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.
A growing number of political leaders consider wealth inequality to be a major economic and social problem. They complain that wealth is being shifted to the top at everyone else’s expense.
Is wealth inequality the crisis that some people believe it is?
A new Cato study examines six aspects of wealth inequality and discusses the evidence for the various claims being made. Here are some findings:
- Wealth inequality has risen in recent years but by less than is often suggested. Faulty data from economists Piketty, Saez, and Zucman are behind many exaggerated inequality claims. Furthermore, wealth estimates overstate inequality because they do not include the effects of social programs.
- Wealth inequality tells us nothing about poverty or prosperity. Inequality may reflect innovation in a growing economy that is raising overall living standards, or it may reflect cronyism that causes economic damage.
- Most of today’s wealthy are business people who built their fortunes by adding to economic growth, and some have created innovations that benefit all of us. The share of the wealthy who inherited their fortunes has declined sharply in recent decades.
- Cronyism is one cause of wealth inequality which may have increased as governments have expanded subsidies and regulations. Some countries with high levels of wealth inequality also have high levels of cronyism or corruption.
- The growing size of the U.S. welfare state has crowded out or displaced middle‐class wealth‐building, and thus likely increased wealth inequality. Some countries with large welfare states, such as Sweden, have high levels of wealth inequality. Numerous presidential candidates want to expand social programs, but that would likely increase wealth inequality.
- Wealth inequality has not undermined U.S. democracy despite frequent claims to the contrary. Research shows that wealthy people do not have homogeneous views on policy and do not have an outsized ability to get their goals enacted in Washington.
Wealth inequality by itself is not a useful metric, but the underlying causes should be considered. U.S. wealth inequality has risen modestly, but mainly because of innovation and growth that is raising all boats. Policymakers should aim to reduce inequality by ending cronyist programs and removing barriers to wealth‐building by moderate‐income households.
The new study by Chris Edwards and Ryan Bourne is here.
The government says that America’s poverty rate is 11.8 percent. It also says that the poverty rate has hovered around 11 to 15 percent since 1970 suggesting little or no progress against poverty in decades.
But the Census Bureau’s official poverty rate is biased upwards and kind of meaningless. In terms of material well‐being, families near the bottom are much better off today than in past decades because of general economic growth and larger government hand‐outs.
In a Cato study, John Early recalculated the U.S. poverty rate using more complete data and found that it fell from 19.5 percent in 1963 to just 2.2 percent in 2017. (The study’s charts are updated here.) Early is a former Assistant Commissioner of the Bureau of Labor Statistics.
Bruce Meyer and James Sullivan perform a similar exercise in this new study. They find that the poverty rate fell from 13.0 percent in 1980 to 2.8 percent in 2018. Meyer‐Sullivan calculate their figure based on consumption rather than income, but the general idea is the same. Meyer is at the University of Chicago and Sullivan is at the University of Notre Dame.
The Early and Meyer‐Sullivan estimates are charted below. Both estimates reflect a large reduction in material deprivation for less fortunate Americans. Unfortunately, this great news about the American economy is usually ignored in media reports and political discussions.
Both Early and Meyer‐Sullivan use a more accurate inflation measure than the one used for adjusting the official poverty rate each year. And they both correct for the fact that the Census — in its main poverty series — excludes numerous government benefits including Medicaid, food stamps, and earned income tax credits. Both studies make a number of further adjustments.
The charts below show the Early and Meyer‐Sullivan poverty rates compared to the official Census series. Note that all poverty rate calculations stem from essentially arbitrary poverty thresholds measured in relation to a chosen base year. John Early anchors his series to the official rate in 1963. Meyer‐Sullivan anchor their series to the official rate in 1980.
The important thing is not the calculated poverty rate in any particular year but the trend over time. The official series shows no sustained improvement in poverty in recent decades, while the better estimates from Early and Meyer‐Sullivan suggest large gains for households near the bottom.
In sum, using somewhat different methods, Early and Meyer‐Sullivan both show that the official poverty data is far too pessimistic.
I interpolated the value for 1982 in Meyer‐Sullivan.