Why We Need More Than a Holiday From Sales Tax Holidays

Although the summer equinox started a little over a month ago, the summer break is already winding down. Students are gearing up for the academic year. Part of that gearing up is having the parents buy school supplies and backpacks. In an attempt to boost consumer spending, state governments have implemented what are referred to as sales tax holidays (see below). We already see such states as Florida and Tennessee are implementing sales tax holidays this summer for school supplies. 

A sales tax holiday is a "limited-time period where a state allows sales tax to be waived or reduced on categories of items." State tax holidays typically last a few days, but can last longer. These temporary sales tax exemptions are not limited to school supplies. States have enacted sales tax holidays for such goods as computers, clothing, groceries, and sporting goods. This year, more states are looking to expand these tax-free periods due to inflation and large state budget surpluses. While sales tax holidays are a great political gimmick, they do not make for great tax policy. 

Much of what makes a sales tax holiday ineffective is the temporary nature of the exemption. The assumption made by proponents is that the tax holiday boosts additional sales. As a report from the Federal Reserve Bank suggests, what happens is that the sales tax holiday only shifts the timing of the purchases instead of increasing overall purchases (Aladangady et al., 2017). Since sales tax holidays primarily shift purchases, as opposed to increasing them, they do very little to increase economic growth. This makes sense since sales tax holidays are usually offered when demand is at its highest and most inelastic, thereby doing little to shift overall demand curves. 

The temporary nature also means time-based discrimination. Why should a purchase during one small window of time be time-exempt while the same product during the rest of the year is taxable? Also, what is a consumer to do if they cannot purchase that weekend? Some are working or on vacation. Others could be in between paychecks during the sales tax holiday, especially if the holiday is only a few days. A study from the Federal Reserve Bank of Chicago shows that those who benefitted the most were those with incomes over $70,000 because they had the financial stability and resources to time their purchases (McGranahan and Marwell, 2010). 

Time is not the only form of discrimination. Sales tax holidays are generally arbitrary on the items that they produce. Aside from creating economic distortion and reducing market efficiency, these holidays also complicate inventory management and taxation. For the exemption to be successful, retailers need to comply with the tax code to if they are to be at all successful. The tax code should be as simple as possible. However, it takes a lot of paperwork and man-hours to wade through red tape for an exemption that typically lasts for a few days. 

This red tape and complication in the tax code creates more opportunity for tax evasion. Mentioning tax evasion is notable because one of the advantages of using a consumption tax is that a sales tax is easy to track, measure, and tax (Fritts, 2020). It ends up being complicated to make so many adjustments for such a short period that many businesses (small businesses in particular) do not want to deal with the compliance or adjusting cash registers. 

Finally, some retailers might exploit the tax holiday by increasing their prices. This would reduce the benefit of the sales tax holiday to the consumers (e.g., Hawkins et al., 2003), which is one of the main reasons for such a tax holiday. 

Sales tax holidays do not increase purchases, promote economic growth, or provide relief to consumers, especially those from low-income households. The fact that you need a tax holiday in the first place implies that the current sales tax structure is too burdensome. Sales tax holidays are first and foremost a distraction from the fact that sales tax holidays do nothing to provide long-term relief. It must be bad when tax policy think-tanks both on the Left and the Right cannot stand sales tax holidays. If politicians want to make a true difference, they should work on making a more competitive tax system that works for consumers and producers alike. 

Should Sweden and Finland Be Joining NATO? Here Are 9 Arguments Against the Proposal

Much like Switzerland, Sweden developed a reputation for neutrality that dated back to the end of the Napoleonic Wars. Sweden was able to maintain its neutrality through the gruesomeness of both World Wars and the Cold War. It looks like its tradition of neutrality is coming to an end. The war between Russia and Ukraine has Sweden rattled enough that Sweden, along with its neighbor Finland, has petitioned to join the military alliance known as the North Atlantic Treaty Organization (NATO). A couple weeks ago on June 28, Turkey lifted its veto to the Nordic nations' bids to NATO, which led to a memorandum being signed between Turkey and the Nordic nations of Sweden and Finland. 

Before filing its petition on May 18, Sweden and Finland have been security partners to NATO. In 1994, they joined NATO's Partnership for Peace. They also contributed personnel to the conflicts in Afghanistan, Iraq, and the Balkans. In 2014, Sweden and Finland were designated as Enhanced Opportunity Partners. This is about as close as one can be to NATO without actually being in NATO. 

