America in Debt Damage Zone 

OCTOBER 19, 2021 10:16AM

America in Debt Damage Zone


Federal government debt is rising rapidly. The government spent almost $1 trillion more than it raised in revenues in 2019, and the overspending gap widened to $3 trillion in 2020 and 2021. The excess spending was borrowed from domestic and foreign creditors, and it all represents costs pushed forward onto tomorrow’s taxpayers.

The United States is becoming one of the most indebted high‐​income nations in the world. Including state and local debt, our government debt totals 141 percent of gross domestic product (GDP), which compares to an average of 100 percent of GDP for 32 high‐​income countries.

One likely effect of our high debt is slower economic growth. Economists have not nailed down precisely the mechanisms through which that happens, but many statistical studies find that higher debt correlates with slower economic growth.

Veronique de Rugy and Jack Salmon at the Mercatus Center summarized 24 cross‐​country studies that looked at government debt and growth, as summarized in the table below. Seventeen of the studies found a threshold above which rising debt is associated with reduced growth.

Government debt above 90 percent of GDP is correlated with slower economic growth, based on the average of 17 studies. That means America’s debt—at 141 percent and rising—is well into the debt damage zone and is likely undermining our prosperity already.

Salmon updated his debt and growth research in the Cato Journal. He found 36 studies that identified a statistically significant negative effect of government debt on growth.

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Data note: for the 17‐​country average, I used the higher figure when a study found a range for the growth‐​slowdown threshold.


In their haste to pass massive spending bills and clobber the rich, the Democrats are floating some radical tax schemes. The latest far‐​out idea is to tax capital gains even before gains are realized. No other country in the OECD taxes capital gains in such an aggressive manner.

The Democrats are obsessed with raising taxes on capital. They’ve proposed raising the top capital gains tax rate, even though our federal‐​state rate of 29 percent is already higher than the 19.5 percentaverage in Europe. They’ve proposed raising the corporate tax rate, even though our federal‐​state rate of 27 percent is already higher than the 19 percent average in Europe. And some Democrats want to impose an annual wealth tax, even though nearly all European countries have eliminated those harmful levies.

Many high‐​income countries in Europe and elsewhere have heavier overall tax burdens than we do, but they make up the difference with high taxes on consumption, not capital. These countries recognize that taxes on consumption, such as value‐​added taxes (VATs), are less damaging than taxes on capital.

The Democrats are steering America to a worse place than Europe—a place where the private sector is undermined by expansive welfare programs, and where the programs are funded by taxes on capital rather than VATs. I am against a VAT for the United States because I favor smaller government, but I worry that the Democrats want to impose bigger government funded in an even more damaging manner than big European governments.

Let’s compare taxation in the United States and other high‐​income nations. In 2019, overall tax revenues were 24.5 percent of GDP in the United States and 33.8 percent in 35 OECD countries, on average. The charts below show the shares of overall tax revenues raised by taxes on goods and services or consumption (e.g. VATs and sales taxes) and taxes on income and profits (e.g. individual income taxes, corporate income taxes, and capital gains taxes). The charts are from here.

The United States raises a larger share of revenues from (more damaging) income and profits taxes and a smaller share from (less damaging) consumption taxes. Democratic proposals would worsen our reliance on the more damaging taxes. Instead, we should devolve government programs to the states and rely on state sales taxes to fund the needed activities.

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Notes: The OECD tax shares appear to be based on 35 countries in 2019, but would include fewer countries in prior years. I calculate that U.S. taxes in 2019 were somewhat higher than the 24.5 percent reported by the OECD. I discuss unrealized capital gains here and here, and I examine taxes on capital income here and consumption taxes here.

Biden’s Befuddlement on Corporate Taxation

Let’s look today at the wonky issue of “book income” because it’s an opportunity to point out that there are three types of leftists.

  1. Honest leftists who understand economics and recognize tradeoffs (I think of them as “Okunites“).
  2. Dishonest leftists who understand economics but pretend that tradeoffs don’t exist (the “demagogues“).
  3. Leftists who have no idea what they’re saying or thinking (I think of them as, well, Joe Biden).

I’m being snarky about the President because of this recent tweet, which contains a couple of big, glaring mistakes.

What are the mistakes (I’m not calling them lies because I don’t think Biden has the slightest idea that he is wrong, much less why he’s wrong).

  • The first mistake is that corporations pay a lot of tax (payroll tax, property tax, etc) even if they are losing money and don’t owe any corporate income tax.
  • The second mistakes is that Biden is relying on a report about corporate income taxes that has been debunkedbecause it relied on book income rather than taxable income.
  • The third mistake is that the President implies that his plan force all big companies to pay the corporate tax when that’s obviously not true.

Regarding that third mistake, Kyle Pomerleau of the American Enterprise Institute explains why there will still be companies paying zero corporate income tax.

