The Show-Me State Should Show That Zero Income Tax Can Work in Missouri

"Eliminate the state income tax" is one of those proposals that sounds like it fits libertarianism like a glove. Personally, I don't need much convincing that there are problems with taxing income. I wasn't exactly thrilled in 2013 when the federal income tax reached its 100th birthday. This brings us to current events. 

Tomorrow, the citizens of Missouri are voting on a ballot about whether to eliminate the state income tax. In concept, I like it. All things considered equal, I prefer a consumption tax over an income tax because it generally does lest discourage work, saving, investment, and entrepreneurship. The proposed amendment has stages to phase out the income tax while giving lawmakers a way to find ways to replace the lost revenue. However, my enthusiasm wanes when it collides with economic reality. 

The concern is not simply whether I think consumption taxes are better than income taxes. It is about what happens afterwards. State governments still have expenses, and the state income tax makes up about 69 percent of the state's discretionary revenue fund. Unless the state decides it is going to spend a whole lot less, it needs to make up that lost revenue somehow. The question is whether Missouri can generate enough consumption tax revenue without causing more problems. 

I asked a similar question last year when analyzing Mississippi's income tax elimination proposal, and noted that not every state is built the same. Florida can lean on tourism. Alaska has oil. Nevada has Las Vegas. Texas excels in energy production, has rapid population growth, and property taxes to help make up. 

Missouri certainly has a diverse economy, but what is its equivalent to Texas' energy sector or Florida's tourism sector? This doesn't mean that it is doomed to fail. But it also means that Missouri cannot copy other states and except the same results. I don't see an obvious revenue source replacing over $6 billion in revenue. Every dollar not collected through the income tax has to be replaced somehow, or not spent in the first place. That is the part where I think Missouri will have quite the uphill battle, and that is the part where I would like for them to show me how they would succeed. 

If that weren't enough, there is another challenge. Replacing income taxes with consumption taxes is not as simple as increasing the sales tax rate. Even organizations that generally favor shifting away from income taxes have warned about the difficult. 

The Tax Foundation recently examined this topic and found that replacing state income taxes is much more difficult than estimates suggest. The reason is that a realistic consumption tax base is narrower than advocates often assume. Taxing business inputs creates its own problems, which excluding them means that the tax rate may need to be substantially higher. 

The lesson is not that states should keep income taxes forever. The lesson is that tax reform requires careful design. A poorly structured consumption tax can create problems of its own. I hope Missouri succeeds in create a more economically efficient tax system because that is a goal worth pursuing. 

However, lowering or eliminating a tax is only one part of reform, much like I brought up with the Kansas tax cut experiment last decade. The state must ensure that the replacement system is sustainable, transparent, and does not create unintended consequences. So far, it has not done a good job to show me that.

Supreme Court Strikes Down Trump's Tariffs: Why SCOTUS Didn't Add $2.4T to the Debt

Last Friday, the U.S. Supreme Court (SCOTUS) announced a much-awaited decision. In a 6-3 ruling, SCOTUS declared that Trump's tariffs under the International Emergency Economic Power Act (IEEPA) are unconstitutional. I took this as a win not only for the separation of powers, but also for the economic wellbeing of the American people. Economic estimates calculated that these tariffs would have cost consumers billions of dollars, reduced GDP growth, and harmed net employment while doing little in the way of measurable benefits. In a previous piece, I also point out that it is not only economic modeling. History has shown these adverse economic effects to materialize as a result of tariffs. As I wrote earlier this month, these tariffs are even affecting U.S. national security. So yes, I am quite happy and relieved to see this SCOTUS ruling. 

Counting Revenue That Does Not Exist

Yet I noticed a couple of estimates that came out in response to the ruling, and they were both budgetary in nature. The first estimate is from the Wharton School of Business, which a leading business school in the U.S. Wharton estimates that unless replaced by another revenue source, future tariff revenues will fall by half. The second estimate is from the bipartisan Committee for a Responsible Federal Budget (CRFB). CRFB writes that "SCOTUS tariff ruling could add $2.4 trillion to the debt [over the next decade]." According to the CRFB, this ruling could raise the debt-to-GDP ratio from the baseline 120 percent to 125 percent. One of the reasons that this SCOTUS ruling matters is because the Trump administration presented the tariffs not only in terms of trade policy, but also as a source of government revenue. 

The Mirage of "Lost Revenue"

Since the administration touted the tariffs as a revenue source, the framing of "the SCOTUS ruling adds debt" is especially misleading. Tariff revenue under the likes of Section 232 or IEEPA are temporary, process-dependent, and potentially disruptive on an international level. Assuming that the tariffs would last indefinitely or that there would not be economic blowback is unrealistic. The SCOTUS ruling does not add to the debt. Pretending that future tariff revenue increases debt ignores the reality that the money has not arrived in the government's coffers. An absence of a tax increase is not the same thing as an increase in the debt. 

Tariffs only shift resources from consumers and businesses to the government temporarily. They do not magically create wealth out of thin air. Calling tariffs "revenue" distracts from the fact that tariffs are a tax. The government does not have first dibs on the gains from private economic activity. Baseline budgeting treats the tax revenue as a permanent fixture once enacted. As I argued last September, the economic and fiscal realities of tariffs made tariffs an unreliable revenue source, especially given the negative economic effects and the risk of retaliation. That disconnect between baseline budgeting and economic reality is why the claim that "SCOTUS ruling causes debt" rings hollow.

The Real Culprit: Congress' Credit Card

The baseline assumption is that Congress does nothing else, that the currently enacted laws are on auto-pilot. This brings us to what really causes debt. U.S. federal debt does not exist because SCOTUS declared Trump's IEEPA tariffs unconstitutional. It is because the government has consistently spent more money than it makes. That is an outcome of basic accounting. As the most recent Congressional Budget Office (CBO) Budget and Economic Outlook shows, the government is projected to create an average annual deficit of 6.1 percent from 2027 to 2036. Keep in mind that this is higher than the 1976-2025 average of 3.8 percent. The fact that the CBO projected before the tariff ruling that the debt-to-GDP ratio would be at 120 percent, a ratio that is higher than it was after WWII military spending, should make us pause and ask what the real issue is.

The Deficit Solution Congress Refuses to Touch

As I detailed in 2024, tax cuts from the Tax Cuts and Jobs Act did not cause the economy to implode. Similarly, the absence of tariffs did not cause the debt "to explode" because of the SCOTUS ruling. It simply exposes how the U.S. economy is becoming increasingly fragile due to Congress' inability to get its spending under control. Tariffs, tax cuts, or emergency powers will not fix that insatiable, profligate spending. If you actually care about government spending (and if you are a U.S. citizen, you certainly should because of how it will directly affect you) and want a smaller deficit, don't go begging for more government revenue. Tell Congress to stop buying things it cannot afford.

2/12/2026 Hodgepodge: Interest on Debt, Who Pays for Trump's Tariffs, and National Guard Costs

This has been quite a busy week for me personally. I wanted to make sure that I got in two entries in this week, so I want to give a grab bag of some of the ongoings within the wonderful world of public policy. I hope to return to providing more in-depth analyses next week. 

