I’ve been following economic policy closely since Richard Nixon’s assault on economic freedom with his August 15, 1971, economywide price controls. While there have been ebbs and flows in economic freedom in the fifty years since then, I have never seen anything like the full court press against economic freedom exercised by President Biden and his administration. To the extent it succeeds, it will not only reduce our freedom but also slow the growth of our real income.
If you think Biden’s policies compare to Jimmy Carter’s, you would be wrong. Carter’s energy policies were horrendous. He continued Nixon’s and Ford’s price controls on oil and gasoline until he finally started to phase them out in his last year in office; he dictated minimum and maximum temperatures for buildings; and he set energy standards for appliances that have made them less useful and more expensive. In one of his worst hires, he appointed G. William Miller as chairman of the Federal Reserve and Miller went on to print more money and cause more inflation. But Carter was a leader in ending economic regulation of airlines, of trucking, and of railroads. Airline deregulation made airline travel cheaper and made it much easier for middle-class people to fly multiple times a year. Trucking and rail deregulation made those shipping modes more efficient and cheaper. And in 1979 he appointed Paul Volcker as fed chairman and Volcker went on to follow a semi-monetarist policy that, under President Reagan, brought inflation down to low single digits. Carter also signed a tax bill in 1978 that reduced the tax rate on long-term capital gains.
Nothing that the Biden administration has done or is proposing on economic policy is comparable to Carter’s accomplishments. On every front, Biden and his appointees are pushing for massively higher spending, taxes, and regulation. Moreover, simply looking at the budget numbers, scary as they are, understates the damage because of the particular way the proposed programs are structured. Many of the programs set up bad disincentives and also intrude in private decision making that has worked out fairly well.
By the end of his second month in office, Biden had signed a $1.9 trillion coronavirus relief bill. I’ve written about that bill in “An Unnecessary ‘Stimulus’ ” (Defining Ideas, March 5, 2021) and “The ‘Stimulus’ and the Damage Yet to Come,” (Defining Ideas, March 18, 2021.) I also warned (in “Child Tax Credits Feed Debt and Dependency,” Defining Ideas, April 23, 2021) that politicians of both parties would push to extend the hugely expensive child tax credit beyond its expiration date of December 2021. Sure enough, extension of the child tax credit to the end of 2025 is a major part of Democrats’ $3.5 trillion budget reconciliation bill. Presumably the Democrats are thinking that once even high-income Americans have had almost five years of getting thousands of dollars annually from the government simply for having of-age children, many of them will advocate extending the payments beyond 2025. Unfortunately, they’re probably right.
Another major expenditure in the $3.5 trillion budget bill is for a federal child care program. University of Chicago economist Casey B. Mulligan has a habit of actually reading and thinking through long congressional bills. In his October 14 blog post, titled “Childcare in ‘Build Back Better,’ ” Mulligan gives a detailed description of the child care provisions of the bill. Those provisions are so extensive that they would, if implemented, upend child care. The bill would prevent federal funds from going to child care providers unless the workers were paid as much as elementary-school teachers. How much is that? Mulligan cites data from the Bureau of Labor Statistics showing that in 2019 elementary-school teachers were paid an average of $63,930 per year. By contrast, in 2019 child care workers earned an average of only $25,510 annually. Thus, the federal bill would make child care much more expensive.
Moreover, the bill would price child care, based not on the value that the parents perceive, but on the parents’ income. Consider households whose income is between 75 percent and 150 percent of the median household income, which, in 2019, was $69,560. (Median income in 2020 was even lower, $67,521, because of COVID-19 and the regulations imposed by state and local governments, but presumably that was temporary.) Households in the 75–150 percent range would have income between $52,170 and $104,340. That would include most families in America. A family with income in this range would pay an extra $7 for one child’s care for every additional $100 in family income. A family with income in that range and two children in child care would pay an extra $14 for child care for each additional $100 of income. That amounts to an implicit marginal tax rate, just based on child care alone, of 14 percent. A family in the 22 percent federal tax bracket and a state tax bracket of 4 percent would also face a 7.65 percent tax rate for Social Security and Medicare (or a whopping 15.3 percent tax rate if self-employed). That family’s marginal tax rate already amounts to 33.65 percent. Adding 14 percentage points for two children in child care makes the implicit marginal tax rate for that family a stiff 47.65 percent.
I stated in my introduction that many of the programs would set up bad disincentives and intrude in private decisions that have worked fairly well. The federal child care program illustrates both. The additional 7 to 14 percentage points in marginal tax rates for the majority of families that use child care would be a strong disincentive to work and to make additional income. Taxes cause distortions. Economists even have a term for such distortions: deadweight loss. A theorem in economics states that the deadweight loss from a tax is proportional, not to the tax rate, but to the square of the tax rate. So, for instance, doubling tax rates doesn’t double the deadweight loss; it quadruples the deadweight loss. Increasing a family’s marginal tax rate from 33.65 percent to 47.65 percent would raise its marginal tax rate by 41.6 percent (14/33.65 * 100.) But it would double the deadweight loss.
And for what? For taking an area of the economy that works fairly well and purposely making it much more expensive.