Bringing in Finland would expand NATO's border with Russia by an extra 800 miles. The ascension of these two countries would expand NATO's presence in the Baltic Sea and Arctic Circle. Sweden and Finland have military assets to contribute, as we see below. Given that Sweden and Finland are already part of the European Union, it seems to make sense to have these two nations make their security commitments align with the West, as well. Both countries ascending at the same time could lower risk in comparison to submitting bids separately. As intuitive as it might seem, is it really the right choice?   

1. In spite of the war in Ukraine, the geopolitical dynamic between Russia and the Nordic nations has not fundamentally changed. Russia has made no threat against Finland or Sweden. There are no major disputes between the countries. Ukraine notwithstanding, post-Soviet conflicts that Russia was involved in entailed at least some form of a casus belli. Neither Sweden nor Finland have had a major military dispute with Russia since the Continuation War of 1941-1944 (also known as the Second Soviet-Finnish War). Plus, Russia is fighting a war in Ukraine and has been losing forces without near-term replacements. Factor in Russia's military engagements with the economic sanctions and one can see that given current geopolitics, the likelihood of war between Russia and the Nordic states is quite low. 

2. Russia's invasion of Ukraine does not warrant NATO protection. You would think Russia would have been granted a swift victory, especially given its troop size and military might. As of July 3, Russia has only managed to invade the eastern portion of Ukraine (see below). If anything, Russia's lack of progress in the Russo-Ukrainian War signals that the Russian military has been dealing with its own deficiencies, ranging from intelligence, personnel, and training to corruption and low troop morale. Russia does not have the geopolitical clout, the land, or military might that it once had in the Soviet era. Russia's subpar performance combined with the economic sanctions that will most likely weaken Russia in the medium-term and the cost Russia is paying for the Russo-Ukrainian War should put Swedish and Finnish minds at ease. 

3. Sweden and Finland joining NATO could create more geopolitical problems in the medium-term. Right now, Moscow does not hold any grudges against Stockholm or Helsinki.  However, it is possible that the Russo-Ukrainian War does not go well. Russia could set its sight on Finland prior to Finland's ascension to NATO. Why? Not only to gain domestic support of the Putin regime, but also as a preventative measure to make sure it does not join NATO. 

Another factor to consider is that post-Soviet Russia has instigated wars over three instances of potential NATO expansion: Georgia (2008), Crimea (2014), and Ukraine (2022). If Finland joins NATO, it would more than double the land border between Russia and NATO alliance members. Such a move would serve to give fodder to Putin's theory that the Western powers are closing in on him. Russia's ambassador to Finland, Pavel Kuznetsov, already said that Moscow would respond with retaliatory countermeasures in the event that Finland joins NATO. Deputy Chairman of Russia Security Council Dmitry Medvedev similarly said that Finland joining NATO would double the land border of the NATO alliance with Russia, which would mean refortifying Russia's borders. 

Why give Putin a pretext for escalation and reinforce Moscow's security fears when the status quo has brought stability in the Baltic region for more than half a century? If Moscow were to act similarly in Latin America, or Mexico more specifically, it would be reasonable to assume that the United States would respond in an escalatory fashion. Sweden and Finland should not be allowed entry to NATO for the same reason that Ukraine was not allowed: for fear of escalation with Russia, nuclear or otherwise.  

Bringing Sweden and Finland into the fold of NATO adds two more triggers to Article 5 of NATO, which is the Article that stipulates the collective defense of the alliance. It is true that Sweden and Finland would receive protection under Article 5 if they become members of NATO. It is a double-edged sword because they could also become potential targets, provided that Russia and NATO perceive one another in adversarial terms. Swedish and Finnish military capabilities would become part of the calculus of Russian targeting and strike prioritization in the event of a conflict between Russia and NATO. Conversely, if Russia attacked Poland or another Baltic country, Sweden and Finland would be obligated by Article 5 to help out in a conflict that does not directly affect their national security.  

4. There is doubt as to whether Sweden and Finland could contribute to collective defense. This is not to say that Sweden or Finland do not have military capabilities because they do. The Swedish island of Gotland could help NATO secure the Baltic region. Finland's military has 23,000 active military personnel and an extra 238,000 reservists it could muster up within a month. Finland's main weakness in its military is its lack of missile defense. Sweden's major source of national defense is its navy. While these countries have capabilities to defend their own borders, I have to wonder whether these resources would be adequate to "contribute to the security of the North Atlantic area" (per Article 10 of NATO) and help NATO beyond the context of their own borders. 

Historically, the modern states of Sweden and Finland have been much more focused on defending their own borders than collective defense. What's more is that the two nations have not spent much of their respective GDPs on military expenditures (see World Bank data below). According to World Bank data, neither Sweden nor Finland meet the NATO criterion of spending at least 2 percent of GDP on military expenditures, although increased spending suggests they could reach that minimum. 

