The two sides of a coin are typically regarded as opposites. In the case of President Biden’s $5 trillion Build Back Better bill, the two sides are actually the same. Both the revenue and expenditure provisions of this agenda will cause substantial decreases in employment. The only difference will be how.
The Build Back Better bill would deliver a double blow to an already disrupted labor market. Most of the explicit tax increases in the agenda directly disincentivize investment, which reduces capital, wealth, wages and employment. Meanwhile, the creation of new (and the expansion of existing) employment-tested and income-tested benefits would increase the implicit tax on working.
The tax increases on both corporate and pass-through business income would reduce wage growth by shifting investment out of the business sector, reducing competition and overall investment, and contributing to lower employment. The tax increases on capital gains, as well as increased corporate taxes on foreign profits, would exacerbate these effects.
The expansion of Affordable Care Act subsidies and paid medical-leave mandates would also reduce employment levels by tying benefits to not working. This and other provisions are gifts to unions, helping them achieve the goal of higher wages through reduced labor supply.
The bill would expand the child tax credit for households that earn no income for a full calendar year. Perhaps the bill’s authors are too young to remember the 1996 welfare-reform law, which demonstrated how sensitive single mothers’ work behaviors are to such disincentives.
Additional subsidies for food, along with medical coverage and housing, decrease as a household earns more income, providing more disincentive for working. The implicit employment and income taxes from a total of 13 such measures would add almost eight percentage points to the marginal tax rate on labor income. Other parts of the bill further reduce the purchasing power of wages by educing competition and raising costs in telecommunications, energy and other products and services, increasing prices in those industries.
After separately estimating the effects of Mr. Biden’s tax hikes, we find large costs to the supply side of the economy. One of us (Mr. Ginn), along with Steve Moore and E.J. Antoni, finds that the explicit tax increases on income, investment and wealth will cost five million jobs over a decade compared to baseline growth. The other (Mr. Mulligan) finds that implicit tax increases on work will cost nine million jobs.
While these two effects may overlap, the Build Back Better agenda is a jobs killer. Pushing these programs further into the budget window may change the headline spending number, but it won’t change the economic damage they will do to the nation.
The president’s plan would be the largest tax-and-spend increase—and disincentive to work—since the introduction of the income tax. It would tax those who produce and subsidize those who don’t. It would encourage dependency on government and punish self-sufficiency. Wealth taxes could exceed 70%, and marriage penalties on small-business owners could exceed $130,000. Families could be hard-pressed to keep farms and businesses after the original owner dies. And the real median household income would fall by $12,000. Meanwhile, lower-income households would see their generous government assistance decline rapidly in the event of even a modest increase in earned income.
Increasing the implicit tax on working has the same effect as a statutory tax increase on income, investment and wealth: decreased employment. With inflation-adjusted private investment having declined for the first two quarters of this year, the nation doesn’t need direct—or indirect—tax increases, especially on investment.
Likewise, with a near-record high 10.4 million job openings in August, the same month there were 8.4 million unemployed, the nation doesn’t need additional disincentives to work. The Build Back Better agenda would hamstring a labor market that remains five million nonfarm jobs below its February 2020 levels and potentially reverse the economic recovery.
Nobel laureate James Tobin was a leading Keynesian economist and key adviser to President Kennedy. He described high-implicit-tax situations as causing “needless waste and demoralization. . . . It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.”
The hidden tax of inflation prevents people from getting out of poverty. Inflation isn’t just an inconvenience; it’s a huge obstacle to prosperity for the vulnerable and low-income. And even if Congress and the Fed have good intentions, their next steps could make the current bad situation worse.
The latest inflation data from the consumer price index shows an increase of 6.2% over the last year. This means that Washington took this out of your paycheck from no fault of your own or without you sending them a check.
This sleight of hand is caused by the Federal Reserve built on the excessive spending by Congress and it crushes the hopes and dreams of many, especially the poor.
If you received a raise recently, say around 8%, then about three quarters of it is not real—it’s inflation. The purchasing power of goods and services through your raise is cut by higher prices. If your raise was about 6%, normally a healthy increase, then your purchasing power doesn’t change. At this pace, prices are set to double in less than 12 years, but will your paycheck?
People with lower incomes tend to receive smaller raises, and those on fixed incomes receive no raises or raises that just match inflation, such as those on Social Security. For them, inflation is the harshest of taxes and they can’t avoid it. Families with lower incomes have few assets like corporate stocks that can grow as prices rise.
