May 5, 2025

The Honorable Scott Bessent
Secretary
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington DC. 20220

Kevin Hassett
Director
National Economic Council
1600 Pennsylvania Avenue, NW
Washington DC  20500

The Honorable John Thune (R-SD)
Senate Majority Leader
United States Senate
Washington DC 20510

The Honorable Mike Crapo (R-ID)
Chairman Senate Finance
United States Senate
Washington DC  20510

The Honorable Mike Johnson (R-LA)
Speaker of the House
U.S. House of Representatives
Washington DC. 20515

The Honorable Jason Smith (R-MO)
Chairman, House Ways and Means Committee
U.S. House of Representatives
Washington DC  20515

We write today in opposition to any limits on the ability of businesses to deduct state and local taxes paid, unless offset dollar for dollar by new, broad-based, and permanent pro-growth tax reforms.

The ability of businesses to deduct state and local taxes paid on their profits is a longstanding “ordinary and necessary expense” embedded in the U.S. tax code. Corporations have been able to deduct state corporate income tax paid for as long as such taxes have existed. “Pass through” entities like Subchapter-S companies, partnerships, etc. were confirmed in their ability to deduct state and local profit taxes paid at the entity level in the 2017 “Tax Cuts and Jobs Act.” And businesses have always been able to deduct all other state and local taxes, such as property taxes and severance/extraction taxes.

The challenges businesses face in the current economic environment means that tax hikes on them should be avoided. Tariffs, wild stock and bond market swings, and widespread predictions of a recession mean that now is the wrong time to raise taxes on businesses.

President Trump and the Congressional Republican majority did not run on business tax increases. In fact, the GOP trifecta was achieved with the opposite promise–to stop tax increases across the board, and to make the Trump tax cuts permanent. Eliminating longstanding, ordinary and necessary business deductions raises average effective income tax rates.

Business taxes paid on business profits are fundamentally different from the individual SALT cap debate. Businesses deduct costs incurred for all ordinary and necessary expenses–rent, salaries, equipment, and state and local taxes. This has nothing to do with how much personal income tax, sales tax, and property tax an individual or family gets to deduct on their tax return. The two issues are only loosely connected because income taxes on businesses are apportioned based on where transactions take place, not where businesses are located.

It’s vitally important that all the provisions of the 2017 Tax Cuts and Jobs Act be made permanent. We look forward to working with you in the coming weeks to enact permanent, pro-growth tax reforms for American families and employers.

Sincerely,

Ryan Ellis
Center for a Free Economy

Kent Kaiser
Trade Alliance to Promote Prosperity

Patrick M. Brenner
Southwest Public Policy Institute

David Wallace
Fair Energy

Tom Giovanetti
Institute for Policy Innovation

James Davis
Fans for Fair Play

Paul Gessing
Rio Grande Foundation

Terry Neese
National Grassroots Network

Casey Givens
Young Voices

J.W. Delano
Southeast Texans for Liberty

S Corporation Association

National Ready Mixed Concrete Association

The Association for Hose and Accessories Distribution

Air Conditioning Contractors of America

National Roofing Contractors Association

National Wooden Pallet & Container Association

Hartz Mountain Industries

National Association of Convenience Stores

Saulius “Saul” Anuzis
American Association of Senior Citizens

Colonel Rob Maness
Gator PAC

The Sheet Metal and Air Conditioning Contractors National Association

Glass Packaging Institute

Air Conditioning Contractors for America

National Tooling and Machining Association

Precision Metalforming Association

Performance Racing Industry

Charles Sauer
Market Institute

John Goodman
Goodman Institute

Susan Carleson
Carleson Center for Welfare Reform

Jeff Cargerman
Inventors Project

George Landrith
Frontiers of Freedom

Norm Singleton
US Policy

Jeffrey Mazzella
Center for Individual Freedom

C. Preston Noell III
Tradition, Family, Property, Inc.

Ryan McGowan
Institute for Legislative Analysis

Larry Ward
Constitutional Rights PAC

Palmer Schoening
Family Business Coalition

Associated Equipment Distributors

National Lumber & Building Material Dealers Association

American Subcontractors Association

Small Business & Entrepreneurship Council

Forest Resources Association

National Association of Insurance and Financial Advisors

North American Association of Food Equipment Manufacturers

James L. Martin
60 Plus Association

Chadwick Hagan
Founding Principles PAC

International Foodservice Distributors Association

Jim Pfaff
Conservative Caucus

Water and Sewer Distributors of American

North American of Food Equipment Manufacturers

Precision Machined Products Association

Pete Sepp
National Taxpayers Union

Patrice Onwuka
Independent Women’s Voice

Jim Edwards
Conservatives for Property Rights

Andrew Langer
Institute for Liberty

Gabriel Llanes
Legacy of Liberty PAC

Bartlett Cleland, Innovation Economy Alliance

Kevin Kearns
US Business and Industry Council

Julio Rivera
Reactionary Times

Autry Pruitt
New Journey PAC

Matthew Kandrach
Case for Consumers

Angie Wong
Capitol Hill Fight Club PAC

Independent Electrical Contractors

Energy Marketers of America

Leading Builders of America

National Association of Professional Insurance Agents

Specialty Equipment Market Association

National Council of Farmer Cooperatives

National Propane Gas Association

Ralph Benko
Capitalist League

Structural Insulated Panel Association (SIPA)