Also, Sweden had to reinstate its conscription in 2017, which could signal a weakness in its military readiness. Since Finland shares a border with Russia, its military has prepared its reservists have greater readiness. As another point to consider, Sweden and Finland are cozier with China than the U.S. government cares for, which would make it more difficult for Sweden or Finland to contribute anything significant to collective security policy as it pertains to eastern Asia. Overall, these factors suggest that Sweden and Finland would not provide much beyond territorial defense of their respective countries to the NATO alliance.  

5. Even if Russia were to attack, it would not mean that Finland or Sweden would be hung out to dry without NATO membership. As we have seen with Ukraine, the Western powers are willing to give arms and resources in the event of war, even without NATO membership. Also, Sweden and Finland are part of the European Union. The European Union provides mutual defense under the Treaty of Lisbon. Sweden and Finland can receive military aid without having to join NATO. Refusing entry to NATO would not be leaving Sweden and Finland in the lurch, but rather maintaining a status quo that has been working for decades. 

6. Defending Sweden and Finland would not be so easy. Neither Sweden nor Finland have a direct land route from continental Europe. Everything coming from NATO allies would need to be deployed by airlift. Russia's war with Ukraine has illustrated that Russia has the ability to neutralize air deployments. Sweden and Finland would be in range of Russia's ground missile, anti-ship, and surface-to-air systems. Furthermore, the Russo-Finnish border could be a challenge to defend given the terrain. While Finland could be a great launching site for attacks, the double-edged nature of this geographical relation means that it is vulnerable to Russian attacks. This is not to say that the task of defending the Nordic nations is impossible, but it would require considerable resources and coordination to make it work for NATO. The actual cost might be higher than the projected cost (see Point #8). 

7. The larger the alliance, the more territory that NATO would have to defend in the event of a war. If the member countries proportionately contributed, that would be one thing. The issue is that the United States does the heavy lifting. The United States is de facto the primary source for providing security guarantees for 29 nations. Given NATO's history, it is reasonable to assume that the United States will be on the hook for Sweden's and Finland's security commitments, much like it has with other NATO allies. It is dubious that the Nordic nations would share the burdens of the military costs. Sweden has not even been admitted to NATO and it has already asked the Pentagon for naval assistance. 

8. Much like with Ukraine, defending Sweden and Finland is not of vital geopolitical importance to the United States. I say this as someone who is almost half-Swedish and has an affinity for the Nordic region. Yes, there are multiple countries within the NATO alliance system. However, in practice, it would be the U.S. military that would disproportionately spend on Finnish and Swedish defense. Europe should bear more responsibility in preserving peace in Europe, but European powers have been content on letting the United States shoulder much of that burden. 

As such, it makes sense to ask how adding Sweden and Finland would benefit U.S. interests. What is the exact threat that Finland or Sweden face? We already know that a Russian attack on these two nations is unlikely (Point #1). We know that Sweden and Finland would not be left to fend for themselves in the unlikely event of war (Point #4). What is the measurable benefit of adding Sweden and Finland to NATO? The United States arguably has more vital security interests, especially in Indo-Pacific Asia. 

9. Since the United States would be paying for a large portion of the bill for the ascension of Finland and Sweden to NATO, we should ask what the cost of ascension would be. A 2021 analysis from Center for Strategic and International Studies (CSIS) asks what NATO enlargement would look like and what it would cost. According to CSIS, it would cost as much as $11.6 billion upfront and $1.8 billion annually after that (CSIS, p. 93, 104). In 2021, the U.S. Department of Defense (DoD) spent $741.7 billion. If the United States were responsible for half of that $1.8 billion, it would mean a 0.1 percent increase of the DoD's budget. 

Conversely, the United States has a debt-to-GDP ratio of over 100 percent, something the country has not seen since World War II. National debt issues will continue to haunt the United States for years to come, especially since there is no sign of government spending slowing down. The United States should be shrinking its military obligations in light of the long-term insolvency that such an expanded role costs. We should not add the defense of Sweden and Finland to the list of unnecessary military expenditures, especially since it would not improve the geopolitical situation for anyone. 

[As a side note, the United States should examine how much they support Europe vis-à-vis NATO. A professor at MIT found that having European nations be more responsible for its regional security could save the United States up to $80 billion annually (Rosen, 2021).]