Interest on U.S. Debt. Earlier this week, the Congressional Budget Office (CBO) released its Budget and Economic Outlook for the next ten years. This report has some eye-popping findings, such as the debt-to-GDP ratio is expected to hit over 120 percent in the next decade. For context, all that wartime spending for World War II only got the debt-to-GDP ratio to 106 percent. This is not the sort of record that the U.S. should want to break. Because of that profligate spending, the U.S. is paying off more interest on debt than ever. According to this report (p. 82), the U.S. government is projected to spend a whopping $16.2 trillion (yes, that is trillion with a "t") on interest between 2027 and and 2036.

Who pays for Trump's tariffs? Trump and Vance were under the belief that other countries were going to pay for Trump's tariffs, that Trump's tariffs are without cost or consequence. It turns out that is false. When I reported on this topic about three weeks ago, I covered a report by the Kiel Institute that says that the U.S. as the importing country pays 96 percent of the costs of the tariffs. What was not clear from this Kiel Institute report is whether the businesses paid or if it was the consumers. 

This is where the Budget and Economic Outlook comes into play. According to the CBO (p. 30), 95 percent of the tariffs were paid by raising consumer prices on U.S. consumers. This means that businesses have by and large passed on the costs to the everyday American. This lines up with a recent Tax Foundation estimate that Trump's tariffs are a tax of $1,000 in 2025 and $1,300 in 2026 for the average household. 

National Guard. In response to the rampant crime in Washington, DC, President Trump deployed troops to reduce crime in DC. Irrespective of the debate about whether this is effective, we now know how much this cost. The CBO recently released a report on how much all Trump's deployment of the National Guard to all cities cost, which was $496 million from August to December 2025. For DC alone, that was an amount of $223 million. Regardless of what you have to say about the crime rates, there has to be a more cost-friendly route to bring crime down without having to resort to using the National Guard. Perhaps another conversation for another time. 

Red Ink and Green Cards: How Increasing Immigration Improves the Fiscal Health of the United States

After the dust settled in the 2024 U.S. presidential campaign, it was a given that immigration was going to be a major topic during Trump's second term. He beefed up border control and has implemented mass deportation. Additionally, Trump signed off on a 1 percent remittance tax that will most likely fuel the immigration he is trying to stop. He is trying to use a law and order justification, even though immigrants are about half as likely to commit crimes as native-born citizens. While he is tackling immigration for criminal justice and cultural reasons, there is one aspect of restricting immigration that Trump is neglecting: its fiscal impact. 

What happens to a nation's balance sheet when a country closes its doors to newly arrived immigrants who are workers, taxpayers, and/or future parents? Amid the campaign slogans and punditry, few commentators or pundits have asked what immigration will cost this country in a fiscal sense. As federal deficits mount and such entitlement programs as Social Security and Medicaid become insolvent, immigration is not merely a cultural issue, but a budgetary one. A new report from the American Enterprise Institute (AEI) released earlier this month takes this concern seriously by presenting a post-pandemic snapshot with updated 2024 Current Population Survey data. With these data on newly arrived immigrants, there is a more updated projection of fiscal impact.

The AEI report finds that immigrants with a Bachelor's or graduate degree have a strong net fiscal impact. For low-income households, the net fiscal impact has a net direct cost in the short-term (see below). However, the AEI study identifies often overlooked, indirect positive fiscal effects as a result of low-income workers who increase the net benefit. This is hardly surprising since undocumented immigrants pay nearly $100 billion in taxes annually. 

One of the key indirect benefits is that the immigrants provide higher wages of native workers as a result of complementary immigrant workers. By increasing labor market efficiency, both low-skilled and high-skilled immigrants can boost native workers' wages, which in turn increases overall tax revenue.

Second, immigrants contribute to capital stock growth. With more workers, the existing stock of capital (e.g., factories, equipment, infrastructure) becomes relatively scarce. To rebalance the capital-to-labor ratio, firms are incentivized to invest in new capital. More capital translates into more capital-related tax revenue. Once these indirect positives are accounted for, it can offset the short-term fiscal costs on the state level in education (see Colas and Sachs, 2024). 

Looking at the long-term, AEI estimates that in a 75-year time horizon, increased immigration would reduce the fiscal gap by $750,000 per household. With the 2.2 million new households (7.9 million people/average household size of 3.6 people), the result would be a reduction of the long-term fiscal gap by $1.75 trillion. 

This finding about net positive fiscal impact lines up with a 2023 Cato Institute white paper saying that even immigrants without a high school diploma contribute a net positive fiscal impact. This AEI paper also lines up with a Congressional Budget Office (CBO) report from July 2024 about the fiscal impact of immigration. The CBO found that over the next decade, increased immigration by 200,000 a year would add $1.2 trillion in revenue. The 2023 IMF research paper also demonstrates the macroeconomic benefits of immigration, including increased GDP, employment, total factor productivity (TFP), and labor productivity.

This evidence should be taken seriously when analyzing Trump's mass deportation. This AEI report shows that the post-pandemic surge in immigration strengthened federal revenue and expanded the labor supply. As I pointed out last month, forced mass deportations would not only be morally problematic, but fiscally reckless. In terms of increasing fiscal deficits, mass deportation will end up reducing the GDP and reducing workers' wages, both of which have serious fiscal consequences.

Immigrants are often depicted as a fiscal burden on the citizens of the United States. However, after crunching the numbers, the opposite turns out to be the reality. Far from draining this country, immigrants stabilize this country's fiscal health. With growing deficits and declining fertility levels in the United States, restricting immigration not only fails to solve the problem; it makes matters worse. If Trump wants to be serious about immigration policy, it should not start with a border wall, raids from ICE, or fantasies about how immigrants are disproportionately responsible for crime. It needs to start with economic reality. 

Social Security at 90: An Outdated, Broken System Failing Retirees and Betraying Future Generations

On August 14, 1935, President Franklin Delano Roosevelt signed the Social Security Act. With the stroke of his pen, FDR established the Social Security program that we know today. Social Security was initially created as a safety net for the elderly during the Great Depression, many of whom lost their savings, jobs, and family support. Over time, Social Security became a source of supplementary retirement income. It has also faced increasing criticism, including here at Libertarian Jew. It drew enough of my ire that I listed it as one of the twelve reasons we should all dislike FDR. What makes Social Security so terrible? 

Why Social Security Is Fiscally Unsustainable 

Social Security is insolvent and fundamentally unstable. Why fundamentally unstable? In part, it has to do with its pay-as-you-go mechanism. In spite of what most Americans believe, recipients do not have their personal account with their own funds. Current workers pay the benefits of current retirees through the pay-as-you-go mechanism. Social Security's pay-as-you-go mechanism shares structural similarities with Ponzi schemes in that current contributors fund current recipients. Although Social Security is legally sanctioned (unlike a Ponzi scheme), this structure of transferring income instead of saving it raises sustainability concerns. No one has money saved in a personal Social Security retirement account because money is transferred from current taxpayer dollars to current beneficiaries. The only difference between a Ponzi scheme and a Social Security is that when the payout pyramid collapses, no one goes to jail. Taxpayers simply pay more. 

