Topic: Tax and Budget Policy

Ending the Tax Breaks for Real Estate

The release of a snippet of Donald Trump’s tax return from 1995 showing a net operating loss of nearly $1 billion, potentially allowing him to legally avoid paying taxes for an 18 year period, has given us another reason to condemn Donald Trump and the complicated provisions in the tax code pertaining to real estate that allow Trump and others like him to pay much less in taxes than the rest of us. One tax professional told me that there’s no reason for a big real estate concern to ever pay income taxes of any kind to the government if they have an accounting firm that knows what it’s doing.

A few people have expressed a hope that, should Trump lose, Congress would begin to look at some of the various real estate tax loopholes that allow such legal tax evasion. I would wholeheartedly agree with such sentiments, and humbly suggest that the purge begin with the most egregious and expensive real estate tax break of them all–the mortgage interest deduction. 

The MID costs the government $80 billion a year in lost revenue and is one of the most expensive tax breaks in the code. It may also be the least effective–because it’s a deduction (as opposed to a credit, or direct subsidy) that means that only the wealthiest homeowners (the top 30% or so) can actually take the deduction.

Why All the Labor Force Dropouts?

The distinguished Stanford University economist Robert Hall, co-architect of the famed Hall-Rabushka flat tax, once described himself to me as a [Bill] Clinton Democrat. Bob Hall wrote one of the most serious studies trying to figure out why the U.S. economy has remained so weak for so long. He concluded that much of the explanation lies in the ways in which recent marginal tax and transfer incentives discourage work.

In an analysis similar to that of Casey Mulligan of the University of Chicago, Hall attributes much of the startling drop in labor force participation to the expansion of federal transfer payments. Disability benefits and food stamps, in particular, are quickly phased-out if nonworkers take a job, or part-time workers switch to full-time work, or single-earner families become two-earner families. In other words, higher tax rates on work and more generous subsidies to leisure leave the economy with fewer people seeking work and therefore less production, lower tax revenue and greater federal spending on transfers from those who earn income to those who instead rely on government.

As Hall put it,

Labor-force participation fell substantially after the crisis, contributing 2.5 percentage points to the shortfall in output. The decline showed no sign of reverting as of 2013. Part is demographic and will stabilize, and part reflects low job-finding rates, which should return to normal slowly. But an important part may be related to the large growth in beneficiaries of disability and food-stamp programs. Bulges in their enrollments appear to be highly persistent. Both programs place high taxes on earnings [emphasis added] and so discourage labor-force participation among beneficiaries. The bulge in program dependence …  may impede output and employment growth for some years into the future.

Politicians and Spending Caps

Budget experts worried about the growth of federal spending and deficits have proposed various statutory and constitutional restraints to get the budget under control. I favor a simple cap on the percentage growth in annual total outlays.

Many state governments have spending, deficit, and debt restraints on the books, both statutory and constitutional. The restraints do help to tame state fiscal policy, but there is lots of cheating by the politicians.

Researching Cato’s new Governors Report Card, I came across an illuminating story about Connecticut’s spending restraint mechanism. I quote here at length:

The 1991 General Assembly tried to temper outrage over enactment of the state income tax by drafting a statutory spending cap. Voters would add the cap requirement to the state Constitution one year later by adopting the 28th Amendment.

The cap is supposed to keep spending increases in line with the annual growth in personal income or inflation, whichever is larger. For most of the cap’s history, the legislature has relied on personal income.

The cap system uses an average of personal income growth over the previous five years. That means that the sluggish growth years immediately following the last recession — which ended in 2010 — will continue to limit spending growth under the current cap system.

That makes sense to me—citizen income is stagnant in slow-growth Connecticut, so government growth should be limited so that it doesn’t squeeze people more when they can least afford it.

But that’s not how Connecticut politicians see it:

Both political parties have looked for ways around the cap over the past decade. The governor and legislature can exceed the cap legally if they agree and take special steps.

