Is it too late to step back from the edge of fiscal insanity?
2020-12-20 · Guest: Chris Edwards (Cato Institute) · 52:20
Federal deficit and Biden administration spending plans
Bob Zadek and Chris Edwards of the Cato Institute discuss the looming fiscal crisis caused by the deepening federal deficit. They analyze the Biden administration’s proposed $7 trillion in new spending and the potential economic fallout of doubling capital gains and corporate taxes.
Topics: Federal Deficit, Biden Administration, Capital Gains Tax, Corporate Income Tax, Infrastructure Spending, Privatization, Air Traffic Control, Cato Institute
Speakers: Bob Zadek, Chris Edwards
The Deepening Fiscal Hole [00:00]
Bob Zadek: Good morning, everyone. Welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show in all of radio. We are this morning and always the show of ideas, never once the show of attitude. Thank you so much for listening this almost winter Sunday morning.
This morning, the topic for the show is—and it’s a foreboding topic—the deepening hole. We will spend an hour with coming attractions. “Attractions” maybe is the wrong word. We will look forward a couple of weeks and thereafter when the Biden administration moves in, the Trump administration moves out—hopefully they leave the silverware, unlike the Clintons—and once the Biden administration is in office and in power, and power they will have, once they take power, they will set about the exhausting task of raising and then spending a cool $7 trillion. That’s trillion with a T. $7 trillion, perhaps, of new money in carrying out the Biden worldview.
Where will they get $7 trillion? That is the topic of this morning’s show. And of course, where they will get it, in short, is from you and I. And what will happen when they help themselves collectively to $7 trillion? Well, my friends, it’s not pretty. To help us understand what is in store for us from a fiscal matter, from a deficit matter, I’m happy to welcome back to the show my good friend and very wise scholar on these matters, Chris Edwards. Chris is always my go-to guest when it comes to federal spending. Chris is the Director of Tax Policy over at the Cato Institute, and he heads the Downsizing Government project over at Cato. We’ll give you the link later on in the show. Wouldn’t we all just love the concept and the carrying out of downsizing government? And Chris has given lots and lots and lots of thought to what’s in store for us with the Biden administration and what’s in store for us even without the Biden administration. How do we possibly recover from this spending orgy that prior administrations have imposed upon us? Chris, welcome to the show this morning.
Chris Edwards: Thanks a lot, Bob. And you know, I must say, our Downsizing Government website—we named that when Obama first came into office in 2008. He promised to go through the federal budget and cut out all the wasteful programs. So we created Downsizing Government to help his administration cut wasteful programs. Of course, he didn’t cut wasteful programs at all. But you know, this shows how everything is so different today. Biden is coming into office not promising to cut or trim any waste. He’s promising to spend, as you say, $7 trillion more. So our country is really going in a disastrous direction with the government.
The Deficit “Death Spiral” [02:55]
Bob Zadek: Well, you’ve got to respect Biden for at least being honest about it. Obama may have been honest—who can look into his soul as to whether he intended or whether it was just a campaign slogan to get him elected—but we’ll never know whether he intended to do it. But of course, he did not, as you say, downsize government.
Now, the subject broadly is the deficit. The deficit, the concept of the deficit, simply means government—and we are talking now primarily about the federal government—the government spends more than it takes in. And by the way, I hate the phrase “income” when you talk about the government, because income is something praiseworthy, like you earned it. Well, the government doesn’t earn its income; it takes it at the barrel of a gun. So, but it’s called income nevertheless. So the deficit is when the income into the federal government is less than the outflow. Since the books have to, if you will, balance, the deficit—the difference between spending and income—is borrowed. In other words, future generations will pay for it. Now, that is kind of cool in the short run if you’re alive today. Let’s let the kids pay for my—the pleasures that government bestows upon me. But that cannot go on forever. Or can it?
So tell us about how it comes about that somebody—and you’ll tell us who—some entity or group of people in the world say, “No more. We’re cutting you off, United States. We’re not going to give you any more credit.” And that will be the beginning of the end because the well will have gone dry. We’ve never experienced that. Nobody’s ever experienced that or even read about it. So tell us what that, in a realistic way, looks like, how it’s likely to happen, and when it’s likely to happen. Because if the world never says, “We’re not giving you any more credit,” if the world never does that, then your prediction will never take place.