Because Social Security relies on current workers' contributions to pay current retirees, its stability is directly tied to the number of workers supporting each beneficiary. When the ratio is high, the system can function smoothly, like it did when the worker-to-beneficiary ratio was 159.4 to 1 in 1940 (SSA). With the Baby Boomer generation retiring, that ratio has decreased to 2.7 in 2023 and is expected to decrease to 2.1 workers by the end of the century (Pew Research). This decreasing worker-to-benefit ratio means that there are fewer workers shoulder the burden of a growing system, thereby putting greater financial strain on Social Security. 

When the demographic shifts are combined with the pay-as-you-go mechanism, the payroll tax becomes a more unsound funding source of the Social Security program. Over time, the deficits add up and will deplete the Social Security Trust Fund. The most recent SSA annual report predicts depletion in 2034, although it is likely that one of the negative effects of the "Big, Beautiful Bill" is accelerating that date to 2032. Once that Fund is depleted, statute dictates that Social Security payments are limited to incoming revenue. According to the bipartisan Committee for a Responsible Federal Budget's (CRFB) estimates, that will translate into a 24 percent cut in Social Security benefits (see below). 

To maintain this behemoth that is 21 percent of the federal budget and the single largest item in the budget, the government needs to find a way to fund $25 trillion in unfunded Social Security obligations. Right now, the current Social Security tax rate is 12.4 percent: 6.2 percent paid by the employer and the other 6.2 percent by the employee. If you are self-employed, you pay the 12.4 percent. Historically, Social Security taxes have increased, not decreased (Tax Policy Center). Given that the worker-to-beneficiary ratio is expected to decline, do not be surprised to see the payroll tax increase as a response from Congress to try to "fix" Social Security.

The Burden on Younger Generations

Younger people especially get harmed if politicians decide to fund Social Security program in perpetuity. How much will it cost the median worker entering the workforce to keep Social Security going indefinitely? According to a Cato Institute analysis, it would cost $157,000, which is the equivalent of giving up 29 months of pay over a lifetime, which is more than two years' worth of salary. Despite paying more, these workers are expected to receive reduced benefits compared to current retirees, or even have reduced or means-tested benefits. In short, younger generations are being asked to pay more for less.

What is the Return on Investment?

And what does a taxpayer, regardless of age, get for paying all that money? A low return on investment, or ROI for short. The SSA publishes internal real rates of return (IRR), which act as a measure of ROI. Using a simple midpoint estimate of the IRR from its most recent IRR report, the ROI for Social Security is 2.7 percent, while the Treasury bond real rate of return is about 2-3 percent (nominal is closer to 4-5 percent). In contrast, the average stock market return in the last five years was 8.9 percent when adjusted for inflation; 8 percent in the last decade; and 6.3 percent in the last 30 years. 

Why the low ROI? The reality is that Social Security reserves are mandated to be invested in U.S. government securities only. Treasury bonds are essentially IOUs from the federal government to itself, which means that Social Security will never be high-yielding in its current form. A Tax Foundation study confirms that it is the combination of these investment choices, a lower birth rate, and a lower worker-to-beneficiary ratio that contribute to this low ROI (Entin, 2016).

For Social Security proponents, they see Social Security as a safety net that provides baseline financial protection. But what good is that safety net if it fails to meet the financial needs of retirees, especially those who depend on it as their primary or sole income source? With rising costs and increased lifespans, seniors need an investment tool that allows them to maintain a dignified standard of living. Social Security fails spectacularly on that front, especially when compared to the average ROI of the stock market. That safety net mentality of prioritizing insurance-like protection over investment-like returns is what has gotten the American people into hot water, much like it has with Medicaid. If retirees had the ability to invest their Social Security taxes elsewhere, 27 percent of Americans would not have to rely solely on Social Security for income (Pew Research). 

Structural Flaws and Moral Hazards

In case fiscal insolvency, a low return on investment, or disproportionately harming young workers was not enough, here are more reasons to take issue with Social Security:

• There is no ownership or inheritance of Social Security. If someone dies, they cannot pass on their hard-earned savings to heirs as they can with a 401K. Even the Supreme Court has recognized that individuals are not guaranteed Social Security contributions (Flemming v. Nestor).
• Despite its progressive formula, Social Security is not means-tested. High-income retirees can still collect full benefits, regardless of need. This feeds into the program's entrenched safety net mentality, which prioritize broad, guaranteed payouts over investment-like returns or personalized savings. This undermines both its financial sustainability and its ability to efficiently target those truly in need. The fact that it fails on both counts undermines its rationale for existing as a government program.  
• Social Security hits the poor harder with its flat tax, i.e., everyone pays the same rate. However, the tax cap at $176,100 effectively makes it regressive. The reason why it hits hard is that the 6.2 percent cuts into one's expenses when struggling to make ends meet. This tax takes a significant share of income that would otherwise go to basic needs or personal savings. 
• Social Security is designed as a lifetime, inflation-adjusted annuity. The longer one lives, the more one can collect through Social Security. Although lower earners receive a higher benefit as a percentage of their earnings, it is not so helpful because the structure disadvantages demographics with shorter average lifespans (e.g., Bostworth et al., 2016), such as low-income workers and certain racial minorities (e.g., African-Americans, Native Americans). 

Alternatives and a Case for Privatization

Reform is always kicked down the road because the myopia of the election cycle disincentivizes long-term thinking. As this report from the Cato Institute shows, reform is possible. Other countries have implemented social security reforms, whether it is transitioning to a basic benefit structure (New Zealand), reducing excessive benefits for higher earners, implementing automatic stabilizers (e.g., Sweden's age-indexed eligibility), or voluntary Universal Savings Accounts (e.g., Canada). Countries like Sweden and New Zealand have adopted innovated reforms that improve solvency and fairness, offering models that the U.S. could adapt. 

Changing demographics and increasing obligations make the current system outdated in terms of serving the needs of the retirees of today and in the future. Since Social Security is the "third rail" in U.S. politics, U.S. politicians lack the willpower to do anything aside from kicking this volatile can down the road. Rather than more incremental reforms, I would prefer privatization, in no small part because the Organisation for Economic Co-operation and Development (OECD) found that private accounts lead to broader economic growth. 

Individuals need greater control over their retirement savings, potential for higher returns, and flexibility in retirement goals to help avoid poverty in their old age. In short, they need autonomy over their future quality of life. If U.S. politicians stay mired in the inertia that is the myopia of election cycles and buying votes, future retirees remain vulnerable to government stupidity. It is time for politicians to embrace privatization instead of keeping retirees trapped in a subpar retirement system. 

