The Biden administration will need practically every Democratic representative in Congress to vote for its proposed $2 trillion package of tax increases, which would be the largest in 54 years. To gain that support, the president may have to season his legislation with some SALT. The bill, which raises corporate taxes and boosts capital-gains levies, among other things, doesn’t restore the full federal deduction for state and local taxes that Donald Trump’s 2017 tax-cut bill capped.
Democrats in key high-tax blue states, including New York representative Tom Suozzi and New Jersey representative Josh Gottheimer, have been complaining that Trump’s tax bill placed an undue burden on their states’ residents. Some have vowed not to support any tax legislation unless it reinstates the full SALT deduction. The problem: federal data show that restoring the deduction would overwhelmingly profit rich taxpayers—and lawmakers in many blue states have already raised their own levies on the rich.
Subsequent data have shown that the SALT changes fall heavily on the rich, while the vast majority of taxpayers in high-tax states have benefited from the Trump cuts. An analysis of 2018 New York tax returns found that the number of residents subject to the higher rates of the Alternative Minimum Tax declined to just 0.2 percent of all returns, down from 5.9 percent in 2017. Thanks to the doubling of the standard deduction, the number of New Yorkers itemizing their deductions shrank by nearly two-thirds that year, according to an Empire Center report. A recent report by the left-of-center Brookings Institution found that 57 percent of the benefits of restoring a full SALT deduction would go to the top 1 percent of households, providing them with an average tax cut of $33,000.
Almost everyone I know in Britain has been surprised—for once, pleasantly so—by the success of the country’s vaccination program against Covid-19. We are so accustomed to the abject failure of our public administration in almost everything, from its political dithering, followed by self-evidently wrong (and costly) decisions, to its bureaucratic incompetence and moral corruption, that when something goes right, we stand amazed. What, indeed, can explain why something should at last have gone right?
The government decided that everyone should be immunized according to risk—first the oldest people and health workers, then the slightly less old and those with compromised immunity, and then the still less old, and so forth, until all adults will have been covered. By spring, more than half the population had received a first (and most important) dose of a vaccine. Almost no opposition to, or even criticism of, this manner of proceeding has arisen— unlike with almost everything else the government has done in its response to the pandemic—and the uptake of the vaccination offer has been high, except among some ethnic minority groups.
The government website to make a vaccination appointment could hardly have been better designed. It gave a large choice of locations, based on their distance from one’s home; we could select time and place. My wife and I chose the following day at noon at Ludlow Racecourse, where a large vaccination center was operating. We could have had our vaccination at my local doctors’ office, 300 hundred yards away from where we lived, but in a time of lockdown, we wanted a day out: so reduced have been our horizons of late that a drive of 20 miles or so seemed almost exciting.
While the economic case for reducing inequality isn’t clear, a moral case can be made. One could argue that it’s wrong for the few to have so much while the many have so little. But it’s not the Fed’s job to make moral decisions about the ideal distributions of wealth. This is an inherently political calculation—one that should be addressed through institutions directly accountable to voters. Moreover, the tools at Congress’s disposal—tax rates and control over benefits, for example—are better suited for taking on inequality. And these policies involve costs, too, in terms of growth. Voters should be the ones to decide whether they want to pay them.
The Fed’s role is to balance short- and long-term interests, making the hard choices that may harm the economy now in exchange for long-term stability and expansion. Once politics are involved, however, it becomes difficult if not impossible to make this trade-off. The Fed can do what it does because it has a narrow mandate: reasonable inflation and maximum employment. It needs to stay in its lane.
Since last winter, 1.8 million women have left the labor force entirely—neither working nor looking for work. At first, closed schools and the high cost of child-care options seemed responsible. But economists who have crunched the numbers argue that closed schools can’t explain higher female unemployment. Women with young children make up only 12 percent of the labor force and were only slightly more likely to leave the labor force than were women without young children. The exception? Women with young children who don’t hold college degrees—they constitute only 6 percent of the labor force but saw the biggest drop in employment. Their employment rate has fallen by almost eight percentage points since the pandemic started.