Chris Edwards: So here’s the easy way to understand how disastrous the situation we are in is. This year, the current projections show that the federal government will spend $5.1 trillion and it will take in $3.3 trillion in taxes. So you can see that there’s a giant deficit, the difference between those numbers of around $1.8 trillion. So let’s translate that to an individual worker. That’s like an individual worker earning $33,000 a year but spending $51,000 a year and borrowing $18,000 fresh every year to support his spending habit. Obviously, you can see for an individual, if they’re only making $33,000 a year and they’re spending $51,000 a year, they’re going to go bankrupt very quickly if putting all that money on their credit card and the like. It’s not going to last.
Well, that’s what the federal government is doing. And even when we get back to “normal” a year or two from now, the government is only going to be taxing about 75% of what it spends. For—you know, it—that is not going to last. Currently, the federal government accumulated debt is equal to about 100% of our GDP. That is the highest it has ever been in over 200 years of history. The previous high was in World War II when it hit about the same amount, about 100% of GDP. But in prior debt spikes, we’ve always paid it back. You know, after the Civil War, we paid the debt back. After World War I and World War II, we always paid the debt back. But today, government debt is spiking even though we’re not at war, and the projections show that government debt is just on this skyrocketing upward path. It is a unique place in American history. It’s not going to last. We are going to get a financial crisis of some sort or a massive and disastrous tax hike of some sort down the road. Economists can’t tell us when it’s going to happen, but it is going to happen.
Is the U.S. “Too Big to Fail”? [07:16]
Bob Zadek: Now, you have made the obvious and accurate analogy to an individual. You’ve drilled it down to a level everybody can understand. And you said if an individual keeps on incurring debt, sooner or later, your phrase was, the individual would go bankrupt. Of course, that’s correct. But the individual goes bankrupt not directly; it’s because the creditors stop extending credit. So in your hypothetical, in your analogy, the individual would not go bankrupt if that individual were able to continue to roll over the debt. That could go on forever, and the individual just incurs more and more and more debt, and it’s only theoretical.
So tell me about how it comes about that somebody—and you’ll tell us who—some entity or group of people in the world say, “No more. We’re cutting you off, United States. We’re not going to give you any more credit.” And that will be the beginning of the end because the well will have gone dry. We’ve never experienced that. Nobody’s ever experienced that or even read about it. So tell us what that, in a realistic way, looks like, how it’s likely to happen, and when it’s likely to happen. Because if the world never says, “We’re not giving you any more credit,” if the world never does that, then your prediction will never take place.
Chris Edwards: So how it happens is that right now, the federal government can borrow at a very low interest rate. I don’t think that’s going to last. I mean, a lot of economists seem to think all this borrowing is okay because they assume that the interest rates stay low for years and years into the future. The current Congressional Budget Office projection assumes 10-year Treasury bonds stay at around, you know, no more than 3% over the next decade. But historically, we can look around the world and we can see when countries get into crisis, they start accumulating too much debt, creditors around the world get scared, and interest rates spike. The creditors demand a lot higher interest rates from the borrowers. So that’s how the crisis will happen.
We’ll start seeing interest rates start rising, and as we saw, say, in Greece a decade ago, government borrowing rates spike. Then interest payments become a much bigger share of the government budget, and so it becomes like a death spiral. The government has to borrow more and more to cover all this $5 or $6 trillion of spending it’s doing. Creditors can see that the government is getting more and more in trouble; they demand higher and higher interest rates. So as interest rates start spiking, then the economy tanks because industries like the housing industry are very interest-rate dependent. If interest rates start rising, then the housing industry will tank. Business investment will plunge because businesses won’t be able to borrow money because interest rates will be high. The exchange rate will start falling. Foreign creditors won’t want to lend to American businesses, let alone the American government, because the exchange rate’s falling.
So you get into this economically disastrous situation. And then so Washington has only two choices: they would have to either radically cut spending—people’s Social Security benefits would be cut off, Medicare, Medicaid will be cut—or taxes, you know, will be hiked dramatically. Capital gains taxes, corporate taxes, individual income taxes will be hiked. That will cause the death spiral to spiral even faster. So businesses will face higher taxes and higher borrowing rates. They’ll be in a terrible situation. They’ll have to cut back their operations, lay people off. So we see that it’s a death spiral, and we’ve seen that in countries like Greece. I mean, if you looked a decade or so ago when Greece got into its government debt-caused crisis, the economy plunged for years. Interest rates spiked up to 15% or more for years. The private sector was killed. And even a decade later, I’ve looked at the data, the Greeks’ living standards were still down 20% or more from 15 years earlier. So this, you know, it’ll cause permanent lasting damage if we let this crisis happen. Economists, to end on this, economists don’t know when this is going to happen, but we’ve seen it happen in other countries. We’ve seen it happen in places like Puerto Rico. It could well happen to the U.S. federal government. We just don’t know when.