Big Beautiful Bill Will Result In Big Debt Without the Big Beautiful Economic Growth

President Trump spent his Fourth of July signing into law the One Big Beautiful Bill Act (OBBBA), a budget reconciliation bill passed by the 119th Congress. OBBBA contains a number of policy priorities from Trump's second term, including removing the tax on overtime, funding Trump's deportations of undocumented workers, extending individual income tax provisions from the 2017 Tax Cuts and Jobs Act, and removing the tax on tips. Given its sheer size, I cannot cover everything in one entry. We will have to see if I cover various provisions in the future. 

What I can say is that on the whole, the OBBBA is not looking good for the United States. The White House's Council of Economic Advisers (CEA) is optimistic. According to the CEA's analysis, the OBBBA is expected to reduce the debt-to-GDP ratio to 94 percent, reduce the deficit by $8.5 to $11.1 trillion over the next ten years, and increase the real GDP by between 4.6 percent to 4.9 percent over the next four years. But none of the policy wonks on any side of the political aisle share the White House's optimism. 

While the Right-leaning Tax Foundation calculates that there will be modest GDP growth as a result of the OBBBA, Tax Foundation is anticipating an extra $3 trillion in debt. The Congressional Budget Office (CBO) estimates that OBBBA will increase the debt by $3.4 billion. The Wharton School, which is the premiere business school in the United States, assessed the OBBBA and found that it would increase deficits by $4.1 trillion, as well as the debt-to-GDP ratio increasing by 7.7 percent and decreasing the GDP by 0.3 percent over the next decade. The bipartisan Committee for a Responsible Federal Budget (CRFB) found that OBBBA will increase the deficit by $4.1 trillion, accelerate Medicare and Social Security insolvency to 2032, and explode interest costs to $2 trillion a year. 

For those of us who care about the deleterious effects of debt on everyday living, this "Big Beautiful Bill" is a big mess. Neither the expanded tax preferences nor the subsidies like the ones in OBBBA are going to do us any favors. We should all be concerned about deficits and economic growth, but that is not evident in the bill that the Republicans passed. Without considerable spending cuts to get the U.S. government's spending binge under control, OBBBA will be nothing but a big, bloated blunder in the United States' budgetary history. 

DOGE at One Month: Examining Its Tameness on Tackling Government Efficiency

DOGE. Department of Government Efficiency. What started out as a noncommittal remark by President Trump and a half-serious tweet from billionaire Elon Musk has made multiple rounds of the news cycle since Trump's initial executive order brought it to life one month ago from today. Initially, DOGE was created to modernize government-wide software and infrastructure. An executive order issued on February 11 extended that power to workforce optimization, including letting go of hundreds of federal workers. Critics believe that DOGE is an unconstitutional power grab that is going to dismantle the United States government. Proponents believe that DOGE will overhaul federal bureaucracy and bring sanity to profligate government spending and largesse. Which depiction is closer to the truth? 

Since Trump won the 2024 election, I called for the abolishment of the Department of Education, the U.S. Agency for International Development (USAID), and the Federal Emergency Management Agency (FEMA). Furthermore, condensing ministries was part of Argentinean President Javier Milei's plan to reduce government spending. As a result of his plan, he was able to generate a surplus for the first time in over a decade. It is likely that Milei's chainsaw approach to government inspired Elon Musk. In concept, I agree with having a bureaucratic agency focused on making government more efficient. The question is whether DOGE has been successful or will succeed, legal and constitutional challenges notwithstanding. 

DOGE claims that it has already saved the taxpayers $55 billion so far. When accounting for some preexisting improper entries, duplicate entries, and other federal accounting nuances, the figure is closer to $8 billion. DOGE has mainly targeted low-hanging fruit, particularly with waste and fraud. DOGE's workforce optimization is not much better. 

The rule of "one in, four out" for the federal workforce sounds drastic, but it does not do as much as one would think. The military as well as those in law enforcement, public safety, or immigration enforcement are exempt. That exempts 60 percent of the federal workforce. Plus, even if you cut half the federal workforce, the $150-175 billion in savings would not make a sufficient dent to tackle the $2 trillion deficit. 

And that is part of the point. The national deficit for year-to-date is $700 billion. To avoid that deficit spending, we would need to eliminate the Department of Education and USAID five times over. To avoid adding debt and bring a balanced budget, we would need to eliminate the equivalent of ED and USAID thirteen times over. That is how staggering U.S. government spending is! While one could argue that DOGE's spending cuts are worthwhile, they are modest in comparison to the large scale of government spending. 

As the Cato Institute brings up, trying to make government more efficient misses the mark. Why? There are aspects of government that cannot intrinsically be run efficiently, which is why there are multiple parts of federal government that should not exist at all. If you cannot scrap or at least greatly reduce the size of given government agencies, waste and inefficiency will ensue. 

This Cato Institute report to DOGE gets at how to address major cuts to the federal budget. If DOGE does not tackle the major three drivers of the federal budget, which are Social Security, Medicare, and Medicaid, what DOGE can do to make the federal budget great again is minimal. 

This brings up a final point from Reason Magazine, which is that DOGE cannot go in and do it alone. Short of abolishing the Constitution, DOGE will need Congress' help to get the job done because Congress pulls the purse strings and Congress is responsible for determining the scope of the executive branch's activities. Given that Congress can barely pass stop-gap temporary funding, never mind pass all its required bills (last time it did that was 1996), I will not hold my breath in Congress getting its act together to help DOGE with its mission. Without lasting structural reform, DOGE is at best a distraction from the real issues facing the federal budget. 

President Javier Milei Improved Argentina in His First Year as Planet's First Libertarian President

As much as I love Argentina culturally, its economy has been ruined by nearly eight decades of Peronist government largesse, including gargantuan government redistribution programs, protectionism, an exceptionally interventionist monetary policy in which the central bank printed money like it grew on trees, and general disregard for property rights (not to mention the civil rights abuses throughout Argentina's modern history, especially in the 1970s). Argentinians were so dissatisfied with the rampant inflation, eroding purchasing power, and pervasive poverty that in 2023, they elected the first self-identifying libertarian head of state, Javier Milei. It is more than Milei's eccentric personality, which included waving a chainsaw at political rallies promising how he was going to cut government spending. Milei had an established career as an economist, author, and professor prior to becoming President. 

This week commemorates the one-year anniversary that he assumed his role as head of state for Argentina. So-called conventional wisdom predicted that Milei's "shock therapy" would make matters worse for Argentina. While I was thrilled to see a libertarian head of state that could potentially be an inspiration to other world leaders to cut back on regulations, taxation, and government spending, I knew he had to contend with a lot. Plus, Argentina had been ranked as a repressed economy by Heritage Foundations' Economic Freedom Index prior to Milei's election. It turns out that in spite of the political and economic obstacles he had to face, Milei had a successful first year. 

• Within the first few months, he was able to cut enough government spending where Argentina had a budget surplus for the first time in over a decade. Milei has continued to generate a budget in subsequent months (IARAF). When you compare Milei's surpluses to previous deficits, the difference is astounding. It is even more so when you consider that Argentina has spent the last 113 out of 123 years running up deficits. 

