Category Archives: tax policy

Why the U.S. Debt is so Scary III. The Disconnect

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Most of my readers know that I am a candidate in the May 15 Nebraska Republican Primary for the U.S. Senate, against the incumbent Deb Fischer because she is ignoring our enormous and out-of-control national debt. In fact she has recently voted twice, for the new tax law and new budget, to increase our annual deficits by hundreds of billions of dollars per year.
The only way to “fix the debt” is to begin shrinking our annual deficits.  She is moving us in exactly the wrong direction that we need to go.
My last two posts, here  and here, explain why our debt is so scary: we risk losing our status as the world’s leading economic power and, furthermore, a new crisis could occur much sooner than many people expect.


Unfortunately for the future of our economy, the new tax law is gaining support amongst the American population, with approval having now reached 50% and disapproval having sunk to 45%. Yes, the new tax law will increase economic growth in the next two years before the extra stimulus fades away.  But the additional debt will greatly hurt our economy in the long run.


Conclusion. The national Republican leadership has sold the American people a bill of goods. At a time when economic growth is already picking up speed, the Republican Congress has stepped on the gas to yield an additional short term stimulus at the great risk of long term harm.  This is highly irresponsible a endangers the Republican Party’s reputation for fiscal responsibility.

Ignoring the National Debt Endangers Our Country

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Here is the preliminary version of my campaign announcement, now scheduled for Wednesday, January 24, for the Nebraska Republican Primary for U.S. Senate:

“This may sound overly dramatic but if we ignore the debt much longer, it will endanger the future of our country.

This is exactly what the new tax law does, in spite of its otherwise good features, by increasing the debt by $1 trillion over the next decade.  And 51 Republican Senators voted for this new law, including Nebraska’s Deb Fischer who is running for reelection this year.  I am running for her seat to challenge her about our ballooning debt because she is doing nothing about it and has just voted to make it worse!

First of all, the chart below shows why our debt situation is so serious. It now sits at 77% of GDP (for the public part on which we pay interest), the highest since WWII, and is predicted by the Congressional Budget Office to keep getting steadily worse, hitting almost 100% of GDP by 2027.


Right now interest rates are so low, less than 2%, that our debt is almost “free” money.  But this cannot and will not last much longer.  Inflation has already started to increase and the Federal Reserve has started to raise interest rates.

Rising interest rates mean much higher interest payments on our debt. This will put an enormous strain on the federal budget, choking off spending for many of the things such as education, scientific and medical research, infrastructure and social programs which so enhance our quality of life.

And furthermore, these much higher interest payments on the debt will continue, and even grow worse, indefinitely into the future, placing a huge burden on future generations, our children and grandchildren.

The solution is to shrink our annual deficits ($668 billion in FY2017 and likely over $700 billion for 2018) down to a much more manageable level so that our debt will also shrink as a percentage of GDP.

I emphasize that this can be done in a sensible, non-disruptive way by simply curtailing spending increases in most government programs without actual budget cuts, and thereby reducing our huge annual deficits over a period of several years.

The Affordable Care Act expands access to healthcare (which is good!) but does nothing to control cost (which is bad!).  American healthcare needs major changes.  One way to do this is to abolish the employer mandate and migrate from employer provided health insurance to personal insurance with age-based, instead of income based, tax credits.  Medicaid can move to the same age-based (refundable) tax credit system. Also fix Medicare by making Medical Savings Accounts readily available for Medicare Advantage plans and then encouraging migration from regular Medicare to Medicare Advantage.

Such major changes as I have proposed above likely will be considered controversial.  However, which is better, to implement major changes in a rational, careful manner while there is time or rather to wait for a new fiscal crisis, much worse than the Financial Crisis of 2008, which will inevitably occur down the road if we continue to ignore the debt?

Summary. The U.S. has a horrendous debt problem which is getting worse all the time.  We badly need representatives in Congress who will stop ignoring our debt and make reducing it a very top priority.  This is why I am challenging Deb Fischer as she runs for reelection. “

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After the New Tax Law: Debt Is an Even Bigger Problem

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The Republicans in Washington are exuberant because passing the new tax law means that they finally have gotten something done. And the new law will have at least one highly beneficial effect:

  • The new 21% corporate tax rate will increase profits for domestic corporations and encourage multinational corporations to bring their foreign profits back home. Even if these profits are used to buy back company stock or are paid out in larger dividends, the new money will be put to use in the U.S. economy one way or another. This will give the economy a boost and create new and better paying jobs. This is how private enterprise works and it is the best economic system ever invented.