The Biden Tax and Spend Plan [12:16]
Bob Zadek: Now, there’s a concept that nobody has mentioned in the narrative you’ve described. I’m about to mention it, which, since nobody has mentioned it except I’m about to, leads me to believe that I probably don’t know what I’m talking about. But you’ll feel free to tell me that after I raise the following concept. During the last financial crisis and financial crises before that, we have heard the phrase “too big to fail.” It was applied first a long time ago to Continental Bank in Chicago when that was the first major bank to fail, I think that was in the ’70s if I’m not mistaken. It was applied, of course, to large brokerage houses, investment banks, and banks during the financial crisis early in the 21st century. And banks were felt, and other financial institutions were felt, to be too big to fail. There would be a systemic failure in the whole economy if these entities were allowed to fail. We can discuss on another show whether that was correct or not—I think it was not—but let’s assume it was correct or it was partially correct. And that means that since the failure of a bank or several banks would bring down the whole economic system, therefore nobody was going to allow those banks to fail. If a bank is too big to fail, isn’t the United States too big to fail? And wouldn’t the world have to, have to, bail us out, extend our debt, on the condition that we got our house in order, whatever that may mean? Who can predict? But does the principle “too big to fail” have any impact on your rather dire prediction?
Chris Edwards: Well, the scare and the worry is not that the U.S. federal government goes bankrupt. It won’t go bankrupt because it has enormous taxing power. And ultimately, the U.S. government can rely on the fact that it can raise massive amounts of taxes. But, you know, the problem is it creates an economic death spiral. The higher they raise taxes, the more it kills the private sector, and then the less revenues flow into Washington because the private sector is shrinking. So that’s the real fear here: that interest rates will spike and then the interest costs that the federal government pays will start rising.
So for example, this year, the federal government is only going to spend about $350 billion on interest costs. But that could easily become much higher. It could double or triple. So the federal government’s got to find this new fresh money somewhere. And the fear is that it’ll be—it’ll massively raise taxes on us, which will kill the private sector, which will kill our standard of living moving ahead. And so that’s what, you know, I think that’s the most immediate threat.
And then there’s the threat of inflation. We’ve seen historically and around the world that governments that get into a—they start borrowing too much, creditors start getting worried, interest costs start rising. The seemingly easy way out is to start inflating the value of your currency, which reduces the real value of your debt. So that’s a threat too. I mean, inflation—we might have a government and central bank that follows an inflationary policy to try to reduce the real value of debt. And inflation is a tax, and inflation is a tax on working people, on average folks and lower-income folks. Rich people can get around the inflation problem, but it’s the rest of us, regular folks, when the price of food and clothing and housing start rising quickly as the government starts running inflation to get rid of its debt. That’s a giant tax on us. So one way or the other, all this debt—this is a giant cost that’s being pushed forward. It’s going to result in us paying higher taxes or paying higher taxes in the form of an inflation tax ultimately.
Specifics of the Biden Proposal [16:44]
Bob Zadek: Now, we have gotten some indication already, and you have written about the—what looks to be the Biden administration tax-spend future. What will life be like from a taxing and spending standpoint under the Biden administration? And there’s lots that you have written about that really was scary to you. Give us some of the headlines. What, based upon—and this, of course, early indications, who knows what the political process will yield—but based upon what we know now, what scares you the most? What are some of the elements of Biden’s taxing and spending approach that scare you the most from the standpoint of really representing a threat to the U.S. economy?
Chris Edwards: Well, the first thing on spending: we’re in this bizarre situation where, as we said, the federal government spends more than a trillion more each year than it raises in revenues. So the logical and prudent thing to do for an incoming administration would be to start reducing that spending amount so we can balance our budget. You know, we’re spending over $5 trillion a year and we’re only raising just over $3 trillion a year. It’s a crazy, unbalanced situation. We should be reducing spending.