While the Biden administration’s proposals would increase the tax burden on corporations by about $2 trillion over the next decade, they would not change the basic structure of the corporate income tax. The Democrats’ proposal would not end corporations paying zero federal income tax in certain years.Corporations will still be able to carryforward losses, and credits will still be available for corporations to offset their tax liability. The administration has proposed a minimum tax to address these headlines by tying federal tax liability to book income. The minimum tax would require corporations with net income over $2 billion to pay the greater of their ordinary corporate tax liability or 15 percent of their book or financial statement income. Corporations would still be able to offset the book minimum tax with losses and general business credits.

Glenn Kessler of the Washington Post tried to defend Biden’s tweet as part of his misnamed “Fact Checker.”

He had to acknowledge Biden was using a made-up number, but nonetheless concluded that the President’s assertion was “probably in the ballpark.”

This is one of Biden’s favorite statistics. …the president has used it in speeches or interviews 10 times since April. Normally he is careful to refer to “federal income taxes” so the tweet is little off by referring just to “taxes.” …Let’s dig into this statistic. It’s not necessarily wrong but there are some limitations. …The number comes from…the left-leaning Institute on Taxation and Economic Policy (ITEP). …Company tax returns generally are not made public, so ITEP’s numbers are the product of its own research and analysis of public filings. But it is an imperfect measure. …the information in the filings may not reflect what is in the tax returns. …Nevertheless, the notion that 10 to 20 percent of Fortune 500 companies do not pay federal income taxes is consistent with a 2020 report by the nonpartisan Joint Committee of Taxation. …This “55 corporations” number is probably in the ballpark.

For what it’s worth, I don’t care that Kessler gave Biden a pass for writing “taxes” instead of “federal income taxes.”

After all, that’s almost surely what he meant to write (just like Trump almost surely meant “highest corporate tax rate” when complaining about America being the “highest taxed nation”).

But I’m not in a forgiving mood about the rest of Biden’s tweet (or Kessler’s biased analysis) for the simple reason that there is zero recognition that companies occasionally don’t pay tax for the simple reason that they sometimes lose money.

I’ve made this point when writing about boring issues such as depreciation, carry forwards, and net operating losses.

At the risk of stating the obvious, companies shouldn’t pay any corporate income tax in years when they don’t have any corporate income.

P.S. I’m not mocking Biden’s tweet for partisan reasons. I was similarly critical of one of Trump’s tweets that was glaringly wrong on the issue of trade.

Corporate Taxes and the Laffer Curve

In a new documentary film, Race to the Bottom, I had an opportunity to pontificate briefly about corporate tax and the Laffer Curve.

Dan Mitchell on Corporate Tax Rates and the Laffer Curve

At the risk of understatement, I represented a minority viewpoint in the documentary. Most of the people interviewed had a negative view of tax competition, considering it to be (as suggested by the title) a “race to the bottom.”

By contrast, I view tax competition as a way of constraining the “stationary bandit” so that we don’t wind up with “goldfish government.”

For purposes of today’s column, though, I want to focus on the narrower issue of the relationship between corporate tax rates and corporate tax revenue.

In the above video, I asserted that lower rates did not result in lower revenue. Indeed, I even made the bold statement that revenues increased.

Is that correct?

Fortunately, I don’t need to do any elaborate calculations to prove my point. I’ll simply direct readers to the work of two left-leaning international bureaucracies.

Back in 2017, I cited an article form the International Monetary Fund that included a graph clearly illustrating that the drop in tax rates has not been accompanied by a drop in tax revenue.

This was a remarkable admission considering that the article argued in favor of higher tax burdens.

Likewise, last year I cited a study from the Organization for Economic Cooperation and Development that also acknowledged that falling tax rates on companies did not translate into lower revenues.

Given that the OECD has a big project to increase business tax burdens, that also was a startling admission.

None of this means, by the way, that lower rates always lead to more revenue.

Indeed, most tax cuts cause revenue to decline (though not as much as predicted by static estimates).

The bottom line is that lower tax rates are good for economic performance and my friends on the left shouldn’t get too worried about disappearing tax revenue.

P.S. There’s also some 2017 OECD data and 2018 OECD dataabout business tax rates and business tax revenues.

P.P.S. Earlier this year, I cited OECD data that also included personal income tax rates and tax revenue.

—-

Emailed to White House on 1-3-13.)

President Obama c/o The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500

Dear Mr. President,

I know that you receive 20,000 letters a day and that you actually read 10 of them every day. I really do respect you for trying to get a pulse on what is going on out here.

Class Warfare just don’t pay it seems. Why can’t we learn from other countries’ mistakes?

Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising taxes.

Needless to say, I was right. Not that this required any special insight. After all, no nation has ever taxed its way to prosperity.

We’re now at the end of 2012 and Portugal is still saddled with a weak economy. And the higher taxes haven’t resulted in less red ink. Indeed, according to the Economist Intelligence Unit, government debt has jumped from 93 percent of GDP in 2010 to 124 percent of GDP this year.