One additional large expenditure in the $3.5 trillion budget bill is $220 billion for “affordable” housing. In a recent interview with Hoover senior fellow John Cochrane, Mulligan noted that the $220 billion expenditure on housing doesn’t mean that the tenants of the housing would get $220 billion of value. To see the difference between spending and value, imagine that someone offers you two choices: $220 that you can spend however you want or a $220 expenditure on something that the giver chooses. If what he chooses is what you would have spent it on anyway, then the $220 expenditure is worth $220 to you. But it’s much more likely that he would spend it differently than you would. Mulligan speculates, based on other government expenditures for public housing, that tenants would value the $220 billion at only about $60 billion. To be sure, the $220 billion would show up in gross domestic product as $220 billion. But economists have always warned that GDP is an imperfect measure of well-being, and this would be such an instance. The expenditure on affordable housing would be funded by higher taxes either now or in the future. So the higher taxes are a reduction in freedom to fund something that makes our economic well-being, our prosperity, less than otherwise.
And that brings us to taxes. The tax increases in the bill are many. The bill would raise the corporate income tax rate from the current 21 percent to 26.5 percent. It would raise the tax rate on high-income individuals and families from the current 37 percent to 39.6 percent. And it would raise the top tax rate on long-term capital gains from 23.8 percent to 31.8 percent. All of these increases in tax rates would discourage investment.
Why does that matter? Because one of the main sources of increased well-being for workers in general is more capital per worker. More capital per worker raises productivity, increasing real wages. We saw that dramatically, and in a shorter time period than I expected, after the 2017 tax cut. Corporate tax rates were cut from 35 percent to 21 percent. Between 2018 and 2019, real median household incomes had risen by 6.8 percent. The increases were even bigger for Hispanic households (7.1 percent), black households (7.9 percent), and Asian-Americans (10.6 percent). This means, therefore, that Biden’s proposed tax increases would have the reverse effect. They would lead to slower growth in capital per worker, causing productivity and, therefore, real wages to grow more slowly.
The increases in tax rates would generate more tax revenue for the federal government. But precisely because they would discourage investment, the increased tax rates would not likely increase federal tax revenue as much as the Democrats in Congress predict. That means that the annual federal budget deficit, already projected to be high, would be even higher than they expect.
One additional note. President Biden promised that he would not raise taxes on people making under $400,000 a year. But if he signs a bill that raises corporate tax rates, he will break his promise. Even if we accept the implausible claim that none of the corporate tax increase would be borne by workers and consumers, at least some of it is borne by corporations. And who owns corporations? Stockholders. Tens of millions of people with incomes below, and often well below, $400,000 own stock in corporations. They would pay higher taxes. And if the feds raise taxes on cigarettes, as the House Ways and Means Committee proposes, millions of people who don’t own stock would still pay higher taxes.
One of the genuine accomplishments of the Trump administration was deregulation of the economy. The Biden administration has reversed and continues to reverse that deregulation. While the instances are too numerous to list, I’ll highlight two: one may seem trivial and the other is huge.
The apparently trivial measure is the reregulation of shower heads. In the 1990s, federal regulators mandated that showerheads sold in the United States couldn’t emit more than 2.5 gallons of water per minute. That’s why we get much weaker flows than most baby boomers remember. A way around was to have multi-headed showers, each with a 2.5-gallon limit. But the Obama administration decided that people could not buy even multi-headed showers that, in total, emitted more than 2.5 gallons. In December 2020, President Trump’s administration reversed the Obama tightening. But Biden has reversed that small deregulation. Now we can rest assured that our showers will be just as unsatisfying as in the 1990s.
Arguably the most intrusive regulation the Biden administration proposes is the one on people’s accounts in financial institutions. USA Today recently corrected an InfoWars exaggeration of the plan. The InfoWars headline: “Biden’s Treasury Dept. Declares IRS Will Monitor Transactions of ALL U.S. Accounts Over $600.” USA Today pointed out two mistakes. First, the Treasury can’t make such a move without Congress’s authorization. Second, writes Ella Lee of USA Today, “[E]ven if the proposal is adopted banks would not provide access to individual transactions, just the total amount flowing in and out of an account annually.” The correction is important but is it supposed to be comforting? Democrats announced that they would raise the threshold from $600 to $10,000. But you need only have an average of $834 a month flowing out of your account to trigger IRS surveillance. So the IRS would know more about the majority of account holders than they do now.
Recently, Norah O’Donnell of CBS News asked Treasury Secretary Janet Yellen about the proposal. Yellen claimed that it was to catch wealthy people who are massively evading taxes. Yellen gave an example of someone who reports income of $10,000 but has $3 million flowing out of his checking account. Said Yellen: “That tells the IRS that’s an individual you might audit.” And this has exactly what to do with people whose flow out of their bank account is $10,000? Yellen was widely regarded as a first-rate economist. Surely, she’s still enough of an economist to know the difference between $10,000 and $3 million. Her sticking to her guns on the surveillance proposal suggests something more sinister: that she wants to go after, not the just the high-rolling tax cheats, but also, say, the gardener who gets away with paying a few hundred dollars less in taxes in a year.
Speaker of the House Nancy Pelosi said recently that the $3.5 trillion budget bill is “transformative.” Unfortunately, she’s right.