That happened in 2005 when Gov. M. Jodi Rell, a Republican, signed a declaration of fiscal exigency — declaring a budget emergency. More than 60 percent of the Democrat-controlled House and Senate voted to approve the plan.

Two years later, Rell and lawmakers used the same approach, this time approving a biennial budget that shattered the cap by a record-setting $690 million in the first year.

Since in 2011, Malloy has refused to declare a budget emergency. But that doesn’t mean he hasn’t bent to the cap’s weight.

The governor has proposed or approved moving spending outside of the cap – in large quantities …

The Democrat-controlled Appropriations Committee stunned the Capitol in April 2015 when it proposed a budget that moved billions of dollars in spending for pensions and other retirement benefit costs out from under the cap — for the first time since the spending control was established in 1991.

Both Rell and Malloy have been awarded “F” grades from Cato for their fiscal irresponsibility. It’s a shame that politicians of both parties in Connecticut aren’t abiding by a sensible constitutional restraint passed with the support of 80 percent of voters

Governors Fiscal Report

Most state governments are in an expansionary phase, as revenues are growing at a steady clip. Some governors are using the growing revenues to expand spending programs, while others are pursuing tax cuts and tax reforms.

That is the backdrop to this year’s 13th biennial fiscal report card on the governors, which Cato released today. It uses statistical data to grade the governors on their taxing and spending records since 2014—governors who have cut taxes and spending the most receive the highest grades, while those who have increased taxes and spending the most receive the lowest grades.

Five governors were awarded an “A”: Paul LePage of Maine, Pat McCrory of North Carolina, Rick Scott of Florida, Doug Ducey of Arizona, and Mike Pence of Indiana.

Ten governors were awarded an “F”: Robert Bentley of Alabama, Peter Shumlin of Vermont, Jerry Brown of California, David Ige of Hawaii, Dan Malloy of Connecticut, Dennis Daugaard of South Dakota, Brian Sandoval of Nevada, Kate Brown of Oregon, Jay Inslee of Washington, and Tom Wolf of Pennsylvania.

The report describes the record of each governor and discusses the outlook for state budgets. Medicaid costs are rising, and federal aid for this huge health program will likely be reduced in coming years. At the same time, many states have high levels of unfunded liabilities in their pension and retiree health plans.

Those factors will create pressure for states to raise taxes. Yet global economic competition demands that states improve their investment climates by cutting tax rates, particularly on businesses, entrepreneurs, and skilled workers.

News reports about the states often focus on policymaker efforts to balance their budgets. Balanced budgets are important, but policymakers should also be running their governments in a lean and frugal manner, reforming tax codes to spur growth, and generally expanding fiscal freedom for state residents.

Cato’s new report helps to sort out the governors who are moving in that direction from those who are not. An oped describing the main results is here.

Notwithstanding a New Rhetorical Strategy from Statists, Higher Taxes and Bigger Government Is Not a Recipe for Growth and Development

I must be perversely masochistic because I have the strange habit of reading reports issued by international bureaucracies such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation and Development.

But one tiny silver lining to this dark cloud is that it’s given me an opportunity to notice how these groups have settled on a common strategy of urging higher taxes for the ostensible purpose of promoting growth and development.

Seriously, this is their argument, though they always rely on euphemisms when asserting that politicians should get more money to spend.

  • The OECD, for instance, has written that “Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people.”
  • The Paris-based bureaucrats of the OECD also asserted that “now is the time to consider reforms that generate long-term, stable resources for governments to finance development.”
  • The IMF is banging on this drum as well, with news reports quoting the organization’s top bureaucrat stating that “…economies need to strengthen their fiscal frameworks…by boosting…sources of revenues.” while also reporting that “The IMF chief said taxation allows governments to mobilize their revenues.”
  • And the UN, which has “…called for a tax on billionaires to help raise more than $400 billion a year” routinely categorizes such money grabs as “financing for development.”

