludes his misguided stimulus spending. Also, the GOP Congress pushed to restrain spending after the 2010 election.
Obama’s defense spending fell as Iraq and Afghanistan started to wind down.
Trump has been a big spender across the board. His new budget promises cuts, but it remains to be seen whether he really means it or whether his budget is just an accounting exercise.
I reported that state and local governments in New York spend twice as much as governments in Florida. New York also has a larger bureaucracy. Carl Campanile of the New York Post reported on these findings yesterday and captured a retort from the office of New York Governor Andrew Cuomo:
“Sounds like this ginned‐up study from a group of right-wing 19th century robber baron wannabes fail to mention that New York is Washington’s favorite ATM, paying $26.6 billion more in federal taxes than we get back while Florida receives $45.9 billion more than it pays,” said Cuomo senior adviser Rich Azzopardi. “Get a calculator.”
Actually, I am familiar with the “balance of payments” data Azzopardi refers to, and back in the 1990s aided then New York Senator Daniel Patrick Moynihan with such calculations. New York has long paid more to Washington in taxes than it receives back in federal spending on social programs, contracts, grants, and federal wages.
New York’s Rockefeller Institute has done the latest calculations. It found, “New York’s overall balance of payments remains the least favorable of any state in the nation.” Why does New York get such a raw deal? The Institute found, “New York’s consistently negative balance of payments is driven primarily by the disproportionate amount of federal taxes paid, rather than relatively lower federal spending received.”
And why does New York pay a disproportionate amount of federal taxes? Because the federal tax code is highly progressive and New York has a large number of high‐earners and a high cost of living. The progressive federal tax code has ripped off New York and other wealthy states for decades. The chart below from Rockefeller shows federal taxes paid per capita.
But here’s the thing: New York politicians have done nothing about it! New York politicians should be leading the charge against the unfair soak‐the‐rich federal income tax. Instead, most House and Senate members from New York are liberals who cheerlead for progressive taxation, and thus who work in the federal legislature to undermine their own state.
Since New York gets such a raw deal from federal fiscal relations, New York politicians should be the ones trying to revive federalism by shrinking federal spending and transferring activities back to the states. I argue here that such devolution would be good for every state, but it would particularly benefit states such as New York that pay so much in federal taxes.
Finally, note that New York’s balance of payments problem is no excuse for the gross inefficiency of its government compared to that of Florida. Rather than griping about Cato Institute data, Cuomo and Azzopardi should be grabbing their calculators and finding savings in the state’s bloated budget.
Anti‐wealth fever grips the Democratic Party and seems sure to carry into the election year. Bernie Sanders and Elizabeth Warren are leading the billionaire bashing binge, but even rising star Pete Buttigieg says that he is “all for a wealth tax.”
Leftist politicians dish out lots of rhetoric about wealth, but they seem ignorant of how it is created and used. They assume that top wealth is just expensive toys such as luxury yachts.
Actually, most wealth of the wealthy is business assets, not personal assets, as discussed in my op‐ed in The Hill today. The chart below shows the components of wealth of the richest 0.1 percent of Americans. Forty‐two percent is equity in private businesses and 31 percent is equity in publicly traded businesses. Another 22 percent is bank deposits, debt, pensions, and other assets. Just 5 percent of this group’s wealth are their homes.
A rough guess is that one quarter of the deposits, debt, pensions, and other assets are holdings of government debt. That means almost 90 percent of the wealth of the top 0.1 percent of Americans consists ultimately of equity and debt in businesses, which in turn funds the capital investments that create jobs and spur economic growth.
Leftists often claim or imply that wealth at the top comes at our expense, but the reality is the opposite. Wealth at the top supports jobs, opportunities, and incomes for millions of other Americans.
The liberal tax group ITEP has a new study suggesting that many large corporations did not pay income taxes in 2018. The study relies on taxes reported on financial statements, but those are often quite different than actual IRS payments, which are private and undisclosed.
Low corporate income taxes may seem like a scandal, but we should eliminate these taxes altogether. Corporate taxes ultimately land on individuals as workers, shareholders, and consumers, and in today’s global economy economists think that corporate taxes land mainly on workers. Cutting corporate taxes should boost worker compensation over time as business investment and productivity increase. Capital and labor are not enemies—as often assumed on the political left—but complements, as I discuss here.