But Biden’s central campaign promise—he wants to spend about $7 trillion more, as you said. He wants to spend another $2 trillion or so on infrastructure, $600 billion on housing. He wants to raise Social Security benefits even though the Social Security system is already in terrible trouble. He wants to spend more than a trillion more on government healthcare. He wants a giant new entitlement program for paid leave, and on and on.
Here’s one of the things with this spending: a lot of this spending, like his housing spending—oh, he wants to spend $2 trillion more on education as well. So it’s not like the federal government’s just going to give the states another $2 trillion for their schools and say, “Okay, here’s some money for you, do what you want with it.” All this federal money’s going to come with strings attached. So essentially, Biden is promising he’s going to impose all these new micromanagement ways to control the nation’s schools. So more federal spending means more federal micromanagement of the economy and state and local government. So that’s the first thing.
The taxes: he’s promising higher corporate taxes. He’s promising to double the capital gains tax rate from around 20% to 40%. Here’s why this is dangerous: the American high-tech economy in Silicon Valley depends upon low capital gains taxation because the return to all these new innovative startup companies is a capital gain. This doubling of the capital gains tax would kill Silicon Valley and it would kill America’s high-tech innovation industries. I do not understand why there isn’t more of an outcry from Silicon Valley and the tech industry about these proposed Biden plans for capital gains. And he would, you know, he’d raise taxes on high earners across the board.
He’s going to raise—he’s got all these regulatory plans. He’s promised this radical and frankly rather extreme green economy. So he’s going to be raising taxes on energy, which is going to hit average working families across the board. He’s got plans, he’s got all kinds of big government labor union plans to, you know, he’s promised to try to repeal right-to-work laws in states that have those and try and do—there’s all kinds of things the federal government can do from a regulatory and legislative matter to promote collective bargaining, which is coercive labor union laws, which I think would be really bad for the U.S. private economy as well. So just about everything he’s proposing, it seems to me, would be damaging to the private sector. And so that’s—so we’ve got all this spending, we’ve got the higher taxes, we’ve got more regulations, we’ve got more micromanagement of state and local government activities. It’s a really disastrous plan ahead that he’s proposing here.
Capital Gains and Innovation [21:19]
Bob Zadek: Now, let’s drill down a bit. You have written about the capital gains tax. Capital gains tax is basically—or the low capital gains tax rate which we have now—basically imposes a lower level of taxation on income gained on an asset that you own for a period of time when you sell that asset at a profit. Stock, we’ll say. You pay less of a tax, and it is felt that that lower tax encourages investment. But Chris, I have read a lot about the capital gains tax rate, and while it will make investing less attractive, but still, if you invest and if you’re right, you will make a profit. And the question is, how clear is it that once the capital gains tax rate is increased, that in fact there will be a meaningful reduction in investment? Putting it another way, how much of the investing in Silicon Valley, of course, is worthy of attention? How much of the investing only takes place today because of low tax rate as opposed to investing because the possibility of making buckets of money, albeit taxed at a higher rate, the prospect of making buckets of money is too tempting to discourage people? So is there any empirical data that shows a direct link between the level of risk-taking and capital gains tax rate?
Chris Edwards: The first thing to know is that I think people have a biased view of Silicon Valley because we’re all aware of the big successful hit companies, whether it’s the Facebook or the Google or the Amazon and the newer companies like Zoom and the like. We’re all familiar with the hits. But the reality of Silicon Valley is that a lot of people, mainly wealthy people, angel investors and also venture capitalists, pump enormous amounts of money, tens of billions of dollars, hundreds of billions of dollars over time, into highly risky startups. And you know, the basic statistics for angel investment and venture capitalists are that only one in ten of their investments become big hits. Most of them fail. I mean, there’s a giant graveyard in Silicon Valley of companies that fail.
So why do the venture capitalists and the angel investors pump all that money into all these highly risky companies when the alternative is they could put money into safe investments like, you know, any of the standard industrial stocks in the S&P 500, or they could—rich people could put their money into tax-free muni bonds, for example? They put their money into highly risky startups in Silicon Valley for the chance that maybe five or six years down the road, one in ten of the risky companies they invest in is going to be a big hit. And if it’s a big hit, there’s a big capital gain benefit.
So the current federal capital gains tax rate is 24%, but if you—Biden wants to raise it to around 40%. That becomes—it becomes a lot riskier to put your money into those highly unlikely, you know, uncertain investments in tech stocks if the tax rate goes up that high. Again, you have the alternative to earn safe returns in the S&P 500, in tax-free muni bonds. So that capital gains tax rate is really important.
