Topic: Tax and Budget Policy

Government: High Subsidies, Low Satisfaction

The OECD has released results from a survey of 22,000 people in 21 countries regarding their views of government social programs.

Governments in the high-income OECD countries hand out more subsidies than ever, yet many people feel that they are not getting what they want. The OECD survey finds, “There is clear dissatisfaction with existing social policy. Across the surveyed countries, many respondents believe public services and benefits are inadequate and hard to reach.” And the survey finds, “More than half of respondents say they do not receive their fair share of benefits given the taxes they pay.”

Those responses make it sound like people may want a bigger welfare state. But other responses show that people don’t believe that the existing welfare state works very well. Two-thirds of the OECD respondents think, “Many people receive public benefits without deserving them,” as shown in the chart below. And 60 percent across the OECD think that “government does not incorporate the views of people like them when designing social policy.”

In my study of government failure, I found that even as the U.S. government has vastly expanded social programs, the public has not grown fonder of the government, but rather has become more alienated. Public polls show that the share of people who trust the federal government has plunged from about 70 percent in the 1960s to about 20 percent today. Today, about 80 percent of Americans are “angry” or “frustrated” by the federal government, according to Pew. Americans have grown less fond of the government even as the number of programs ostensibly created to help them has increased.

What seems to be going on is that politicians relentlessly propagate myths that the government should coddle the citizenry and that it can do so efficiently. They propagate an expansive public interest theory of government. But actual government programs are inefficient, wasteful, and often counterproductive, which the public choice theory of government better describes. Government realities are different than government dreams.

Governments overpromise and underdeliver, and that seems to underlie the dissatisfaction coming through in these polls.   

Federal Gas Tax Increase Not Needed

President Trump’s new budget proposes to increase federal spending on infrastructure by $200 billion over 10 years. Many members of Congress are supportive. Some favor raising federal gas taxes to fund more highway spending, and President Trump may be on board.

However, increasing federal gas taxes and federal infrastructure spending is a bad idea. For one thing, the vast majority of government infrastructure is owned by the states, including 98 percent of all U.S. streets and highways. The states have many options to finance their highways and other infrastructure including state gas taxes, sales taxes, debt, user charges, public-private partnerships, and privatization.

A federal gas tax hike makes no sense because states can raise their own gas taxes anytime they want. Indeed, half the states have raised their gas taxes in just the past six years, as the Wall Street Journal reported yesterday:

Ohio Gov. Mike DeWine is pushing for an 18-cent-per-gallon increase in the state’s gas tax after he said he discovered a $1 billion infrastructure spending hole that transportation officials say was masked for more than a decade by borrowing.

The proposal is running into objections from some state lawmakers and sparking debate over how much the state should spend on new transportation projects and how much of that should be borne by taxpayers.

Governors in more than half a dozen states are considering boosting gas taxes. They follow more than two dozen states that have done so since 2013, as rising construction costs and greater fuel efficiency erode revenue generated from the taxes.

The chart shows that while the federal gas tax has been held at 18 cents per gallon, state gas taxes have risen steadily, according to API data. The average state gas tax increased from 21 cents per gallon in 1994 to 34 cents per gallon today, which includes excise taxes and other taxes on gasoline.

More on highways and infrastructure here and here.

Opportunity Zones Invite Corruption

Federal politicians routinely lambast the tax code as full of loopholes favoring special interests and generating lobbying—then they add more loopholes generating even more lobbying and corruption.

The Tax Cuts and Jobs Act of 2017 created special-interest tax breaks called “Opportunity Zones.” The law empowered governors and U.S. Treasury officials to carve up every state in the nation into winner and loser areas. Investment projects in the winner areas receive capital gains tax breaks, while projects in the loser areas get the short end of the stick.

The Wall Street Journal reports that former casino head Steve Wynn lobbied Trump Treasury officials to fiddle with O-Zone regulations to favor his investments. Apparently, the Treasury did not go along, but the episode shows how narrow tax breaks fuel the lobbying industry in Washington.