Another reason to eliminate corporate taxes is that they are undemocratic. The corporate tax burden ultimately lands on individuals, but the tax payments are hidden from voters. Politicians may want to hide the costs of government, but the interest of citizens is visibility.
ITEP finds that the 2017 GOP tax law reduced corporate taxes, but that was a feature of the law, not a bug. For example, the law changed the rules for capital investment. ITEP found: “Industrial machinery companies as a group enjoyed the lowest effective federal tax rate in 2018, paying a tax rate of negative 0.6 percent. These results were largely driven by the ability of these companies to claim accelerated depreciation tax breaks on their capital investments.” These companies apparently did what lawmakers had hoped for—increased their investment, which had the side effect of reducing their taxes. That’s not a scandal.
Finally, note that ITEP’s calculations of average effective tax rates are not the only way to measure tax rates. This recent study by the Canadian Department of Finance examines marginal effective tax rates (METRs), which are the rates on additional investments. METRs indicate the attractiveness of a country’s tax system toward new investment.
The Finance chart shows that the U.S. METR is 18.4 percent, which is lower than some major countries but the same as the average across all OECD nations.
Earlier this week, Centers for Medicare & Medicaid Services (CMS) raised its estimate of Medicaid’s improper payments from $36 billion (9.8 percent of federal Medicaid expenditures) to $57 billion (14.9 percent of federal Medicaid expenditures). Actually, the situation is far worse than these estimates suggest. As we discussed in a Wall Street Journal op‐ed after the numbers were released, Medicaid’s improper payments now almost certainly exceed $75 billion – or more than 20 percent of federal Medicaid expenditures.
This year’s report shows not only a significant increase in CMS’s estimate of improper payments. Its methodology also shows the agency has been hiding even larger improper payments for years. CMS estimates improper payments in the Medicaid program by auditing each state and DC once every three years and then using the most recent estimate available for each to construct a three‐year rolling average. The 2018 report therefore covered fiscal years 2015–2017, while the 2019 report covered fiscal years 2016–2018.
There’s one important caveat, however. The Obama administration did not perform Medicaid eligibility audits for fiscal years 2014–2017. Instead, it simply plugged the eligibility rate from the pre‐Obamacare era into its improper payment calculations. This change would tend to hide any increases in improper enrollments that may have accompanied the implementation of ObamaCare’s Medicaid expansion. Indeed, other evidence suggests severe eligibility errors and problems accompanied the Medicaid expansion. As a result, the 2015, 2016, 2017, 2018, and 2019 reports likely underestimate the true extent of Medicaid improper payments because they use pre‐ObamaCare data to describe what was happening under ObamaCare.
So it’s a very big deal that CMS’s 2019 report showed a 5.1 percentage point increase in the three‐year moving average—from 9.8 percent to 14.9 percent—compared to the 2018 report. Note that while both reports’ averages use imputed improper payment rates for fiscal years 2016 and 2017 based on pre‐2014 (i.e., pre‐ObamaCare) data, the newest three‐year average replaces the pre‐ObamaCare rate used for 2015 with the actual, post‐ObamaCare estimate for fiscal year 2018.
Mathematically speaking, in order for the overall three‐year average to rise by 5.1 percentage points, the improper payment rate estimate for FY 2018 must be 15.3 percentage points higher (5.1 x 3 years) than the FY 2015 estimate. Given that the true improper payment rate in 2015 was almost certainly at least 8 percent, then the true improper payment rate in Medicaid (or more precisely, the real three‐year rolling average from FYs 2016–2018) would then exceed 23 percent (15.3 percent + 8 percent). In other words, as long as the improper payment rate in FY 2016 exceeded 5 percent — and Medicaid’s improper payment rate has never been below 5 percent — the true improper payment rate exceeds 20 percent.
Even this much higher three‐year rolling average is likely too low. CMS surveys the 50 states and DC in cycles – with 17 jurisdictions each year. The 2019 report updates the payment rate with “Cycle 1” states – which includes Arkansas, Connecticut, Delaware, Idaho, Illinois, Kansas, Michigan, Minnesota, Missouri, New Mexico, North Dakota, Ohio, Oklahoma, Pennsylvania, Virginia, Wisconsin, and Wyoming. Recent OIG government audits of newly eligible Medicaid expansion enrollees known as “new adults” in California, New York, Colorado, and Kentucky, as well as non‐newly eligible enrollees in California, New York, and Kentucky find serious program integrity issues and high improper payments during the 2014–2015 initial implementation of Obamacare. None of these states with well documented issues with their expansions were included in Cycle 1. Neither are Louisiana or Oregon, where state audits showed significant problems with how those states were conducting eligibility reviews.