Why did higher taxes backfire in Portugal? For the same reasons that higher taxes have failed in Greece, Spain, Bulgaria, France, Italy, the United Kingdom, and so many other nations.

  • Higher taxes undermine incentives for productive behavior, thus reducing an economy’s potential for growth. This means less economic output, which also means a smaller tax base. This Laffer Curve effect doesn’t necessarily mean less revenue, but it certainly means that tax increases rarely raise as much money as initially projected.
  • Higher taxes usually are a substitute for the real solution of spending restraint (i.e., Mitchell’s Golden Rule). Politicians oftentimes refuse to reduce the burden of government spending because of an expectation of additional tax revenue. Heck, in many cases, higher taxes trigger an increase in the size and scope of the public sector.

So did Portugal learn any lessons from this failed experiment in Obamanomics?

Hardly. Indeed, the government plans to double down on this approach – even though it’s increasingly apparent that higher tax burdens won’t translate into much – if any – additional tax revenue. Here are some excerpts from a report in the Financial Times.

Lisbon plans to lift income tax revenue by more than 30 per cent, raising the effective average rate by more than a third from 9.8 to 13.2 per cent. Anyone receiving more than the minimum wage of €485 a month, including pensioners, will also pay an extraordinary tax of 3.5 per cent on their income. …the steep tax increases facing many families have made the outlook for 2013 – the third consecutive year of austerity, recession and rising unemployment – the grimmest yet. Total tax revenue has fallen considerably below target this year, forcing the government to implement additional austerity measures… The coalition will be relying on increased state revenue to account for about 80 per cent of the fiscal adjustment required in 2013 – a reversal of the original bailout plan, in which consolidation was to be achieved mainly through spending cuts.

Amazing. The government imposes huge tax hikes, which don’t generate any positive results. Yet even though “tax revenue has fallen considerably below target,” confirming that there are significant Laffer Curve issues, the government chooses to repeat the snake-oil fiscal therapy of higher taxes.

Anybody want to guess what’s going to happen? The answer, of course, is that this will further dampen incentives to generate income and comply with the government’s fiscal demands.

The latest increases have stretched the tax system to the limit, says Carlos Loureiro, a tax partner at Deloitte. “The current model is exhausted. We need to do something different,” he says. “Any further increase in tax rates is unlikely to result in increased revenue.” Income from value added tax, the government’s biggest source of tax revenue representing about 36 per cent of the total, has been falling since 2008, despite a sharp increase in the rate – the main rate is now 23 per cent. Both the government and the European Commission have acknowledged the risks of depending on increased tax revenue, which is more growth sensitive, to meet fiscal targets and contingency spending cuts amounting to 0.5 per cent of national output have prepared in case of another tax shortfall.

I almost want to laugh at the part of the excerpt which notes that tax revenue “has been falling…despite a sharp increase in the rate.”

Maybe it’s time for these fiscal pyromaniacs to realize that revenues might be falling because rates are higher. In other words, Portugal not only isn’t at the ideal point on the Laffer Curve (collecting the amount of revenue needed to finance legitimate activities of government), it may even be past the revenue-maximizing part of the curve.

To be fair, there are lots of factors that determine economic performance, so higher tax burdens are just one possible explanation for why the tax base is shrinking or stagnant.

The one thing we can state with certainty, though, is that Portugal’s fiscal problem is too much government spending. The failure to address this problem then leads to very unpleasant symptoms, such as lots of red ink and self-destructive class-warfare tax policy.

If all that sounds familiar, that’s because it’s also a description of what President Obama is proposing for the United States.

Ummm…shouldn’t they be targeting politicians?

P.S. I don’t want to imply that Portugal is a total basket case. True, I’m not optimistic about the country’s future, but at least some lawmakers now acknowledge that Keynesian spending was a big mistake. And there are even signs that Portuguese officials are beginning to realize that lower tax rates should be part of the solution. But good policy may be impossible since so many people now have a moocher mentality.

P.P.S. At the risk of bearing bad news to close the year, research from both the Bank for International Settlements and the Organization for Economic Cooperation and Development shows the United States actually faces a bigger long-run fiscal challenge than Portugal.

The Laffer Curve – Explained

Uploaded by on Nov 14, 2011

This video explains the relationship between tax rates, taxable income, and tax revenue. The key lesson is that the Laffer Curve is not an all-or-nothing proposition, where we have to choose between the exaggerated claim that “all tax cuts pay for themselves” and the equally silly assumption that tax policy doesn’t effect the economy and there is never any revenue feedback. From http://www.freedomandprosperity.org 202-285-0244

__________________________________

__________

Thank you so much for your time. I know how valuable it is. I also appreciate the fine family that you have and your commitment as a father and a husband.

Sincerely,

Everette Hatcher III, 13900 Cottontail Lane, Alexander, AR 72002, ph 501-920-5733, lowcostsqueegees@yahoo.com

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