Here’s one bit of evidence of how important it is: every major industrial country in Europe, Canada, Australia, etc., they have much lower capital gains tax rates for the same reason. There’s been a general understanding by finance experts around the world: you need to have a low capital gains tax rate if you want an innovative technology industry, if you want investors to invest in risky companies. You have to have a low capital gains tax rate for them to take that additional risk that they wouldn’t take on safe investments.
Infrastructure: Private vs. Public [25:47]
Bob Zadek: You have written a lot about infrastructure spending. And man, Chris, everything you write is so welcome because the public so misunderstands. Everybody says, “Yeah, I hit a pothole the other day, the roads are crummy, we should fix the roads. The bridges are falling down,” has become a mantra nationally even though, of course, it is not true one tiny bit. So tell us about, from an economic standpoint, why you rail against—what is the—are you just a curmudgeon? Why are you complaining when people want to pave the streets and fix the bridges? What’s your problem, Chris?
Chris Edwards: Well, the first thing to know about infrastructure—all the politicians love to talk about infrastructure spending. The first thing you need to know, and the Bureau of Economic Analysis has detailed data on this: the vast majority of infrastructure in America is actually owned by the private sector. Whether you’re talking gas pipelines or, you know, electric utilities or all those, you know, semiconductor factories or, you know, there’s a vast majority of infrastructure is privately owned. All those cell phone towers—it’s all private. So that’s the first thing.
The second thing is that government infrastructure is pretty important. It’s much smaller than private infrastructure, but the vast majority of government infrastructure is actually owned by state and local governments, not the federal government. America’s entire highway system is owned by state and local governments, not the federal government. Even the interstate highway system is entirely owned by state governments.
So the first thing to know is that state governments, if people think there’s potholes in their highways, their state government is entirely capable of raising taxes to find the money to fill those potholes or repurposing other spending to fill those potholes. So the solution doesn’t have to come from Washington. You know, people should look to their state government to fix infrastructure problems within their state.
The problem if you get Washington involved is that they put all kinds of strings attached on the spending. The money tends to be pork barrel; it goes to the states with the powerful congressmen rather than the states that really need it. There’s a huge amount of general waste in Washington. A lot of the money gets stuck in the expensive bureaucracies in Washington rather than being redistributed out to the states. The federal government tends to spend—biased spending on wasteful infrastructure like light rail systems rather than the useful infrastructure that Americans really want, like expanded highway systems.
So the solution to infrastructure is in state governments, but you know, it’s mainly in the private sector. Most infrastructure in America is private, thank goodness. And the last thing we need is more federal tentacles in that infrastructure, distorting where the investment goes.
Bob Zadek: So your problem is not the amount of infrastructure spending; it’s who does the spending. You have no complaint per se because it’s up to the state to decide how to spend its money, states and local governments. And therefore you will just defer to the states and the political process in terms of which roads to fix and which roads not to fix. So your opposition to infrastructure as a concept is the fact that the federal government does the spending, which means the decision as to where money is spent and how it is spent is decided politically through “you scratch my back, I’ll scratch yours,” and you end up with powerful subcommittee chairmen getting lots of money for their districts to build useless airports, to support local airports and support train stops at local stations that nobody gets on and off and things like that. So your complaint—
Chris Edwards: Exactly. So here’s—think about cell phone towers or the internet. There’s no public policy discussion about how much cell phone tower investment we need to do because private companies, you know, it’s in the marketplace. Private companies figure it out; they look at demand from their consumers and they invest the appropriate amount. The same thing is true with electric utilities. You know, they need more energy production; they invest in more facilities to bring us more energy production.
The problem in government sectors like passenger rail, which is run by Amtrak—the government’s got a monopoly—or airports. All airports in America are owned by government. So how much to invest becomes this political issue and a pork barrel issue like you said. But it doesn’t have to be that way. So the first thing we should do is we should look at assets that the government owns—airports are a good example—and say, “Well, why don’t we move them to the private sector? That way it takes the politics out of it and the private sector can invest the appropriate amount to fulfill customer demand.”