In a forthcoming Mercatus paper, we find that the 12 expansion states with the largest rates of improper eligibility were New Mexico, California, Kentucky, Rhode Island, West Virginia, Oregon, Washington, Arkansas, Colorado, Louisiana, Montana, and New York. Yet, the CMS report only includes two of them (New Mexico and Arkansas). The result is that the 2019 estimate uses data that are not only not up to date, but also unrepresentative. An estimate employing up‐to‐date and representative data would show an even higher improper payment rate. Moreover, the sheer size and extent of improper enrollment problems in California will raise the cycle‐specific rate for the 2020 report.
Looking across the entire country and fully accounting for eligibility problems, it is possible, if not likely, that the improper payment rate is as high as 25 percent of federal Medicaid expenditures, or nearly $100 billion a year. That’s more than the entire $70 billion CMS actuaries estimate the federal government spend on ObamaCare’s Medicaid expansion in 2018.
Improper payments in Medicaid are a real problem for policymakers, and it is imperative that CMS finally take this problem seriously. Next week, the Mercatus Center will publish a new paper we authored that explains the problem in greater detail, including which states have the highest rates of improper payments, and makes a series of recommendations for reform.
One of the more ill‐advised federal activities is trying to micromanage local economies with tax and spending programs. Democrats tend to favor subsidies on things such as public housing and community development, while Republicans often support both spending programs and narrow tax breaks.
The Republican Opportunity Zone program enacted in 2017 used capital gains tax rules to expand federal control over local economies. The program divided the nation between winner and loser investment zones, as I discuss here.
Another GOP micromanagement scheme is HUBZones, which are the subject of a new Washington Post investigation. Businesses in these zones receive preferences in federal procurement. Reporter John Harden notes, “The HUBZone program was the brainchild of now‐retired senator Kit Bond (R‑Mo.), who chaired the Senate Small Business Committee from 1995 to 2001.”
With HUBZones, federal politicians have Balkanized the nation, as shown on this map. As if we don’t have enough divisions in this country already, the politicians keep adding more. They’ve done the same with O Zones, as shown here. As a believer in equal justice under law, I find this sort of top‐down and purposeful division to be a disgrace.
The Post’s previous piece on HUBZones found, “A federal program created to boost small companies in disadvantaged areas has funneled hundreds of millions of dollars into some of Washington’s most affluent areas.” Nonetheless, Kit Bond thinks they are “worth keeping around.”
The new Post article discusses the government ineptitude in operating the program:
A federal program that funneled millions of dollars into the District’s richest neighborhoods at the expense of poorer areas it was created to help used unadjusted and outdated data for years that failed to capture the city’s rapid economic growth.
The Washington Post reported in April that hundreds of millions of dollars in federal contracts were awarded to District businesses enrolled in the Historically Underutilized Business Zones program from 2000 to 2018. Almost 70 percent of the money went to a dozen businesses, mostly in areas such as Dupont Circle, Navy Yard and downtown Washington.
… A new Washington Post analysis found that the HUBZone program’s use of outdated and unadjusted data allowed businesses in wealthy areas to qualify for more than $540 million in federal contracts meant for firms in underserved neighborhoods. Rather than improve inequalities, critics say, the program has exacerbated disparities, and they question whether its calculations fit the program’s mission.
The Post’s most recent analysis found that the program relied on 1999 data to designate poverty levels for 16 years, which did not account for the city’s economic expansion. Furthermore, poverty levels in some areas that received millions of dollars are inflated by a large number of college students, who are concentrated in more‐affluent areas but have little or no income.
The Small Business Administration, which operates the program, did not dispute The Post’s findings, but declined to comment further.
… Since 1999, federal agencies have entered contracts that obligate them to pay District firms about $2 billion, with companies pocketing about half that amount so far, and slated to receive the rest as part of contracts that extend into the future. Of the $2 billion, Ward 2 — which includes well‐to‐do Georgetown, Foggy Bottom and downtown Washington — is set to receive more than $1.4 billion. In poorer areas, such as those east of the Anacostia River, HUBZone opportunities have been slim.
This CRS report describes the legislative history of HUBZones and is suggestive of the large administrative complexity of such schemes.