 

• Milei's elimination of rent control was so effective that it lowered housing prices while expanding the housing supply. 
• Milei has also passed a daily average of 1.8 deregulations since he entered office, which is significant because Argentina is one of the most regulated countries on the planet and its economic growth is thus stifled by regulations. This does not even include trimming the government from 19 ministries to nine ministries. 
• In October 2024, monthly inflation dropped to 2.7 percent, which was about 30 percent a year ago. While that level of inflation seems unfathomable for the Western world, monthly inflation in Argentina has not been this low since November 2021, according to government officials at the Instituto Nacional de Estadística y Censos (INDEC). For a country that has gone through literal hyperinflation, this is a great accomplishment. 

• Argentina's central bank, Banco Central de la República Argentina (BCRA), has lowered the interest rate from 133 percent in December 2023 to 33 percent in December 2024. While this is still among the highest in the world, this move on BCRA's part will lower costs of borrowing money ought to increase investment, consumer spending, and job creation. 
•  Fitch Ratings upgraded Argentina's credit rating to "CCC" last month because of an ability to pay foreign-currency bond payments without issue. 
• Argentina's Emerging Market Bond Index (EMBI), which is JPMorgan's index for measuring debt risk, dropped to a five-year low in October. 
• December 16, 2024 Addendum: I had to add this because this milestone made me excited: Argentina's economy exited a severe recession in the third quarter of this year. 
• If Gallup polling that came out this week is indicative of anything, it is that Argentineans are more hopeful of the state of the economy. 

Postscript. Not everything has been smooth sailing for Milei. In addition to such political obstacles as trade unions and Peronist politicians who prefer the status quo, there has been an increase of the poverty rate, which has reached over 50 percent under Milei. This could very well be part of the short-term pain the Argentineans have to endure to untangle the disaster of Peronist economic policy. If the calculations from the Universidad Católica Argentina are correct, then the poverty in Argentina is already decreasing (see below). [1/11/25 Addendum: Poverty in Argentina in the fourth quarter fell to to 36.8 percent].

Whether the citizens of Argentina can hang on long enough will have sway over the political feasibility over Milei's plans for the second year. Hopefully for Argentina, Trump's political affinity with Milei could accelerate negotiations with the International Monetary Fund and result in a more generous support package, thereby making the short-term poverty spike more tolerable.

That being said, I think it has been a good first year for Argentina. Milei inherited rampant government debt, a high poverty rate, and an annual inflation rate exceeding 200 percent. Milei is getting a handle on government spending, which was one of his major campaign promises. Improved monetary and fiscal policy have lowered inflation, at least by standards in recent Argentinean history. In spite of the increased poverty, wages are beginning to rebound and Milei still remains popular in Argentina. 

Would I like to see Milei do something about dollarization or capital controls? Yes. Furthermore, it is also true that Argentina's tariff rates and overall taxation rate remain high, not to mention Milei being unable to privatize any of the state-owned businesses. It will be more difficult for Milei to achieve his plans for Argentina to become an economic powerhouse once more if he does not address some of these fundamentals soon. But I also know that Rome was not built in a day and that we should not make perfect the enemy of good. I think that if Milei is able to stay on course, 2025 will look even better for Argentina than 2024. If successful, he can provide a mighty case study for how much of a positive impact deregulation, lower taxes, and less government can have on millions of lives. 

¡Viva la libertad, carajo!

Making the TCJA Tax Cuts Permanent Is Not the Problem: Out of Control Government Spending Is

I remember when the Tax Cuts and Jobs Act (TCJA) passed. One of the notable features of TCJA that made me a happy camper was a lower income tax level for nearly everyone. I remember that first paycheck with the lower income tax rates. It was the equivalent of getting a four-percent raise at work. As I pointed out in my analysis of the TCJA in early 2018, one of the features I disliked about TCJA is that the income tax cuts were not permanent. Unless Congress takes action, the income tax rates will revert back to pre-TCJA rates after 2025. It is more than the distorting effects of higher income taxes or the fact that an estimated 62 percent of Americans (myself included) will see their income taxes increase after 2025. 

As I brought up in 2013, income taxes, like all taxes, are in some way distortive. Taxes have two main functions: to collect government revenue and to disincentivize behavior. In the case of income tax, it creates a disincentive to work. Granted, the size of that disincentive depends on one's circumstances and thresholds for paying the tax. Nevertheless, a disincentive exists. As the Right-leaning Tax Foundation brings up in its recent analysis, keeping the income taxes lower means "boosting incentives for workers and leading to more total hours worked and more output." Although it would mean $3.6 trillion less in government revenue, it would also mean a GDP boost of 0.6 percent and 800,000 more FTE jobs over the next decade. 

It is more about the tradeoff between higher economic growth versus lower government revenue. Let us assume that the tax cuts expire, much like the Congressional Budget Office (CBO) does in its Update to the Budget and Economic Outlook from last month. Even with the revenue generated from the pre-TCJA income tax rates, the U.S. government is still nowhere near what it would need to close the gap between expenditures and revenue. 

Why is the gap between expenditures and revenue such a problem? The CBO also answers that question. Hint: it is not because the rich are not paying their "fair share" in taxes, whatever that means. If you go to the spreadsheet for the report, specifically for Table 3-1, you will see that the answer is that the increase in debt is driven by ballooning government spending. 

This is hardly a new theme here on the blog Libertarian Jew. I illustrated this point using CBO reporting as early as 2013. When the credit rating firm Fitch downgraded the United States' credit rating again in 2023, I sounded the alarm about the U.S. needing to get its government spending under control. I did so once more only this past March. 

The national debt is not as urgent as the Big Bad Wolf knocking on the door of the Three Little Pigs and threatening to eat them. It is more like termites eating away at your house. It does not do harm if you do not take care of it this very second. However, if you let those termites continue eating away at the foundation, the house will crumble over time. The house here is the U.S. economy. 

Talking about the economy is not some abstract concept. It affects the purchasing power of everyday citizens. As I brought up in December 2020, not addressing debt will make it harder to save, retire comfortably, and enjoy a high quality of life. The projections in the CBO reporting get progressively more dire with the passage of time because we have not hired the metaphorical exterminator to get rid of the excess government spending. Until we do, the CBO projections are only going to get uglier over time. 

CBO 2024 Fiscal Outlook Is Grim: Will the U.S. Government Finally Address Rising Federal Debt?

Last week, the Congressional Budget Office (CBO), which is the gold standard of U.S. federal legislative analysis, released its Long-Term Budget Outlook. This outlook projects the nations' fiscal and economic outcome for the next three decades. What fun and joy does the CBO predict for the upcoming thirty years? 

Debt will reach 166 percent of GDP in 2054. As the CBO's graph shows below (p. 10), this amount will be significantly higher than World War II. It will be in 2029 that debt will reach its highest levels and go up from there. 