Looking ahead, every jurisdiction located just outside the nation’s 8,700 O-Zones has an incentive to hire lobbyists to pressure governors, federal officials, and members of Congress to redraw the lines and put them in the winner’s circle. Thus, I am guessing that the lobbying and corruption created by O-Zones has only just begun. A better alternative is to reduce capital gains tax rates across the board.

Here is the WSJ reporting:

Former casino executive Steve Wynn generated $2.1 billion and a big potential tax bill last March when he was forced to sell his stake in Wynn Resorts Ltd. after sexual-misconduct allegations. Less than three months later, he held a meeting with Treasury Department officials as they were writing regulations for a new tax incentive that had the potential to help him defer and reduce those taxes.

Mr. Wynn met with senior Treasury officials on June 4 to discuss “opportunity zones,” a break that was part of the 2017 Republican tax overhaul. The opportunity-zone program gives individuals a chance to defer and reduce capital-gains taxes if they make investments into low-income areas.

Mr. Wynn, who left his company and a Republican National Committee position early last year after being accused of sexual misconduct by former casino employees, attended the meeting in the Treasury building with Daniel Kowalski, a counselor to Treasury Secretary Steven Mnuchin who was helping write opportunity-zone regulations. Mr. Mnuchin stopped by the meeting to greet Mr. Wynn, according to a copy of the secretary’s calendar that the department periodically releases.

 

Here are other commentaries on O-Zones:

www.cato.org/blog/opportunity-zones-whom

www.downsizinggovernment.org/opportunity-zones-will-help-connected-developers-not-poor

www.downsizinggovernment.org/opportunity-zones-fuel-corruption

www.downsizinggovernment.org/o-zones-fragment-america

www.cato.org/blog/opportunity-zones-enrich-lucky-landowners

Any Budget That Cuts Fed Ed Is Good, But…

The Trump Administration’s proposed U.S. Department of Education budget, released yesterday, is due some props. It would cut spending by about 10 percent from 2019, and kill some bad programs. But there’s also a downside: it would push federal tentacles further toward private schools, and deeper into charters. Which means the lesson still hasn’t been learned: The Constitution gives Washington no authority to govern in education, and that includes advancing ideas the Trump Administration—and I!—like.

Let’s first acknowledge that it takes some guts to cut education department funding, because the average person probably hears “cuts to education” and thinks “oh no, cutting education!” What they should hear is “cutting spending in the name of education, but that often has very dubious educational effects.”

You can look at National Assessment of Educational Progress scores since the early 1970s, as federal intervention ramped up, and observe essentially no improvement for 17-year-olds:

That’s the federal government’s own yardstick showing stagnation, despite real spending from all sources per public K-12 student, and total federal elementary and secondary outlays, more than doubling since 1970. (The massive leap in federal spending in 2009 is the Obama “stimulus.”)

 

You can also look at the 21st Century Community Learning Centers program, funded to the tune of $1.2 billion for 2019, to see a program for which federal studies find neutral to negative effects. Or you can look at federal student aid programs—including Pell Grants, loans, and loan forgiveness programs that favor Americans working in putatively “nonprofit” jobs—to see hugely counterproductive effects, including rampant tuition inflation, high debt, and the hollowing out of college degrees.

The administration will be bludgeoned with woeful rhetoric for these proposed cuts, but they are the right thing to do.

School choice is also good, but trying to expand it through Washington, as this budget calls for, is wrong, both constitutionally and if we desire maximum choice. As I wrote last week about the Administration’s proposal for a $5 billion scholarship tax credit, “what the feds fund, even indirectly, they inevitably want to control.”

Retired and Raking It In

President Trump’s budget yesterday provides the latest evidence of out-of-control entitlement spending. In the baseline projections, Social Security spending will grow 5.9 percent in 2020 and Medicare spending will grow 8.8 percent. Social Security will grow at a 5.8 percent compound annual rate over the coming decade, while Medicare will grow at 7.8 percent. By contrast, inflation is expected to average 2.3 percent annually over the coming decade.