This suggests that women aren’t working for various reasons. For most families, several factors—child-care options, how much a given job will pay, and their partner’s employment prospects—determine whether they will decide to return to work. Rarely in economics does a single cause explain a phenomenon; policies often affect behavior on the margins. If you’re struggling to find good, affordable child care and you are being paid more to stay at home, that extra factor can tip the scales.
Indeed, several current policies seem to be discouraging women from returning to work.
Watch a recording of Truth in Accounting’s virtual event with special guest Steve Malanga, senior editor at City Journal. In this episode, we discussed the financial troubles of America’s largest cities and the effects of Biden’s infrastructure plan.
Author(s): Bill Bergman, Sheila Weinberg, Steve Malanga
And applying the higher capital gains rate to top earners, who tend to be wealthy, creates bigger distortions because these taxpayers have many tools to avoid the tax. For example, when you inherit assets subject to estate taxes, the capital gains tax that you pay is based on when the asset was transferred to you, instead of when it was bought. This is known as a step-up in basis. Doubling the tax rate makes this provision much more attractive, and word is that the Biden plan nixes it. High earners can find other ways to get around this tax with the right advice. Certain asset classes, such as investment real estate, offer a chance to lower liability. We may also see more high-net-worth investors move further into the murky world of private equity, where values are easier to distort.
There are better ways to collect investment-income revenue. Getting rid of step-up in basis is a start; the administration could also take on the myriad loopholes that favor different asset classes. But these approaches don’t offer the stick-it-to-the rich satisfaction of doubling the rate on investment income—even if we all wind up paying for it.
We can see evidence of the market distortions that government subsidies cause in the market capitalization of electric-car maker Tesla—currently about $650 billion, or more than five times that of General Electric. Tesla benefits from many subsidies already, and the Biden infrastructure plan aims to divert even more to the electric-car industry. And by increasing the corporate tax rate to pay for part of these subsidies, the Biden plan will further distort the market by making the unsubsidized private sector even less attractive to investors.
The pandemic forced many businesses to adopt new technologies that could boostproductivity for decades. Productivity gains don’t always come so fast. It took more than 100 years for the steam engine, a transformative technology, to show up in productivity estimates, for example. The pandemic’s acceleration of this process of technological adoption means that we could be poised for a big burst of follow-on growth and innovation. But government interventions on the scale of the Covid stimulus and infrastructure bill threaten to divert these energies into less productive investments.
True, the added government spending will provide short-term benefits to workers in the form of new jobs building roads, bridges, and airports or retrofitting buildings with green technology. But using industrial policy to create jobs can also generate long-term risks for those workers, by steering them away from gaining the skills and experience the market may need in the future. Research has shown that workers for the Depression-era Works Progress Administration were less likely to take higher-paying private-sector jobs when they became available because they preferred the security of a government guarantee. In the long term, that can lead to wage stagnation and a population less competitive in the global market.
But this is Detroit, which has the highest effective property tax rate of any major city in America, at 3.58 percent of market value. If the tax man assesses your house at its full renovation cost, this would add $537 to your monthly mortgage bill, bringing it to $1,295.
That hefty charge might not look too bad if the quality of local government services is top shelf. As Charles Tiebout observed in his classic 1956 article on local public finance, people “vote with their feet” and shop for their preferred combination of services and prices among various localities. Some happily buy at the public services equivalent of Neiman Marcus, others at Walmart.
From public safety to education to infrastructure, however, Detroit is no Neiman Marcus. To be charitable, let’s suppose the city’s services are on par with those of other Michigan cities, where the average property tax rate is 1.54 percent. Elsewhere, then, a comparable $180,000 investment comes with a monthly mortgage bill of just $989, or $306 a month less than in Detroit.