Entitlement spending is why expenditures continue to outpace revenue. Until the government gets its spending habits under control, there will continue to be a growing deficit. Social Security and Medicare are the two largest culprits of this spending binge. By 2054, these two programs will account for 41.4 percent of federal spending (p. 4).

Interest outlays will more than double. The U.S. government already spends more on interest outlays than it does national defense. By 2054, we will be paying 6.4 percent of GDP (or 23.1 percent of government spending) towards interest payments (p. 10). As I have mentioned before, not only do higher interest payments hamper economic growth, but it means that we could spend that money on something other than interest outlays. 

Two silver linings. One is that the Old Age and Survivors Insurance (OASI) Fund with Social Security with Social Security will expire in 2034, which is one year later than previously projected. But still, it is not good (see below). Two, debt-to-GDP ratio projections are at 165 by 2054, which is 17 percentage points lower over a comparable period than when the CBO released last year's report. Nevertheless, as previously alluded to, it is still a perturbingly high amount of debt.

Postscript. All in all, this unsustainable fiscal path is a quagmire waiting to happen and it shows no signs of slowing down. It reminds me why credit rating agency Fitch's downgraded the U.S. credit rating last year. As the bipartisan Committee for a Responsible Federal Budget (CRFB) enumerates, high debt results in threatened economic vitality, increased budget strains, geopolitical challenges, punishing younger generations, and making it more difficult to respond to emergencies and recessions. Addressing the national debt needs to be a priority if the United States wants to continue being a beacon of economic prosperity. If policymakers continue to kick the can down the road, future policymakers will have to make difficult decisions similar to those that Argentinean President Javier Milei is having to make. I think Argentinean culture is by and large great, but fiscal irresponsibility is one feature of Argentina the United States should not emulate.

U.S. Credit Downgrade by Fitch's a Reminder of Deteriorating Fiscal State of Affairs

The COVID pandemic turned the global economy upside-down. As resilient as the U.S. economy was going into the pandemic, that does not mean the U.S. economy remained immune. Most states in the Union decided to lock down the economy in response to COVID, which cost the U.S. economy a whopping $9.2 trillion. Supply chains were thrown out of whack enough to create a supply chain crisis. If that were not enough, a combination of the Federal Reserve pumping trillions of dollars into the economy along with the government spending trillions on so-called "pandemic relief" caused the inflation spike we see to this day. This debt ceiling debacle earlier this year exposed how out of control the U.S. debt situation is getting.   

It seems that people have been noticing this dysfunction, including credit rating agencies. That would explain Fitch's downgrade of the U.S. government's formerly stellar credit rating of "AAA" to "AA+." This is the second downgrade from one of the major three credit rating agencies since the practice of credit ratings really took off in the early 20th century. The first downgrade was by Standard and Poor's in 2011. Why did Fitch's decide to downgrade now? According to its rating action commentary, Fitch's had the following to say:

"The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to 'AA' and 'AAA' rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions."

The good news is that Fitch's overall outlook is stable. That might have to with a well-diversified and high-income economy, dynamic business environment, and the fact that the U.S. dollar is still the predominant reserve currency. This means that for the time being, the United States still remains an overall trustworthy economic powerhouse. At the same time, there are legitimate concerns. In the short-term, the Federal Reserve is not finished with raising interest rates. This plays into why Fitch's is anticipating a mild recession later this winter.  

Fitch's bring up how the debt-related political standoffs and last-minute resolutions have eroded trust in the U.S. Congress of doing its job to ensure as basic of a function as fiscal management. This is not about mere discontent of how the U.S. government approaches the debt ceiling. It is about the bigger picture. There is no medium-term plan to deal with the country's fiscal challenges. As I have brought up more than once, the debt-to-GDP ratio is rising by government deficits and shows no indication of falling. We have doubled our debt in the past decade, which is a good way to corrode trust in future lenders. The national debt is projected to be double the size of the U.S. economy in thirty years, which does not inspire confidence. Not addressing these failings will have negative impact on U.S. economic growth, which will affect the lives of everyday U.S. citizens.

This downgrade in the credit rating may be temporary or the United States will be in a lot of hurt in the long-run. If the government wants to get a handle on its fiscal state, it would find real reforms for the three main drivers of U.S. public debt: Social Security, Medicare, and Medicaid. What I do know is that if the United States wishes to be the economic powerhouse it has been since the mid-20th century, it needs to get in touch with the tradition of fiscal discipline and fast. Otherwise, the likely path will be more credit downgrades and the United States economy ending up like that of Argentina or Greece.

CBO Report Shows Government Spending Is Creating a Fiscal Crisis

The Congressional Budget Office (CBO), which is the agency responsible for federal budgetary and legislative analysis, released its annual Budget and Economic Outlook. Normally, this would be a normal update to a seemingly uninteresting report. What made the report intriguing is not simply updating for such economic realities as high inflation and tighter monetary policy. This report accounted for the fact that we are at the end of an unprecedentedly high amount of so-called "emergency" pandemic spending, i.e., expansionary fiscal policy. Given how critical I have been of the Federal Reserve and Congress, particularly when it came to contributing to inflation, I am not surprised that the fiscal state is not going well. However, I did not expect things to get this atrocious this quickly. The big picture is that federal debt is projected to climb to 195 percent of GDP by 2053. 

What is the reason for this major increase? Those who were critical of Trump thought it would be because of the tax reform in the Tax Cuts and Jobs Act. There was a slight dip in corporate taxes in 2018, but there was otherwise an increase in tax revenue (p. 3).

According to the CBO, it is "mainly because of increasing interest costs and the growth of spending on major health care programs and Social Security (p. 2)." Social Security and major federal health care programs account for about 60 percent of the projected growth between 2023 and 2033.

The CBO recognizes that government spending since spring 2022 exacerbated inflation (p. 39). The sad truth is that it was not simply unprecedented stimulus spending during the pandemic that made our economic situation worse. GDP growth is expected to stagnate, averaging 2.4 percent from 2024 to 2027 and 1.8 percent from 2028 to 2033 (p. 3). Unemployment and labor force participation rate do not look better (p. 44).

This does not bode well for the United States. Much of economic literature finds that by the debt-to-GDP ratio reaches 78 percent, a country starts to run into issues. We are clearly past that point. By 2028, it will reach 106 percent, which is higher than the previous record for debt-to-GDP ratio that was set during World War II. As I explained in December 2020, a high debt-to-GDP ratio matters for many reasons, including slower economic growth, more tax dollars paying interest payments, and lower investment. 

As we can see above, tax increases alone cannot cover the ballooning spending. Federal spending is out of control and will only get worse as interest rates get higher. Trying to balance a $20 trillion budgetary shortfall suddenly is going to be too much for politicians to stomach. The debt limit should be a leverage point. If we want the United States to avoid financial ruin, Congress needs a credible fiscal stabilization plan. Only with true fiscal reform that entails discipline in government spending can the United States avoid going off a fiscal cliff.

Should We Reach Our Limit with the Debt Ceiling or with High Levels of Debt?