But at the same time the new law has two huge deficiencies which make it a net minus on the whole:

  • It adds $1 trillion to our debt over the next ten years, as scored by the joint Committee for Taxation, the official scorekeeper. And this is after the positive economic effect is taken into account.  Our debt is already 77% of GDP (for the public part on which we pay interest), the highest it has been since right after WWII, and will continue to get worse without major changes in public policy. As interest rates rise and return to normal historical levels, interest payments on the debt will increase quickly, creating a huge drain on the federal budget.

  • The trillion dollar artificial stimulus created by the new tax law, i.e. the trillion dollars in new debt, is likely to overheat the economy, which is now already growing at a 3% annual clip.  This means that inflation is likely to gain increased momentum, thereby causing the Federal Reserve to raise interest rates faster than it otherwise would. This means that interest payments on the debt will be pushed up even faster than otherwise. Without fiscal retrenchment, a new fiscal crisis is virtually inevitable in the relatively near future.

Conclusion. Fiscal restraint in Congress is now more urgently needed than ever, and it is going to be even harder to accomplish than before the new tax law was passed. I am an eternal optimist but it sure would be easy to get discouraged!

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Donald Trump’s First Year as President

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As I gear up to enter the 2018 Nebraska Republican Primary for U.S. Senate, see here  and here, I am focusing on what I consider to be the overwhelmingly most critical and urgent issue facing our country: our rapidly growing national debt, now 77% of GDP (for the public part on which we pay interest), and steadily getting much worse. Nevertheless, just over a year ago an unexpected political earthquake shook the country as Donald Trump was elected President.  As I become a candidate myself for national office, I need to make clear what I think about Mr. Trump.  I will start out by saying that I did not vote for him because of his sleazy behavior towards women.
I will try to be objective about his accomplishments in office, both positive and negative.
On the positive side:

  • He is standing tough on North Korea, working with the U.N., China and other Asian countries to impose strong sanctions on the North Korean economy. He is upgrading U.S. missile defense, as a smart precaution against a North Korean attack on the U.S.

  • He has worked with many other countries to eliminate the ISIS physical caliphate.
  • He has cajoled NATO members into contributing an additional $12 billion towards our collective security.
  • The economy is now growing at a 3% annual rate thanks (at least in part) to his efforts at regulatory reform.

However, on the negative side:

  • The new tax law, which he signed, is likely to kick off higher inflation with the trillion dollar artificial stimulus from increased debt. This will lead to much higher interest rates which will make our huge debt far more costly.
  • His noxious tweets undermine his presidency, by overshadowing his achievements. His personal popularity has dropped from 46% right after the election to 35% today.

Conclusion. The best way for a member of Congress (or candidate for same) to respond to President Trump’s erratic behavior is by being objective, agreeing with him if possible and not hesitating to call him out when necessary. This is what I will try to do.

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Senator Fischer, if You Vote for the Awful Tax Bill, There Will Be Political Consequences!

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Congressional Republicans have agreed on a compromise tax bill, details to be released soon. After scoring by the Joint Committee on Taxation, it will be voted on separately by the House and Senate, sometime next week.  It is likely to reach the President, and be signed into law, before Christmas.


As I have previously discussed at great length, this is a very bad bill for the following reasons:

  • Lowering the corporate tax rate to 21% is actually a good idea because it will encourage U.S. multinational companies to bring their foreign profits back home for reinvestment as well as encouraging foreign companies to set up shop in the U.S.
  • Adding $1 trillion to the debt over ten years, as previously scored by JCT and likely on rescoring, is what is so awful about the tax plan. It is also sad because this could be avoided.  Our debt (the public part on which we pay interest) is already, at 77% of GDP, the highest it has been since right after WWII, and is predicted by the Congressional Budget Office to keep getting worse without major changes in current policy.
  • As interest rates rise, interest payments on the debt will grow dramatically (right now our debt is almost “free” money). Eventually this will lead to a new financial crisis, much worse than in 2008.
  • Overheating the economy, now growing at 3% per year for the last two quarters, makes the tax bill even worse. The last thing our economy needs right now is a trillion dollars of artificial stimulation. This will force the Federal Reserve to raise interest rates faster than it would otherwise.
  • Nebraska Senator Deb Fischer, who is up for reelection in 2018, voted for the Senate version of the tax plan. She should reconsider for the final combined bill and vote no.