The New York tax burden is already punishing enough. New Yorkers pay a greater percentage of their earnings to the state than residents of any other state. The total tax burden, on top of federal taxes, amounts to 12.79 percent of income, according to a new study. Opponents of the latest tax increases claim that the state’s punishing rates are responsible for driving high earners and businesses away, and indeed the state consistently faced massive levels of net outmigration to other states even before the pandemic. That migration has included thousands of jobs in areas like financial services. Among the firms that have relocated significant jobs away from the city are Credit Suisse, Barclays, UBS, and AllianceBernstein, according to a recent Forbes article. Goldman Sachs has moved a big-money management division to Florida, and hedge fund manager Carl Icahn has decamped there as well. The Empire State’s taxes are one reason that former hedge fund manager Leon Cooperman said, “I suspect Florida will soon rival New York as a finance hub.”
The number of excess deaths not involving Covid-19 has been especially high in U.S. counties with more low-income households and minority residents, who were disproportionately affected by lockdowns. Nearly 40 percent of workers in low-income households lost their jobs during the spring, triple the rate in high-income households. Minority-owned small businesses suffered more, too. During the spring, when it was estimated that 22 percent of all small businesses closed, 32 percent of Hispanic owners and 41 percent of black owners shut down. Martin Kulldorff, a professor at Harvard Medical School, summarized the impact: “Lockdowns have protected the laptop class of young low-risk journalists, scientists, teachers, politicians and lawyers, while throwing children, the working class and high-risk older people under the bus.”
The deadly impact of lockdowns will grow in future years, due to the lasting economic and educational consequences. The United States will experience more than 1 million excess deaths in the United States during the next two decades as a result of the massive “unemployment shock” last year, according to a team of researchers from Johns Hopkins and Duke, who analyzed the effects of past recessions on mortality. Other researchers, noting how educational levels affect income and life expectancy, have projected that the “learning loss” from school closures will ultimately cost this generation of students more years of life than have been lost by all the victims of the coronavirus.
Perhaps most damaging, however, has been the idea arising in the last few years that people simply can’t be trusted to make sensible risk assessments—that they must be guided or even manipulated into making smarter choices. The idea that we need to be “tricked” into good behavior was pervasive throughout the pandemic. First, we were told masks weren’t effective, in what turned out to be an attempt to protect supplies for health-care workers. Last spring, we were told that coming into contact with others in just about any environment was unsafe, despite data showing the risk of outdoor transmission was very low. Over the holidays, rather than telling people that they should reduce their risks at holiday gatherings by taking steps like getting a test beforehand, public-health officials said that we should all just stay home, because tests can’t guarantee safety. Even today, the FDA refuses to approve cheap, at-home rapid tests without a prescription because the government doesn’t trust individuals to assess risks based on good, albeit imperfect, information.
The worst, most consequential failure in risk communication concerns the current vaccine rollout. The media constantly instruct us that, even weeks after receiving the second shot, it’s still not safe to socialize without masks. President Biden and Anthony Fauci have warned that we may not be able to resume “normal” life for another year. Fauci recently counseled against vaccinated people eating in indoor restaurants or playing mahjong together. Public-health officials today gave the green light for vaccinated people to gather together—but only after weeks of confusing and contradictory guidance.
The Budget Control Act of 1974 is the most misnamed congressional act in American history. Far from “controlling” anything, its passage caused the federal budget process to spin out of control. In the six years preceding the act, with the Vietnam War raging, annual deficits averaged $11.3 billion. In the first six years after the Budget Control Act, with the war over, they averaged $54 billion.
What happened? The Budget Control Act cut the president out of the budget process by removing his political leverage, leaving Congress in near-total control of the budget. Congressmen have a strong incentive to bring home the bacon, both to their voters and, increasingly, to their donors. Logrolling—you vote for my project and I’ll vote for yours—is, all too often, how Congress works.
Before 1920, there was no unified budget process. Executive departments simply submitted their budget requests directly to Congress. What kept spending under control was a strong political consensus across both parties that the budget should be balanced if at all possible. That idea only began to erode in the 1960s, with a misuse of Keynesian theory.