Wholesale Florist and Floral Supplier Association

Irrigation Association

National Utility Contractors Association

National Retail Federation

FCA International

June 23, 2025

The Honorable Mike Johnson
Speaker of the House
521 Cannon House Office Building
Washington, D.C. 20515

The Honorable Jason Smith
Chairman, House Committee on Ways and Means
1011 Longworth House Office Building
Washington, D.C. 20515

Dear Speaker Johnson and Chairman Smith:

As Congress considers how to make the 2017 Trump tax cuts permanent, the undersigned organizations write to express our strong opposition to any proposals that would impose new taxes or restrictions on private charitable foundations. We support the recently released Senate Finance Committee’s language that eliminates the harmful private foundation tax increases included in the House-passed version of the One Big Beautiful Bill Act (OBBA).

As nonprofit organizations that support individual liberty, limited government and free enterprise, we know policies that siphon private dollars away from charities to line the government’s coffers are antithetical to conservative values and significantly impair the ability to pursue our missions.

Our organizations support conservative and free market leaders whose research and analysis inform policy ideas, increase government accountability and transparency efforts, educate the public, drive civic engagement and promote American values.

We would not be the only ones harmed by such policies, however. Charitable giving supports nearly every conservative cause from advancing the school choice and pro- life movements to protecting our constitutional rights and religious freedoms—as well as community groups nationwide that support our country’s most vulnerable.

While President Trump and congressional leadership have made laudable strides toward lowering taxes and addressing runaway federal spending, imposing additional taxes and restrictions on charitable giving undermines their goal of uplifting Americans.

The draft Senate bill rightly eliminates the private foundation tax increases included in the House version of the One Big Beautiful Bill Act (OBBA). The House-passed bill would raise taxes on charities by more than 600%, allowing the IRS to take nearly $16 billion from private charitable foundations that would otherwise help improve the lives of many Americans. Countless programs and services that provide for the needs of people in every state are funded by the generosity of private citizens. Without them, we would see more Americans reliant on government, which ultimately costs us all more for what is often an inefficient bureaucratic solution.

This enormous transfer of private resources to fund big government spending runs counter to conservative principles and the Trump administration’s efforts to reduce the size and scope of the federal bureaucracy. Instead of targeting the resources of private foundations, Congress should view them as the perfect partner to fill the gaps as policymakers roll back bloated and ineffective government programs.

The truth is that most private foundations operate with lean staff, long-term vision and a deep commitment to serving their communities. Increasing their tax burden would discourage the generosity of families and individuals who voluntarily choose to dedicate time and resources to improving the world for those around them.

Charitable giving helps form the bedrock of a resilient America by supporting organizations committed to creating a stronger, healthier society where every person has the opportunity to thrive. We support our nation’s long history of encouraging private initiative and generosity that benefits the common good, and we will work to advance conservative and free market policies that continue this legacy.

Respectfully,

Christie Herrera
Philanthropy Roundtable

Brent Gardner
Americans for Prosperity

Tim Chapman
Advancing American Freedom

Nathan A. Benefield
Commonwealth Foundation

Nicole Neily
Defending Education

Kristina Rasmussen
Do No Harm

Annette Meeks
Freedom Foundation of Minnesota

Victor Riches
Goldwater Institute

Randy Hicks
Georgia Center for Opportunity

Ronald M. Nate, Ph.D.
Idaho Freedom Foundation

Jon Caldara
Independence Institute

Patrice Onwuka
Independent Women

Tom Giovanetti
Institute for Policy Innovation

Mary Ellen Beatty
Institute for the American Worker

Jenna A. Robinson
James G. Martin Center for Academic Renewal

Joseph G. Lehman
Mackinac Center for Public Policy

Jason Mercier
Mountain States Policy Center

Pete Sepp
National Taxpayers Union

Jonathan Small
Oklahoma Council of Public Affairs

Sally Pipes
Pacific Research Institute

Wendy Damron
Palmetto Promise Institute

Daniel J. Erspamer
Pelican Institute for Public Policy

Heather Lauer
People United for Privacy Foundation

Brenda Talent
Show-Me Institute

Paul J. Gessing
Rio Grande Foundation

Tracie Sharp
State Policy Network

David Williams
Taxpayers Protection Alliance

Todd F. Gaziano
The Center for Individual Rights

Roger R. Ream
The Fund for American Studies

Jennifer Schubert-Akin
The Steamboat Institute

CC: All members of the House Republican Conference

When President Donald Trump returned to office in January, nearly everyone in his circle agreed on the top priority: renewing the 2017 Tax Cuts and Jobs Act. Without action, a crushing 22% tax hike looms, threatening to undo the economic gains of the past decade.