This inflationary blight on low-income earners is the Fed’s doing, but Congress gives the Fed the means to do it and it looks poised to double-down on its bad decisions.
Congress has already authorized $7.2 trillion in spending since the shutdown recession, including much of the waste in the recent $1.2 trillion “infrastructure” bill. Now, the House’s Build Back Better Act would increase spending by $5 trillion, after appropriately excluding budget gimmicks, and increase the bloated national debt by another $3 trillion more than without it over a decade.
This spending would likely be more expensive because the policies would destroy an estimated 7 million jobs by paying people not to work per economist Casey Mulligan’s estimates and reducing entrepreneurs’ investments based on the Tax Foundation’s assessment. And these job losses would most likely be concentrated among those with lower incomes. Increasing unemployment over time would make more people dependent on government, which may be a feature of the bill instead of a bug.
Other proposals, like “green energy” projects and “incentives,” would increase the cost of living for everyone and hurt those with low or fixed incomes most because they’re least able to absorb it. And while the Congressional Budget Office could soon release their cost estimates for the BBBA, we should take them with a grain of salt as they could be too rosy because its static estimates have long been problematic, which is why it should move to more realistic dynamic scoring.
Though Congress’ boondoggle spending doesn’t directly cause inflation, it provides the fuel to the Fed’s fire of printing more money. These progressive policies in Washington are crushing the poor, even as they’re providing tax cuts for the “rich,” and there doesn’t seem to be an end in sight—unless this this latest big-government bill appropriately fails.
Impolitic government programs, like those in President Biden’s agenda, incentivize dependency on government and create cycles of poverty. Few things are more harmful than this because it cuts the rungs out of the ladder that many people use to climb out of poverty and better their lives, both financially and otherwise. These rungs of the ladder start with a job. Work is the only way to permanently earn more over time and improve human dignity that comes with financial self-sufficiency, community, and social capital.
If Congress really wants to give people a hand up—and not just a handout—then it should focus on repealing those programs which disincentivize work and remove the tax hikes that disincentivize investment that goes to hire more workers.
Likewise, if the Fed intends to improve the economy, it should focus on reining in inflation which it controls, not lecturing on diversity. These measures would help take the costly pressure off people, especially low-income earners instead of crushing them based on the president’s progressive agenda.
We’d be wise to remember what Milton Friedman correctly said: “One of the great mistakes is to judge policies and programs by their intentions rather than their results.”
Gov. Kim Reynolds and Republican legislative leaders are making tax reform a priority for the upcoming 2022 legislative session. The path to keeping government from excessively burdening people with taxes and allowing for pro-growth tax reform starts with conservative budgeting.
Fortunately, Iowa has been practicing prudent budgeting. Iowa will end the current FY 2021 with a $1.24 billion budget surplus in its general fund, which is substantially larger than last year’s surplus of $305 million.
Iowa state leadership deserves credit for their recent prudent spending and tax relief. As a result, Iowa was prepared fiscally for much of the costs related to the government shutdown in response to the COVID-19 pandemic. Truth in Accounting’s Financial State of the States 2021 report ranks Iowa in the top 10 (9 out of 50) of fiscally stable states.
In addition, the legislature has been careful to avoid using the billions in COVID-19 related federal funding on ongoing expenses. The $1.24 billion surplus is not a result of these federal dollars, but rather the fiscal conservativism that has spurred economic growth.
Nevertheless, policymakers will need to continue this approach to strengthen the state’s improving fiscal foundation by keeping spending from excessively burdening taxpayers to provide needed tax relief.
This is a reason that the Iowans for Tax Relief (ITR) Foundation recently released the Conservative Iowa Budget (CIB) for FY 2023. This conservative budget approach helps limit spending by setting a maximum threshold on the state’s general fund based on the rate of the state’s resident population growth plus inflation. Given the 2021 rate of 4.51% and a base of $7.1B, excluding $1 billion provided in tax relief this year, the FY 2023 budget should be less than $7.44 billion.
This fiscal rule of a spending limit on the general fund provides a reasonable limitation that essentially freezes inflation-adjusted spending per capita. This helps to lessen the crowding out of private sector activity and helps to stabilize expectations over time.
Iowa’s Revenue Estimating Conference (REC) estimated that revenues will increase for both FYs 2022 and 2023. The REC is estimating $8.9 billion in revenue for FY 2022 and $9.1 billion for FY 2023. This projection is a healthy improvement from the previous year. These optimistic projections by the REC make it prudent to continue using budgetary caution to fund only limited roles for government instead of spending every taxpayer dollar.