As you can see, these bureaucracies are singing from the same hymnal, but it’s a new version.

Infrastructure Spending and the Charleston Seaport

George Will’s oped the other day argued that Congress should hurry up and fund an expansion in the Charleston, South Carolina, seaport. But his piece revealed why the federal government should reduce its intervention in the nation’s infrastructure, not increase it, as Clinton and Trump are proposing.

The Charleston seaport has become crucial to South Carolina’s economy. Will notes that “1 of every 11 South Carolina jobs — and $53 billion in economic output are directly or indirectly related to Charleston’s port.”

There is a problem, however. The Charleston seaport:

needs further dredging in order to handle more of the biggest ships, which is where Congress enters the picture: Unless it authorizes the project and appropriates the federal portion of the $509 million cost to augment South Carolina’s already committed $300 million, the project will be delayed a year. The deepening project is only 14 percent of the $2.2 billion South Carolina is investing in its port facilities and related access.

The biggest ships pay more than $1 million to transit the [Panama] canal; if they miss their transit time, their fee is doubled. Until the port is deepened, too few can be handled here simultaneously, and they can enter and leave the port only at high tide.

Work “Nonprofit”? Get Free Grad School!

The Cato Institute is a 501(c)(3)—a nonprofit organization. Of course, as an employee I get paid more than my job costs me—I make what you might call “profit”—but because of the tax designation of my employer, I could be getting big forgiveness on any federal student loans I might have. Indeed, a new, quick-read report from the Brookings Institution shows that someone could potentially get all of their graduate schooling covered for free through the federal Public Service Loan Forgiveness (PSLF) program which, by the way, is expected to cost the American taxpayer a lot more than originally anticipated.

The general way PSLF operates is if you work for government, a 501(c)3 organization, or some other qualifying entity like a public interest law firm, you can get the remainder of your federal student loans forgiven after 10 years of regular payments. Sound great? Well don’t order yet! Those payments are also controlled, capped at 10 percent of income above 150 percent of the poverty line. So a single person would pay nothing on income below $17,820, and 10 percent on income above that. And it doesn’t matter if you get paid more than your job-description doppelganger in a for-profit venture—as long as you work for a “nonprofit” you qualify for PSLF.

The Brookings report describes how someone could essentially get a graduate degree for free through PSLF as long as he had substantial—but not huge—undergraduate debt and worked in a relatively low-paid field. Of course, many people will want to earn more than low pay, but PSLF furnishes strong incentives to stick with a low-paying job for awhile, or more likely, take on much bigger debt and all the nice-to-have college stuff that goes with big college revenue.

Go ahead, future Jack McCoy, take that dip in the lazy river!

Of course, this is not free to taxpayers, many of whom have not gone to college, or may work in struggling for-profit businesses, or may even have thought the right thing to do was to get an inexpensive—and frill free—education. But according to the report, their PSLF bill is rising as enrollment in the program is much higher than anticipated, and nearly one-third of enrollees have debt exceeding $100,000. The report doesn’t give estimated total costs because those are very hard to predict, but estimates of what would be saved with controls such as capping forgivable amounts have risen by more than 2000 percent just from 2014 to 2016! The figures are in the billions of dollars.

There is a strong argument, of course, that there is nothing more noble about working for government, or a nonprofit hospital, or even a think tank, than owning a neighborhood shoe store, or being an accountant at Apple, or risking all you have on a new, entrepreneurial venture, all of which seek to offer things of value to other people. Heck, it is the production of goods and services for profit that gives us the “excess” wealth that enables us to pay for government and all its programs. But few employees, regardless for whom they work, are losing money on their jobs, and many—see, for instance, federal workers—make big profits from their nonprofit jobs not just financially, but also with lots of vacation time, or job security, or simply doing something fun every day.

We’re all working for profit. Why should we be treated—especially given big costs and unintended consequences—differently just because of our employers’ tax designation?