Extending the tax reform would also give businesses and investors the long-term stability they need to plan, expand, and hire.Repealing the C-SALT deduction would hammer small businesses — the backbone of the American economy.Instead, the administration has sent mixed signals. Daily shifts in tariff policy have rattled markets and injected uncertainty into every sector of the economy. Investors are jittery. Business leaders are holding back. And analysts are already warning of a potential recession.

These mistakes make it even more important to switch the focus to the tax package. The Trump administration should stop talking about tariffs and focus, along with Congress, on stabilizing markets and laying the foundation for economic growth by getting taxes down.

C-SALT: A conservative’s dream

The Tax Cuts and Jobs Act delivered everything conservatives had long demanded: 100% expensing for business property, a 21% corporate income tax rate, and a child tax credit that rewarded work. It stood as the defining achievement of Trump’s first term. Making it permanent could help revive the pre-COVID economic boom.

But lawmakers must resist the temptation to gut the law’s pro-growth provisions to fund unrelated priorities. That includes rejecting the misguided push to repeal or limit the corporate state and local tax deduction, known as C-SALT.

Debates about the individual SALT deduction cap have dominated headlines in Washington. Some reforms to that cap may make sense. But individual SALT and C-SALT are not the same issue, and they shouldn’t be treated as interchangeable.

C-SALT promotes growth by preventing double taxation on businesses. It lets employers reinvest earnings, stay competitive, and create jobs. Rolling it back would hit business owners hard, slow hiring, and weaken America’s edge in the global economy.

Policy groups like Americans for Tax Reform and the Tax Foundation agree: Gutting C-SALT would put long-term growth at risk — and betray the core economic agenda that fueled Trump’s first-term success.

For businesses, state and local taxes are an operating expense. If businesses lose the ability to deduct these taxes, they will be paying taxes on taxes.

Small businesses pay the price

Repealing the C-SALT deduction would hammer small businesses — the backbone of the American economy. Many already struggle under heavy corporate, state, and local tax burdens, especially in rural and Republican-leaning states. Removing this deduction would force them to shoulder a disproportionate share of the pain.

No serious conservative case exists for eliminating or capping the C-SALT deduction. Some Republicans seem confused, conflating C-SALT with the personal SALT deduction, which overwhelmingly benefits wealthy taxpayers in high-tax blue states. But they are not the same. As the Tax Foundation notes, capping C-SALT won’t “reduce distortive tax benefits or enhance state competition” the way a cap on the personal SALT deduction might — because corporate and individual tax systems function differently.

In 2023, American businesses paid nearly $1.1 trillion in state and local taxes. Stripping away their ability to deduct those taxes from federal corporate income tax amounts to a massive tax hike — potentially hundreds of billions of dollars over the next decade.

That kind of tax increase would erase much of the economic progress since the 2017 tax law was passed. It would punish the very job creators conservatives claim to champion.

Lawmakers in Congress — especially Republicans who support free enterprise and pro-growth tax reform that spurs economic growth — should focus on restoring and making permanent the 2017 Tax Cuts and Jobs Act’s tax cuts without jeopardizing the benefits that the C-SALT deduction provides for American businesses of all sizes.

First, some context: Projected federal revenue for 2025 is $5.42 trillion. That’s where all budget and spending discussions should begin, and it’s how most states begin their budget discussions—with a revenue projection.

But that’s not how we do it at the federal level. Regardless of which party controls Congress or the Executive Branch, the federal government starts by asking “how much more spending can we get away with?” 

Here’s another data point: Total federal spending in 2019 was $4.45 trillion—about $1 trillion below 2025 revenue. That means if we could return spending to something just above 2019 levels, we would have a balanced budget—NOW. Instead, it looks like the Republican Congress and President Trump are going to add around $3 trillion in budget deficits (over ten years) to our almost $37 trillion national debt.

The experience of the past forty years tells us that both parties care more about “owning” each other than they do about fiscal responsibility. When one party controls both Congress and the White House, spending goes up more than it does when government is divided. It’s as true of Republicans as it is of Democrats, as we found out this week when the Republican House, filled with members who aspire to become social media influencers, podcasters, and Fox News commentators, voted to increase spending (and thus budget deficits) by supporting the “One Big Beautiful Bill.” Only two out of 220 Republicans voted against it.