Conclusion

Yes, there is instability in Eastern Europe that we have not seen in decades. How Russia will act in the upcoming months is a wild card, especially with the Russo-Ukrainian War. I can understand how Finns and Swedes could feel a heightened sense of concern. At the same time, Russia's actions in Ukraine do not justify an expansion of NATO by allowing Sweden and Finland to enter. Forgetting the fiscal costs for a moment, allowing for these ascensions to pass has the real potential to exacerbate geopolitics in central and eastern Europe. 

NATO membership for the Swedish and Finnish nations is superfluous at best and injurious at worst. Perhaps ascension to NATO could result in a deterrent effect. I'm not going to hold my breath because history and international political theory (specifically that of balance of power theory) have me think that an escalatory effect is much more likely. In any case, I hope that events do not reach to such a level where we have to read about this in future history books.

Robert Reich Continues to Lie About the Negative Effects of the Minimum Wage

With abortion and gun control dominating the news cycle, I wanted to take some time to cover another controversial topic: minimum wage. This past July 1, we saw multiple jurisdictions increase their minimum wage, including the state of Minnesota and the City of Los Angeles, as well as the City of Chicago and the greater Cook County. It sounds like a great victory for the working class. The minimum wage argument goes something like this: "If you wage the minimum wage to a living wage, it helps out workers. The workers are more productive, which in turn helps out employers. It's a win-win." 

American author and political commentator Robert Reich made that argument about a week ago in his piece entitled "4 Myths About Raising The Minimum Wage." For Reich, we should raise the minimum wage to $15 because "it is insult to American workers and it's bad for the economy." Reich attempts to debunk four talking points in the minimum wage debate to make it seem as if you can raise the minimum wage without any consequences. The problem is that Reich is flat-out wrong. I have actually called him out before on his minimum wage information in 2015 and in 2014. I ended up spending my Fourth of July weekend writing this piece and calling him out once more. He addressed four points, and I will respond to his analysis in kind. 

1. If businesses have to raise wages, they'll have to cut employees' hours or jobs all together. Reich takes with this argument by saying that "treating workers is worth the price." He then argues that increases in the minimum wage do not reduce the overall number of jobs. Minimum wage increases are increase in labor costs. As we will see throughout this piece today, companies have to account for the increase in expenses. 

Even if we were to forget standard microeconomic theory about price floors for a moment, Reich's fantasy does not play out in reality. When Seattle raised its minimum wage to $15, there was both a decline in hours worked and overall number of jobs. A 2019 review from the Cato Institute on the minimum wage similarly found that cutting employee hours is one way that employers compensate for the minimum wage hikes (Clemens, 2019). 

Not only is there a reduction in hours, but also an overall reduction in jobs. A report from the National Bureau of Economic Research looked at the impact of federal and state minimum wage hikes since 1992. This report also found that there has decidedly been a negative impact on employment (Neumark et al., 2021). 

The Congressional Budget Office (CBO), which is the gold standard for legislative analysis, has analyzed the effects of a federal minimum wage hike on more than one occasion. What does the CBO find? Among other negative effects, there would be a significant loss in jobs if the minimum wage were raised to $15. The last time the CBO looked into the possibility raising the minimum wage to $15, the CBO found that it would reduce employment by 1.4 million workers. While some workers would have a higher wage and be lifted out of poverty (900,000 according to the CBO), another 1.4 million would be unemployed. While a wage less than $15 can be an issue depending on where in the United States one lives, the last time I checked, $0 per hour is an even less livable wage.  

2. Small businesses won't be able to afford the higher wages and will be put out of business. Reich argues that a higher minimum wage attracts better workers, leads to better worker productivity, and improve retention of workers. I criticized Reich's turnover argument in 2015 by pointing out that the reason that turnout is lower is because the minimum wage hike disincentivizes hiring more workers. 

But let's get back to the main point. Small businesses have less resources to pay for higher wages, especially now after everything that came as a result of the pandemic. Given the wage structures, they do not have the same economies of scale that larger businesses have. It would explain why the average wage for those working for an employer with less than 100 employees is half of what it is for those working for an employee with over 1,000 employees. 

A paper from the National Bureau for Economic Research found that minimum wage increases created greater financial stress for smaller businesses, including "lower bank credit, higher loan defaults, lower employment, a lower entry and a higher exit rate for small businesses" (Chava et al., 2019). As another example, a paper from Harvard economists shows that raising the minimum wage by $1 resulted in a 14 percent increased likelihood that a mid-level restaurant would exit the market (Luca and Luca, 2018). Is it any wonder that such large companies as Walmart and Amazon support $15/hour minimum wages? They have the capacity to better pay for such wages while driving their competitors out of the respective market. 