Conclusion. If Senator Fischer votes for the final version of this bill, and if it passes and is signed into law by the President, then she is personally responsible for the devastation it will wreak on our economy. What can I as an individual Nebraskan do about this?  It should not be hard to figure out.  Stay tuned!

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Ignoring Massive Public Debt Is Morally Unacceptable

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The House and Senate have now each passed their own versions of tax reform and a conference will come up with a single version acceptable to both legislative chambers. Each of the individual bills has been scored to add $1 trillion to the national debt over a ten year period and so the final bill will probably have the same feature.  This is a badge of dishonor on the controlling Republican Congress for the following reasons:

  • Yes, economic growth at 2.1% of GDP since the end of the Great Recession is too slow and has caused stagnant wages for millions of middle- and lower-income workers. Even though the unemployment rate has now dropped to 4.1% and the economy has grown at a rate of 3% for the past two quarters, there is still much labor slack to make up for.
  • Yes, the corporate tax rate is too high and encourages multinational companies to invest overseas. Immediate expensing for new business investment would also speed up growth and thereby create new jobs and higher wages.
  • Revenue neutral tax reform is “easily” accomplished by “simply” offsetting all tax rate cuts by closing loopholes and shrinking deductions by an equal amount. Since two thirds of taxpayers do not itemize deductions, it is primarily the higher income taxpayers who benefit from tax deductions and they can afford to pay higher taxes.

  • Current national debt, at 77% of GDP (for the public debt on which we pay interest), is the highest it has been since right after WWII, and is already predicted by the CBO to steadily keep getting worse. When interest rates eventually return to more normal and higher levels, interest payments on the debt will soar. And this will continue indefinitely, eventually leading to a new fiscal crisis, much worse than the Financial Crisis of 2008.

The GOP tax plan should be killed. Although a revenue-neutral tax plan could be put together and would be beneficial, the current plan makes our debt much worse and should be killed. We simply must make shrinking the debt a very high priority and not be distracted from getting this done.

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The Connection between Taxes and Growth

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One of my favorite economic journalists is Eduardo Porter of the New York Times who writes the weekly column Economic Scene. In his latest column.  He points out that taxes (federal, state and local) for the U.S. and the O.E.C.D. average were about the same 27% of GDP in 1969.  But now, almost 50 years later, the U.S. tax level has stayed the same while the O.E.C.D. average has grown by 7% (see chart below).


Mr. Porter says that according to Wagner’s Law “government spending as a share of the economy will increase as nations get richer and their citizens demand more and better public services.”
Americans may be receiving fewer public services than citizens of the OECD countries but we are also enjoying faster economic growth as pointed out by the AEI scholar James Pethokoukis using data from the International Monetary Fund (see chart below).


According to the Pew Research Center our median family wage is also one of the highest in the world (see chart below).


As pointed out by Mr. Pethokoulis, lower taxes are a fundamental reason for the superior performance of the U.S. economy.  Other (tax-related) reasons are:

  • The most competitive large economy as ranked by the World Economic Forum.
  • An entrepreneurial culture fueled by a willingness to take risks.
  • Labor markets which generally link workers and jobs unimpeded by excessively restrictive labor regulations.
  • A growing population fueled by immigration based on economic opportunity.
  • A culture and tax-transfer system that encourages hard work and long hours.
  • A favorable regulatory environment, relatively speaking.
  • A decentralized political system in which states compete both tax-wise and by other means.

Conclusion. Americans pay lower taxes than other developed countries and also enjoy faster economic growth and higher median wages than most. There appears to be a strong connection between these three fundamental measures of economic wellbeing.

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Improving the Republican Tax Plan

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The Republican tax plan has many good features and is now moving along in Congress. The best feature of all is reducing the top corporate rate from 35% to 20%.  This will make the U.S. internationally competitive and create a strong incentive for all multinational companies to conduct more business in the U.S. and for U.S. multinationals to bring their profits back home for reinvestment.
The Tax Foundation estimates that the Senate version of the Plan will lead to the creation of 925,000 new jobs and an after tax income gain of $2,598 for a middle-income family over a ten year period.
But there are several parts of the plan which could be significantly improved.  For example:

  • Revenue neutrality, at least on a dynamic basis (taking growth into account) is essential. Our national debt is way too large to ignore.