Social Security and Medicare are the first- and third-largest programs in the federal budget, and they are pushing the government toward a fiscal crisis. Medicare spending this year, net of premiums, is $645 billion, while the second-largest program, defense, is $674 billion. But Medicare spending will surpass defense in the next year or two, and by 2029 Medicare at $1.36 trillion will dwarf defense at $787 billion, at least in the baseline projection.

Social Security and Medicare are not the only programs for the elderly in the federal budget. A chart from CBO’s latest update shows the share of overall noninterest federal spending going to the old. The share is expected to rise from 40 percent in 2018 to 50 percent by 2029. Spending on the elderly will create sustained pressure on federal finances and taxpayer wallets in the years ahead.

Trump Budget 2020

The Trump administration has released its federal budget for 2020. The document lays out taxing and spending proposals and provides projections through 2029.

The chart compares Trump’s proposed revenues and spending to the most recent CBO projections. These are from CBO’s “alternative fiscal scenario” (AFS), which assumes that the Trump tax cuts do not expire after 2025 and that discretionary budget caps are lifted.

 

The Trump budget also assumes that the tax cuts do not expire. However, his budget is much more optimistic about economic growth than the CBO, and so estimated revenues are higher.

Note that the tax cuts went into effect in 2018 but federal revenues did not fall. Revenues would have been higher without the cuts, but rising deficits are being driven by relentless spending increases, not a shortage of revenues.

Even with the tax cuts in place, revenues are expected to rise from $3.5 trillion this year to $5.3 trillion in 2029 under the CBO projections. If we restrained annual spending growth to a reasonable 1.8 percent, the budget would be balanced in 10 years.

Federal Budget Outlook and Trump Tax Cuts

President Trump releases his budget for 2020 today. The budget includes major cuts to domestic programs to deal with rising deficits, which is a good approach because out-of-control spending is the core problem with federal finances.

Many people blame today’s high deficits on the Trump tax cuts. Pointing to growing red ink, the AP said yesterday, “Trump’s 2017 tax cut bears much of the blame, along with sharp increases in spending for both the Pentagon and domestic agencies and the growing federal retirement costs of the baby boom generation.”

The Trump tax cuts reduced revenues relative to what they would have been, but the cuts have not reduced overall federal revenues. According to the CBO, federal revenues were $3.32 trillion in fiscal 2017, $3.33 trillion in fiscal 2018, and an estimated $3.52 trillion in fiscal 2019. The tax cuts went into effect during fiscal 2018.

The tax scorekeeper of Congress estimated that the tax cuts would lose substantial revenues, particularly in the near term. But overall federal revenues have not fallen, and indeed are expected to grow strongly in coming years.

The chart below shows annual increases in total federal spending and revenues under CBO’s “alternative fiscal scenario.” The AFS assumes that a portion of the tax cuts do not expire after 2025 as scheduled, and that discretionary budget caps (currently in place through 2021) are lifted, which is likely.

Despite the tax cuts, you can see that 2018 revenues did not fall—they were roughly flat. And now in 2019 revenues are rising strongly and expected to grow at an annual average rate of 4.2 percent over the coming decade. Again, this is with the Trump tax cuts in place through 2029.

The problem is that spending is expected to grow even faster at a 5.4 percent average rate over the coming decade, according to the CBO. That is far above the expected inflation rate of about 2.1 percent in coming years.

As spending rises faster than revenues, deficits will soar. Under the AFS, the CBO expects annual deficits to climb from $0.9 trillion in 2019 to $2.2 trillion by 2029.

America is in the 10th year of economic expansion, so Washington should be running budget surpluses not pushing up deficits to record highs. In his new budget, Trump proposes some unaffordable defense and security spending increases. But he also proposes balancing the budget in 15 years with domestic spending restraint, which is a modest reform goal in the right direction.

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