Most airports in Europe are private. You fly into Heathrow Airport in London, you’re flying into a private airport. You fly into any airport in Canada, you’re flying into a private airport. So that’s the first thing to do: we should take assets that the government owns and mismanages and move them to the private sector. Trump actually, you know, he actually made this point on airports. He said a lot of American airports are actually poorly run and mismanaged. They look sort of—he used the phrase, I think, “third-world airports.” It is kind of true that our airports haven’t kept up, and the reason is because they’re in the government sector. So we need to look at assets that we can move to the private sector, and there’s a lot of stuff that we do in government in America and other countries that move to the private sector.
Another example is air traffic control. People might think that’s a government function, and there’s a lot of fights in Washington over how inefficient our air traffic control system is. It’s not investing enough to keep up with new technologies, and that’s true. But both Britain and Canada, they’ve privatized their system. It’s funded by fees on airlines, and the system works really well, and their systems are more advanced than ours today. So that’s how we need to think about infrastructure. We need to think about how the private sector invests the appropriate amount to fulfill customer demand, which assets can we take, like airports or the passenger rail system, to move to the private sector so that it gets the appropriate level of capital investment.
The Corporate Tax Myth [32:33]
Bob Zadek: Now, on the subject of—well, you were talking about air traffic control, where my brain went with that—my imagination was off and running. And I can just imagine the democratic socialists and that ilk in our political system who will complain that passenger safety is too important to be left to the profit motive, and claiming that private business will cut corners chasing the holy grail of increased profits and we will suffer from a safety standpoint. Forgetting full well that government is free to set the standards. And people—many people lose track of the fact that having the private sector do it doesn’t mean there is no role for government. Government is not bad at setting standards. Government is not bad at providing—well, this is going to sound kind of silly, but I really mean it—government can be effective in causing information to be provided to consumers. Maybe too much information, but they can get the information out. Interest rates, or what’s in a food that you buy and stuff like that. Government is good at that. They’re very bad at actually delivering the service. It just doesn’t work.
So take air traffic control—or by the way, also export this concept to operation of a school system. It seems irrelevant, but it’s not. Have government set the standards, but then allow private business to carry out the contract with the government in accordance with standards, just the way a contractor builds your home according to your agreed-to standards. You let the contractor do the work, and you just set the rules and you say what the final product’s got to look like. So having private business do it doesn’t mean the low bidder gets it and everybody’s going to be at risk from a safety standpoint. So Chris, that’s where I went with that. It can be applied—air traffic control is a wonderful example—but you can apply what you just said to so many areas of the economy where now government is the provider: post office, schools, healthcare, and the like. Let government set the standards, but not actually do the providing. The providing itself is best left to private business. And that’s my takeaway from your very good example of air traffic control, where we are lagging in free-market concepts behind Europe and Canada and perhaps the Far East as well.
Now, Chris, there’s another topic in the Biden plan. Well, first, before we leave Biden for a minute, what is Biden’s plan? You mentioned how he’s going to be spending money, and you’ve mentioned his tax policy, which is going to be—all you’ve mentioned so far is increasing the capital gains tax with the possible detriment that it will discourage investment, perhaps even move Silicon Valley to Ireland where the tax rates are lower. I’m being very theoretical, and we will have, in effect, shopping for a lower tax jurisdiction with the profound loss to the U.S. economy that may happen. Not a lot has been written about that. But tell us how, in the Biden plan to the extent that it has become public, how does he intend to spend, to raise the money to spend the $7 trillion? Is his plan to increase the deficit and who cares because I, Biden, will be dead when you have to pay the bill? Or does he have a plan, such as it is, to pay for it?
Chris Edwards: Well, yeah, he proposes all these tax increases to mainly pay for his spending. So that’s why he promises to raise the corporate income tax. He promises to raise the tax rates on higher-income individuals. Although, as you say, that’s a bit of a false promise because with all the spending and all these promises, he’s ultimately going to have to raise taxes on everyone. And I think the big fear going ahead is that the federal government’s going to get so short of cash, they’re going to want to impose a new broad-based tax that hits everyone, either a European-style value-added tax, which is a tax on all consumption that everyone does, or a giant new carbon tax, which is the sort of the trendy thing amongst centrist and liberal economists. They want a carbon tax that would hit all energy costs in the economy.