  • Shrinking more deductions, to achieve revenue neutrality. The mortgage interest deduction should be eliminated completely, not just limited to $500,000 mortgages. Same for the state and local tax deduction.
  • More progressivity. Keep the estate tax to bring in more tax revenue. Scrap the lower 25% rate for a pass-through business tax because it will be too easy to abuse.  The Congressional Budget Office has estimated that eliminating the individual mandate for the ACA will save $338 billion over ten years.  It will also save millions of Americans from having to pay a tax penalty of $695 or more for not having health insurance.
  • Emphasis on growth. Make expensing (i.e. immediate write-off) for new investment a permanent feature rather than limited to five years only.

Conclusion. There are lots of good features in the Tax Reform Plan. Several changes would make it even better.  As soon as it achieves stability in the legislative process, the CBO will analyze its fiscal and economic effects.  At this point revenue neutrality will be essential for achieving broad support.

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Fundamental Principle for Tax Reform II. What to Avoid

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In my last post I made the case that the two fundamental principles for effective tax reform are:

  • Faster economic growth, to create more jobs and bigger pay raises.
  • Revenue neutrality, since more debt at this time is just too risky.

And then I went on to suggest the specific changes in the tax code which would achieve these goals:

  • Reducing the corporate tax rate to approximately 20%.
  • Full expensing for business investment replacing depreciation spread out over many years.
  • Simplification of rules for individuals such as fewer tax rates and fewer credits.
  • Achieving revenue neutrality by eliminating as many deductions as necessary to pay for the above tax rate cuts.

There are different ways to accomplish all this and I recently described one attractive plan put together by the Tax Foundation. The Republican Congressional Leadership (Big Six) has proposed a different plan which has been analyzed by the nonpartisan Committee for a Responsible Federal Budget.  Unfortunately CRFB concludes that this plan will cost $2.2 trillion over ten years in lost revenue.  But it could be modified in the following ways to become revenue neutral:

  • The mortgage interest deduction is maintained but limited to one dwelling and $500,000, down from the current limit of two homes and $1 million.
  • The tax exemption for employer provided health insurance is limited. This not only increases tax revenue but also forces the 150 million Americans who receive health insurance from their employer to take an active role in holding down the cost of healthcare.
  • Drop the proposal of establishing a maximum “pass through” rate of 25% for business owners. Any such proposal would be subject to wide spread abuse. Businesses would be benefitting from the full expensing provision above and their owners should pay taxes at the same rates as everyone else.
  • Keep the estate tax until annual deficits are greatly reduced. It only brings in $20 billion per year but every little bit helps.

Conclusion. These common sense changes in the Big Six plan would make it revenue neutral and still capable of achieving a significant boost to the economy.

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Fundamental Principles for Tax Reform

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I have been criticizing the Republican Congress lately for straying from fundamentals in attempting to reform healthcare and tax policy. What are the fundamentals for tax reform?  In my opinion they are:

  • Faster economic growth. The economy has averaged only 2% annual growth since the end of the Great Recession in June 2009. The unemployment rate has slowly fallen to the current 4.4% level and a labor shortage is now developing. But wage gains for the broad middle class and especially blue collar workers have been minimal. Faster growth will put pressure on employers to raise wages faster to acquire the skilled workers they need.
  • Revenue neutrality. With the public debt (on which we pay interest) now 77% of GDP, the highest since the end of WWII, and predicted by the Congressional Budget Office to keep getting steadily worse without major changes in policy, it would be the height of irresponsibility for Congress to approve tax changes which increase our annual deficits.

Given these two basic principles, what should be the specific changes made to tax law? Here are my priorities:

  • Lowering the corporate tax rate from its current level of 35% to a competitive level, approximately 20%, with other developed countries. This would be a huge incentive for our multinational corporations to bring their foreign profits back home.
  • Full expensing for business investment is allowed, replacing depreciation over a period of years, to speed up new investment.
  • Simplification of the rules for individuals, such as with fewer tax rates and fewer credits, so that fewer errors will be made and a greater proportion of true tax liabilities will be collected.
  • Create revenue neutrality for the above tax rate cuts by eliminating, or at least shrinking, many deductions and closing loopholes.

Conclusion. Tax reform will be highly beneficial for the economy if it is done correctly. This means ignoring many of the special interest provisions which have also been suggested for conclusion.  I will discuss these in my next post.

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