3. If the wage is raised, prices for everything will skyrocket and lead to widespread inflation. With the inflation being the highest it has been in over forty years, it is understandable that inflation has become a topic of interest in U.S. politics. I would surmise that there are various contributing factors to this current bout of inflation, although some are more so than others. Even looking at other inflationary periods, I would not put minimum wage at the top of the list as a contributor to inflation, especially if the minimum wage increase is small. After all, minimum wage increases are more likely to be indexed to inflation projections, thereby minimizing impact on overall consumer prices (MacDonald and Nillson, 2017). At the same time, there are inflationary pressures, even if they are modest, as a result of artificially increasing wages for minimum wage workers. 

As previously mentioned, employers are trying to find ways to compensate for the increase in the price of labor that minimum wage laws cause. One of those possible ways is by increasing consumer prices. A Hungarian case study showed that the consumers bore the majority of the minimum wage increase through higher consumer prices (Harasztosi and Lindner, 2019). A research paper led by an economist from the Federal Reserve Bank found a similar response to the minimum wage increases, this time in the U.S. fast food industry. Essentially, fast food prices increased about twice as fast as the minimum wage (Aaronson et al., 2007). Two economists at the University of California at Berkeley who are minimum wage proponents even admitted that passing on the minimum wage increase to the customers is a phenomenon (Allegretto and Reich, 2017). 

While increasing consumer prices is shown to be an implemented strategy, there is a limit to how much increasing consumer prices can be used as a business strategy.  If the price increases are too high, demand and eventually overall revenue would drop. That is the law of demand for you! That explains why employers find other ways in addition to increasing consumer prices to deal with the minimum wage increases. While Reich is technically correct to say that prices will not skyrocket, he is still engaging in exaggerated language to deflect that there are still upward pressures on consumer prices as a result of minimum wage laws. 

4. Most minimum wage workers are teenagers making some extra money on the side; they don't need a wage increase. Reich starts off by talking about teenagers and then goes into the red herring commonly used by minimum wage proponents that minimum wage is not livable. As I pointed out in my criticism of Reich's arguments in 2015, if we strictly look at teenagers and look at the 15-19 age bracket, then yes, there is a small percentage of minimum wage workers in that age demographic. At the same time, this is misleading in terms of what a typical minimum wage worker looks like. 

If we use Bureau of Labor Statistics (BLS) data, we see a very different picture than the one that minimum wage proponents paint of a single mother working three full-time minimum wage jobs to make ends meet. I have done this with 2014 data, but I am going to use 2021 BLS data since they are the most recent data from BLS to show that the typical minimum wage worker is far from what minimum wage proponents purport. 

• Age: In terms of age, 44.3 percent of minimum wage workers are 25 or less, although they represent one-fifth of hourly wage workers (BLS, Table 1). 
• Education: 85 percent of minimum wage workers have a high school degree or less. Let's look at those with college degrees in contrast. College degree holders account for 37.2 percent of the overall population (Pew Research), but 14.7 percent of minimum wage workers (BLS, Table 6). Another demographic statistic to remind us that completing a college degree generally helps people with their professional development and earning power. 
• Full- and part-time status. 52.0 percent of minimum wage workers work part-time (BLS, Table 1). 8.9 percent of minimum wage workers work over 40 hours, whereas 5.1 percent work greater than 50 hours (BLS, Table 9).  
• Percent Working at Federal Minimum Wage. There are fewer hourly workers working for minimum wage or less than there used to be. In 1979, 13.4 percent of hourly workers, or 6.9 million workers, worked for minimum wage or less. The percentage and raw number have decreased to the point that in 2021, 1.4 percent of hourly workers, or 1.5 million workers, are making minimum wage or less (BLS, Table 10). 

Conclusion

"Lies, damned lies, and statistics" is what I think of when I read arguments such as those coming from Reich. Every policy enacted has a tradeoff. Reich would prefer to think that we can simply raise wages without there being any consequences whatsoever as long as one feels as if they can claim moral superiority. The world does not work that way. If laws increase the cost of hiring a worker, employers will find a way to work around that cost increase. We explored reducing work hours, cutting jobs, or increasing consumer prices. There are other ways as well, including automation, scaling back workers' benefits, reducing the quality of the work environment, or playing around with work schedules (e.g., Clemens, 2021; Lordan and Neumark, 2017). 

There is a reason why economics is referred to as the "dismal science"; it points out the reality that we have a limited supply of goods and services, also known as scarcity. Economics is supposed to help us figure out how to best allocate that limited supply. Unfortunately for Reich, a $15 federal minimum wage would harm many of the people that he would like to help.