Since the pandemic began, the government went on a spending binge for so-called pandemic "relief." That spending is coming home to roost and the U.S. government reached the debt ceiling on January 19th. The U.S. Treasury has implemented extraordinary measures that are set to expire on June 5th. In the interim, Congress is at a standoff. 

The debt ceiling was created in 1917 by Congress to create a legal limit of how much debt the federal government can incur. As of January 2023, the U.S. government has incurred $31.4 trillion in debt. It has ran an average debt of $1 trillion every year since 2001. That is because Congress consistently spends more than it receives in taxes and other forms of revenue. To compensate for the rest, the U.S. government has to borrow. The debt ceiling is not about approving new spending, but rather about authorizing Congress to pay on previously enacted spending. As such, raising the debt ceiling has become routine procedure for Congress. Since 1960, Congress has raised the debt ceiling 78 times. You can read more about the debt ceiling from the bipartisan Committee for a Responsible Federal Budget (CRFB) here.

Given the number of times the debt ceiling has come into play, the debt ceiling looks more like a political football than a mechanism for financial discipline. Let's take a look at some Treasury data on the subject. In inflation-adjusted dollars, the U.S. debt has ballooned from $2.87 trillion in 1960 to $31.4 trillion. As for debt-to-GDP ratio, we went from 54 percent in 1960 to 124 percent in 2022.

Back to the political football, we seem to be at a moment of political intransigence. Biden does not want anything less than an unequivocal increase of the debt limit without a quid pro quo. The Republicans in the House are willing to increase the debt ceiling provided there are spending cuts. What happens if we do not increase the limit? 

For one, we would need to gather $14 trillion either in spending cuts or tax increases to cover the difference. This amount is not quite double what the Department of Defense typically spends on an annual average. If the U.S. government cannot come up with the difference, it will have to default. If it has to default, the increase in interest rates would most probably make for larger spending cuts and tax increases, not to mention disincentivize investment in the United States. This would also affect other markets since over half of foreign currency reserves are held in U.S. dollars. 

If the possibility of default is real and terrifying, what good does the debt ceiling do? For one, it can help bring debt issues to the attention of Congress and help Congress revisit policies that are driving the debt. We are in debt because Congress has a habit of spending more than it has. Congress is rarely going to change course unless pressured to do so, which is what the debt ceiling does. As the Right-leaning Manhattan Institute points out, every major deficit reduction negotiation between 1985 and 2011 was prompted by the debt ceiling. 

The bipartisan CRFB suggests that the ideal solution would be to lift the debt ceiling as soon as possible while placing in measures to better ensure a more stable fiscal trajectory. I am inclined to agree with that statement, as do 63 percent of Americans, according to a January 2023 Harvard/Harris poll. There are considerable risks if we do not raise the debt limit and if we decide to default. I also do not want the United States to become another Argentina where we have to constantly make painful decisions about the budget and face enormously high interest rates. 

That might seem like an exaggeration to compare the United States' fiscal position to Argentina, but look at where we are right now. We have reached enormously high numbers with no signs of slowing down the debt-to-GDP ratio. Conditions will not get better as Social Security and Medicare trust funds are set to expire, nothing to say of increased political polarization. 

If Congress had fiscal discipline, the debt ceiling would act as a checkpoint to be mindful and reflective of federal spending, as well as provide an opportunity to adjust as necessary. Alas, we do not live in such times. I could be snide and say that the days of fiscal discipline from either party are behind us and we are irreparably screwed. But I would rather think that there is some hoping in staving off the United States having as dire of a budgetary status as Argentina. 

As the libertarian Cato Institute brings up, this requires cutting spending. Cato Institute suggests creating a fiscal plan, reforming the major drivers of the federal budget (i.e., Social Security, Medicare, and Medicaid), and restoring the earmark ban. The bipartisan CRFB also suggests having the debate on the debt limit when Congress is making the decisions on spending levels, and not after. Another helpful suggestion from the CRFB is to tie the debt ceiling to the debt held by the public instead of what we do now with gross federal debt.

Congress is going to make tough choices now or even tougher choices down the road. I know that it is politically anathema to say we need to focus on real reform, especially when it comes to federal spending. One of the basic tenets of economics is that we live in a world of scarcity. There only exist a finite amount of resources, and we should find the best way to allocate those resources. It also means that Congress should stop acting as if money grows on trees because it does not. I know high levels of government spending are not new, but the pandemic brought it to a new level. Look at Biden's American Rescue Plan Act (ARPA). ARPA was supposed to create new jobs. While it did not create jobs. it was a major contributor to inflation. As of September 2022, the Biden Administration added nearly $5 trillion to the deficit. This profligate spending is not only unsustainable, but it is harmful in the long-run.

As I brought up in December 2020, we need to care more about debt than ever increased public debt makes it harder to save money, creates more obstacles to comfortably retiring, and stymies economic growth, all of which lower our quality of life. I do not want to live in a world of paying higher taxes in the future because Congress could not get its act together now. I would prefer to live in a country that is an economic powerhouse in no small part because Congress created a plan to manage the federal debt. Congress needs to act like the future of this country depends on getting debt under control because truth be told, it does.

The "Inflation Reduction Act" Will Not Reduce Inflation, But It Will Have Negative Economic Impact

There is something to be said for the adage "try, try again." In the case of current politics, if you cannot pass the Build Back Better Act, go for a smaller version that is appealing enough to get a slim majority of votes. That is what happened with the Inflation Reduction Act (IRA). The IRA has multiple features, including an extension of Affordable Care Act subsidies, a 15 percent corporate minimum tax, tax credits for zero-carbon energy, more funding for the Internal Revenue Service (IRS), and drug price reforms that will cause more harm. Today, I would like to take a look at the macroeconomic effects of such broad legislation. 

Will the Inflation Reduction Act Reduce Inflation?

You would think with a title like the "Inflation Reduction Act," there would be significant reduction in inflation. At the same time, this would not be the first time that the actual impact of the legislation would be the opposite of what the title suggests. No Child Left Behind ended up leaving behind millions of children. The Affordable Care Act made healthcare less affordable. The Defense of Marriage Act did not defend marriage for everyone that wanted to enter into a consenting relationship with another adult. The Inflation Reduction Act is no exception. The name "Inflation Reduction Act" is a reflection of salesmanship and has nothing to do with reducing inflation. 

The Congressional Budget Office (CBO), which is considered the gold standard for legislative analysis, does not find that the IRA would have significant impact on inflation. For the CBO, it will have negligible impact in 2022. As for 2023, the estimated range is reducing inflation by 0.1 percent to increasing it by 0.1 percent. Penn State's Wharton Business School, which is quite revered in these sorts of analyses, is not any more flattering. The Wharton Business School found that there was no notable reduction in inflation:

The Act would have no meaningful effect on inflation in the near term but would reduce inflation by around 0.1 percentage points by the middle of the first decade. These point estimates, however, are not statistically significant from zero, indicating a low level of confidence that the legislation would have any measurable impact on inflation. 