So ultimately, all the spending, I think, is going to lead—could lead dangerously to new broad-based taxes on everyone. So I think he hasn’t said that directly, although they want to raise the cost of carbon, which is, you know, the cost of energy on everything. But I think all these tax increases that would be really damaging to the economy. Of course, a lot hangs in the balance here with the two remaining seats in the U.S. Senate with the Georgia election in January. I think if Republicans retain those two seats in Georgia, the tax threat will lessen. There’s still a giant problem with spending, though. I fear that enough Republicans will want to spend more money—politicians love spending—that the debt is just going to keep piling up and piling up.
And all this debt is a cost moved to young people on the future. It’s hugely unfair. And I’ll end with this: there’s something that people often don’t think about with all this debt. The federal government’s accumulated now $20 trillion in debt. It is all a cost moved forward onto young people in the future. And the government has had all these trillions of dollars of extra stimulus bills this year to supposedly fight the recession and the like. But people forget that young people in the future will have their own crises. America will have, you know, we may have wars or military challenges down the road. We may have other health crises or natural disasters down the road. So young people in the future are going to have their own disasters to pay for, and we’re asking them to pay for our disasters as well by moving all this cost of debt onto them. It’s totally—it’s incredibly unfair what we’re doing with all this debt moving this cost forward. So to me, this is all a moral issue as well as an economic issue.
The Immorality of Debt [41:06]
Bob Zadek: It is a profound moral issue and one that is never addressed when politicians will give lip service to reducing the deficit. You do hear the phrase—it’s become almost hackneyed—“we shouldn’t saddle future generations with the debt.” Yet no politician ever ran on a platform of reducing the debt. That used to be a bedrock of conservative Republican Party planks, their platform, but no more. And there is nobody left who runs on a platform of living within our collective means.
Now, the answer, as Chris said, is not raise taxes and then we’re living within our means, because raising taxes will have a long-term damaging effect. It’ll kill the golden goose; it’ll kill the economy as you tax the producers. And all of a sudden there’ll be a housing shortage in Galt’s Gulch somewhere as there’s no more room to move to Galt’s Gulch to get away from the high taxation if you’re a producer. So that’s the long-range prospect.
Now, Chris, you have mentioned something that is one of my very favorite tax discussion concepts. And we didn’t discuss this when we prepped for the show, but I’d like to just mention it and get your quick thoughts. You mentioned Biden’s plan is, among other things, to raise the corporate income tax. And it is bedrock core principles when anybody says “let’s tax the rich,” they say “let’s tax American corporations.” That’s like the placeholder for tax the rich. And there’s almost no public discussion anymore—but Chris, there’s about to be, if you and I having this conversation constitutes a public discussion—we’re going to have a very short public discussion on the sophistry of thinking if you tax a corporation, it somehow solves the problem.
The reason I raise the issue is that to a corporation, a business in general—I’m not just picking one corporate form—but when you tax a profit-making enterprise, it becomes a cost like rent or salaries. And since businesses are determined to make a profit, they will simply build in that cost—the cost of corporate taxation—into their product. Which means corporations never pay taxes. Never, ever, ever. They pass along the cost in the product. Which means if you tax auto companies, you’re taxing auto buyers, you’re taxing consumers. If you tax food companies, you’re taxing people who buy food, and so on. And statistically, the lowest 25% of earners in this country bear a disproportionately high burden of corporate taxation through the pass-through. The last politician to discuss eliminating the corporate income tax as a disguised tax on low-income consumers was Steve Forbes a long time ago, Chris. So comment, if you will, on the insanity of having a corporate income tax to begin with. It’s cowardice because you’re taxing consumers but indirectly, without telling consumers you’re taxing them. Now, how off am I on that concept?
Chris Edwards: No, that’s right. There is general agreement amongst economists of all political persuasions that the corporate tax, ultimately, you just think of it from a cash flow perspective, it’s got to ultimately land on lower returns to shareholders, lower wages for workers, or higher prices for consumers. In a global economy, economists are generally agreeing more that the burden actually mainly lands on workers, meaning that corporations ultimately—they’ve got to earn a certain return, they can’t raise prices because we have competitive consumer markets. So ultimately, they have to lower wages for workers, and that’s probably where most of the burden of the corporate tax lands.