Therefore, it is important to keep spending reined in and will require legislators to prioritize every taxpayer dollar, which is difficult as many special interests will be arguing for either new funding or expansion of their previous allocations.
Already public education (K-12, community and technical colleges, and higher education) along with Medicaid comprise 79% of the general fund budget. This creates additional pressure because spending on these items continue to increase and crowd out other priorities.
Many families and businesses, especially during the pandemic and now as inflation reduces their purchasing power, must prioritize their spending. Government should also focus on priorities, even more so than families and businesses – because it is not the government’s money.
Fiscal rules that limit spending help achieve this goal. While Iowa currently has a 99% spending limit in code, this limitation must be strengthened.
The spending limit should be strengthened by passing a constitutional amendment or changing it in the code to be based on a maximum rate of population growth plus inflation. This is an important measure because it accounts for more people paying taxes, higher wages – which are highly correlated with inflation over time, and economies of scale.
Policymakers have a historic opportunity to enact pro-growth tax reform that will benefit all Iowans and make the state more competitive. To achieve this goal policy makers must continue to practice sound budgeting by passing a Conservative Iowa Budget.
The 2023 Conservative Iowa Budget
The Conservative Iowa Budget helps limit government spending so that there are more opportunities for tax relief and for widespread prosperity for Iowans now and for generations to come.
The path to keeping government from excessively burdening people with taxes and allowing for pro-growth tax reform starts with conservative budgeting. Iowa Gov. Kim Reynolds and the Republican-led legislature have fortunately been following a policy of prudent budgeting. Iowa will end fiscal year (FY) 2021 with a $1.24 billion budget surplus in its general fund, which is substantially larger than last year’s surplus of $305 million. The large surplus is a direct result of fiscal conservatism. Nevertheless, policymakers will need to continue this approach to correct for past excesses and strengthen the state’s improving fiscal foundation to provide needed tax relief. This can be achieved by keeping government spending from excessively burdening taxpayers.
The Iowans for Tax Relief (ITR) Foundation’s Conservative Iowa Budget (CIB) for FY 2023 (see Figure 1) helps do this by setting a maximum threshold on the state’s general fund based on the rate of the state’s resident population growth plus inflation, as measured by the U.S. consumer price index (CPI). This fiscal rule of a spending limit on the general fund based on population growth plus inflation provides a reasonable limitation that essentially freezes inflation-adjusted spending per capita. This helps to lessen the crowding out of private sector activity and helps to stabilize expectations over time.
A Conservative Budget for Tennessee
For several decades and under the control of both Republicans and Democrats, Tennessee has been known for its fiscally conservative budgeting. Years of limited spending and low taxes have kept hundreds of millions of dollars in the pockets of Tennessee taxpayers that might otherwise have gone to government bloat. In fact, according to the Tax Foundation, Tennessee residents pay less in taxes than anyone in the country. Conservative budgeting has not only helped Tennessee taxpayers, but it also positioned the state to enter the COVID-19 crisis with a relatively strong “rainy day fund” of $1.1 billion, or seven percent of the state’s general fund expenditures. Tennessee remains in a strong financial position as its economy has bounced back stronger than the national average post-pandemic. Conservative budgeting and sound policy during the pandemic contributed to such strong tax revenues that the state had an unprecedented $2.1 billion surplus in the latest fiscal year despite the crisis.
But future good times are no guarantee—and that’s why, whether in good or bad times, Tennessee families practice priority-based budgeting, making tough choices on how to spend their hard-earned dollars. If Tennessee is to remain an economic powerhouse, policymakers must also continue to make fiscally conservative choices, resist the temptation for excessive spending, and not make it overly difficult for Tennessee taxpayers to fund their state government.
Ron Shultis, Director of Policy and Research for the Beacon Center, commented about the report: “Tennessee has been a fiscal leader for decades but it is important that we not rest on our laurels or take that for granted. The Conservative Tennessee Budget sets the standard for staying a national leader. By ensuring spending doesn’t grow more than population plus inflation, state government won’t become more of a burden on taxpayers.”
Vance Ginn, chief economist at the Texas Public Policy Foundation and co-author of the report, stated, “Any increase in the state budget should be less than the average taxpayer’s ability to pay for it, as measured by population growth plus inflation, which is why the Conservative Tennessee Budget is essential for continued opportunities that best let people prosper. We have seen the success of this approach in Texas for a number of years so I’m excited to partner with the Beacon Center in this fruitful endeavor to keep Tennessee a great place to raise a family and start a business.”
Vance Ginn, Ph.D.