Corporate Minimum Tax

One of the biggest forms of tax reform in the IRA is on corporate taxes. The IRA imposes a 15 percent book corporate tax on companies that make over $1 billion in profits annually. There are different accounting standards used for reporting income to the government (tax income) versus what is reported to investors (book income). There are instances in which book income is larger than tax income, which means that a corporation very well might pay less in corporate taxes as a result. To quote the Left-leaning Institute on Taxation and Economic Policy (ITEP), "if the total taxes (US and foreign taxes) paid comes to less than 15 percent of those profits, this provision would require them to pay additional tax to raise their effective worldwide tax rate to 15 percent." ITEP calculates that such a provision would generate $223 billion over a decade.

Those on the Left, such as those as ITEP, see this as a step in the right direction because it means addressing corporate tax avoidance. This line of thinking assumes that such a reform would be better for the economy or society. Out of the 0.2 percent decline in the GDP that the Right-leaning Tax Foundation projected, half of that decline is attributable to the corporate tax. As I have brought up before in my analysis of corporate taxes (see here, here, and here), corporate taxes are the least effective form of taxation. The Tax Foundation illustrates how the corporate tax is the most economically damaging way to raise tax revenue. 

Using the unconventional way of raising corporate taxes through book income does not make this tax reform any less damaging. In addition to the issues with corporate taxes generally, this alternative minimum tax (AMT) will affect some industries more than others. According to Tax Foundation analysis on this AMT, industries that will feel disproportionate effects are real estate, utilities, mining, and automobiles. The Joint Committee on Taxation concluded that 49.7 percent of this tax incidence would fall on U.S. manufacturers. 

Furthermore, as the American Action Forum details, the United States had a brief, but failed experiment with taxing bookable income in the late 1980s called Business Untaxed Reporting Profit (BURP). What ended up happening with the BURP adjustment was a detrimental effect on financial reporting. This would not only incentivize using alternative accounting practices to under-report book income, but the loss of information for investors had negative effects. All Biden's 15 percent corporate tax is going to do is stymie the economy while complicating compliance with tax collection efforts. 

Excise Tax on Stock Buybacks

The other major tax reform in the IRA is the 1 percent stock buyback excise tax on U.S. publicly traded corporations. You can read this primer from Congressional Research Service for more information. Essentially, the reason for stock buybacks over paying dividends is the tax preferential treatment. Dividends have a top tax rate of 20 percent, but that is still higher than the zero percent tax for stock buybacks prior to the IRA. Stock buybacks also give stockholders a choice about whether or how to receive distributions. Even so, there is a debate as to whether dividends or buybacks are better for both investors and the company in the long-term. 

In any case, one of the main reasons for this excise tax is to increase U.S. tax receipts from foreign investors. A one percent excise tax is still lower in comparison to a 20 percent tax on dividends. Another reason for this tax is to encourage corporations to invest in their business instead of returning excess cash to investors. However, buybacks do not starve firms of cash for investment, according to a 2019 report from the U.K. government. Another study shows that 95 percent of funds from these repurchases are reinvested in other public companies (Booth, 2022).

While projected to accrue $55 billion in tax revenues over the next decade, the Tax Foundation also expressed concern that it might be less if the dividend payouts are largely remitted to tax-preferred retirement accounts. Plus, the call for a tax ignores multiple benefits of buyback (e.g., reduced transaction costs, orderly market trading, lower market volatility). In short, a buyback excise tax could result in an inefficient allocation of capital over the medium-term by trapping capital in stagnant companies.

Will the IRA Raise Your Taxes?

One of Biden's campaign promises was that he would not raise taxes on those making less than $400,000. According to an analysis from the Tax Policy Center, the net effect of the IRA on after-tax income for middle-class households is effectively zero. This makes sense since the two main tax reforms of the IRA are the corporate income tax and excise tax on corporate stock buybacks previously covered. There are no income tax increases whatsoever in the IRA.  

This is where the story gets more complicated. When you only look at adjusted gross income as the chart above does, then yes, taxes do not increase. However, the effects of the corporate tax or the buyback excise tax have more indirect, but nevertheless measurable, outcomes. This is why the nonpartisan Joint Committee on Taxation has a more inclusive measure of income in its analysis, which includes such factors as employers' contributions to healthcare, the employer's portion of Social Security taxes, and the implicit value of the insurance that Medicare provides. I will use calendar year 2023 as an example (see JTC CY 2023 figures below). With this more inclusive category, people who make under $10,000 and more than $30,000 will indeed experience an increase in taxation. This makes sense considering that corporate tax increases have multiple secondary effects, including that a significant portion of the corporate tax incidence falls on workers. Even if taxes on adjusted gross income will not increase, the working class will indirectly pay taxes elsewhere. 

On the other hand, if you use the JCT's numbers to look further out to the third year and beyond, the net result on tax rates are about as impactful as the projected inflation reduction in the IRA. 

Will the IRA help with the deficit? Technically it will, but not by much.

The other thing that irks me is that the Democrats are passing this bill off as fiscally responsible because the IRA is going to reduce the deficit. They are not wrong on that front. According to the bipartisan Committee for a Responsible Federal Budget (CRFB), the IRA is projected to reduce deficits by $300 billion within the first decade. It is the second decade where those savings will increase to the $1.1-1.9 trillion range, largely depending on whether those ACA subsidies remain permanent or not. 

The accuracy of budgetary projections two decades out is more tenuous than they are one decade out. Even so, if the IRA ends up saving over a trillion over the next two decades as the CRFB projects, let's first keep in mind that it would be an average of $95 billion per annum. Who knows what spending binge the federal government will go on between now and then? Second, this does not account for the fact that the Biden administration drove up the CBO's projection of the 10-year deficit by $2.4 trillion with the American Rescue Plan and the bipartisan infrastructure bill that was passed. And then we would have to cover the remainder of the $6 trillion in borrowing that Congress did with its pandemic spending. This all ignores the bigger picture about the state of U.S. public debt, including that Medicare, Medicaid, and Social Security are all going to be driving federal debt further. I understand that the Democrats were looking for a legislative win shortly before midterm elections, but it doesn't change the fact that whatever deficit reduction that the IRA is projected to generate is a drop in the bucket in comparison to $30.7 trillion in debt the U.S. government has accrued and what additional debt it is likely to accrue.

Conclusion

What will be the macroeconomic effects of the IRA? In spite of its name, the Inflation Reduction Act will do nothing of significance to reduce inflation. The unintended consequences of the corporate minimum tax and the excise tax are going to cause more problems than they attempt to solve. As for reducing deficit spending, its impact is minuscule when looking at the grand scheme. If you needed more economic effects than those listed above, the Tax Foundation uses its model to project a few other effects. In the next decade, the GDP is going to decrease by 0.2 percent, there will be 29,000 fewer jobs, and there will be a 0.1 percent decrease in wages, and there will be a 0.3 percent decrease in capital stock. It would be nice to see legislation with the net effect of helping out the American people, but it seems that Congress is incapable of completing such a task.