Earlier you said something which is important, which is, you know, you talked about Ireland. People sometimes—you’ll hear people say, “Oh, well, the U.S. used to have higher corporate and individual tax rates like in the mid-20th century, so why can’t we now?” Well, the reason is the whole world economy is vastly different than it was in the mid-20th century when the American economy sort of rode astride the world. That is no longer the case. Industry today is mobile. Most industry is service industry, it’s computer industry, it’s industries that can frankly locate anywhere, just about anywhere in the world. You can set up a semiconductor chip manufacturing plant in any of dozens of countries today, in Ireland, in China, in Malaysia, in Vietnam. Silicon chips don’t have to be made in California or Arizona anymore. And because of that, raising taxes on high earners, on capital gains, on corporations, you’re going to induce more and more investment to go abroad. And so we just shoot ourselves in the foot.
You’re absolutely right about corporate tax; the burden ultimately lands on individual Americans. And so it’s kind of just a shell game the federal government is playing. And so the higher you raise taxes on corporations, the more of them will move abroad. And besides, the federal government frankly raises very little on corporations. I have the numbers in front of me here. So the federal government in 2021 will raise $3.3 trillion in taxes; only $120 billion of that will come from corporations. Why? Because corporate profits are tiny compared to individual income. The federal government raises the vast majority of its income from individual income taxes and payroll taxes. So the left-wing rhetoric that, “Oh, we’re going to solve our deficit problem or we’re going to fund all of Biden’s spending with raising corporate taxes,” it’s just total nonsense because we hardly raise any from corporations just because the corporate tax base is so small and it’s very mobile. You try to raise taxes on it, it’ll move away. So that whole discussion is very deceptive. I’d encourage people—you can easily look at the Congressional Budget Office data and see that corporate income taxes are very small. You’re not going to raise very much money there even if you thought it was a good idea to raise money and spend more.
The Need for Tax Transparency [48:18]
Bob Zadek: And on the subject of corporate income tax, before we leave it, one of my real pet peeves is that so much of governmental taxation is—since the only real taxpayers are consumers, ultimately we pay all the taxes, not businesses—what I rail against, and I wish there was more written about it, is since we pay all the taxes, I imagine a world where we as consumers, every consumer in America, got one bill from the federal government and from the state government: “Here is your pro-rata share of running our operation, and your tax bill is $58,000.” That would be instead of a sales tax, which is buried, and consumers just realize their food and their clothing costs 8 or 9 or 10% higher, which you kind of don’t notice; it’s to you it’s just the cost of the product. You don’t notice the sales tax.
If you ever would look at a utility bill—if you would look at a utility bill, which now is all online and nobody looks at them, they’re all electronic—you would see how much of that cell phone bill, how much of that cable bill is various taxes, all itemized if you got a bill but no one ever looks at them. So to you it’s just cable is expensive and cell phone is expensive. I mentioned corporate income tax and tariffs and airline travel. All of these have embedded costs involved, which to us, “Wow, the product costs more.” No, there’s a big tax component. I would pray for every consumer getting one bill: “This is your share of the government.” And there will be a second American Revolution rebelling against the high cost. But government has been very skillful at having others be its tax collector so they get the heat and not the government.
Chris Edwards: You’re exactly right, Bob. And I agree with you entirely that taxes are the price of government, and the price should be labeled clearly and transparently. You go into a grocery store or to Walmart, the price of everything is labeled clearly. We should have that with government too. And so I think a big reform thing at both the federal and state levels is eliminating all these excess tax bases we don’t need. So for states, for example, that have both an income tax and a retail sales tax, you eliminate one of the taxes. So Washington state, for example, just has a sales tax and not an income tax. That’s a good system. Oregon just has an income tax and not a sales tax. That’s a good system. So I think we should try to eliminate these excess tax bases, simplify and make transparent and visible taxes so that people can see the burden of government. I entirely agree with you about that.
Bob Zadek: Chris, how can our friends follow your writing at Cato?
Chris Edwards: You know, I’m easy to find just at Chris Edwards at Cato. You can follow me on Twitter. Our website, downsizinggovernment.org, has all my writings about all the federal programs we need to cut and why we need to cut them. People can email me; my email’s on the Cato site. I’m pretty easy to reach, Bob, and I hope people go to some of our writings there and see why we need to cut all this spending from Washington.
Bob Zadek: Let’s you and I light a candle tonight and pray for sequestration again. Those were the good old days. Thanks a lot, Chris. Thanks for sharing an hour of your time this morning. Have a good rest of the weekend as well to my friends out there. I’ll be back again next Sunday. Please enjoy the rest of the weekend.
Chris Edwards: Thanks a lot, Bob. You’re doing a great job.