Now, the 2017 tax cuts had to be extended. For one thing, they were great, and if they hadn’t been extended, the result would have been an enormous tax increase that would have harmed economic growth. But Congress must include the tax cut extension in the Senate’s budget reconciliation process to avoid filibuster and be able to pass it with their simple majority. And the budget process includes spending, which is where things go off the rails.

Because the problem, as always, is spending. Federal revenue grows at a remarkably steady pace. It’s reasonably predictable. But there is no political will to control spending, and that includes President Trump, who urged Republicans against further spending cuts.

There are a lot of good proposals in the One Big Beautiful Bill, and a lot of bad ones. There are ways the Senate can improve the bill, and we hope Senate Republicans will take up the task with boldness.

It’s also possible that, once the budget process is over, President Trump will ease his objections to entitlement reform and Congress can put us on a track to fiscal responsibility before Republicans lose their majority in 2026.

It’s also possible that pigs will fly. 

On this unholiest of days (ironically falling during Holy Week), we don’t need to be reminded that taxes are a pain, that the tax code is overly complicated and unfair, that it violates our financial privacy, and that we just generally hate taxes.

But there are some things that we do need to occasionally remember or even learn for the first time.

Perhaps most important, our politics would benefit if people understood that only people pay taxes.

Businesses don’t pay taxes. Corporations don’t pay taxes. Wall Street doesn’t pay taxes, but neither does Main Street. Only people pay taxes.

This is not just a bit of cute rhetoric. It’s true that businesses submit taxes to the government and have to comply with that part of the tax code, but ultimately all of a business’s taxes are paid by some mix of its customers, its employees, and its shareholders.

Some portion of a business’s taxes is passed on to customers in the cost of goods and services. So when you buy groceries, you are paying some portion of the grocery store’s taxes, the wholesaler’s taxes, and the farmer’s or manufacturer’s taxes. In the past we’ve called these “hidden taxes.”

But the market often won’t allow companies to pass all of their taxes through to consumers, so their shareholders also take a hit in the form of lower returns, lower dividends, etc. And you are probably a shareholder, through your IRA, 401k, pension or other investments. The returns on all of these are reduced somewhat because you absorb some portion of the corporate taxes in your portfolio.

Finally, employees bear some portion of their employer's taxes in the form of reduced compensation. In the policy world, trying to figure out who actually ends up paying the taxes of businesses is called tax incidence, and it’s complicated.

If, in an ideal world, we had a zero tax rate on business income, as a consumer you would pay lower prices, as an employee you would earn more, and as an investor you would enjoy higher returns. Sounds great, doesn’t it?

Except you’d also be paying higher taxes on your higher income and higher investment returns. But there would still be a net gain because of economic efficiencies gained through reduced compliance costs.

When voters support taxes on business they think they’re getting a freebie, because some other entity is paying them, but they’re really voting for higher taxes on themselves. Government uses this fiction to pay for more spending and bigger government. Voters think they are getting something for nothing, but they aren’t.

Now, about tariffs . . . 

As advocates for economic liberty and low taxes, we aren’t fans of tariffs. Until 2016, most conservatives weren’t either.
 
Targeted tariffs and trade restrictions may have limited uses for national security, but consumers overwhelmingly benefit from lower prices made possible by global supply chains and comparative advantage. Global trade is a feature, not a bug, of the modern economy. Prioritizing consumer welfare over producer protection is essential to economic prosperity.
 
Not everyone agrees. Some argue that producers should be protected at the expense of consumers, while others equate trade deficits with economic harm. These views have found their strongest champion in Donald Trump, who openly used tariffs to raise revenue and pressure foreign nations during his presidency, and who plans to double down on tariffs in his second term.
 
While the Republican shift on tariffs is relatively recent, the real issue is broader. Policy disagreements are not supposed to be resolved by presidential fiat but by Congress. The Constitution is unequivocal in granting Congress authority over taxes, tariffs, and trade:
 
“The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, . . . To regulate Commerce with foreign Nations.” (Art. I, Sec. 8)
 
Congress is supposed to jealously guard its prerogative to make law and set tax policy,
yet Congress has delegated conditional tariff power to the Executive Branch through laws dating back to the 1930s. Though conditioned on either emergency or national security, presidents have broad liberties with these powers far beyond their original scope. For instance, imposing a 25% tariff on avocados from Mexico hardly qualifies as a national security issue.
 
This overreach undermines constitutional separation of powers and undermines self-government. As with any policy, the Constitution requires the president to work with Congress, not evade Congress. Courts could eventually rule such delegations as unconstitutional under the “non-delegation doctrine,” but litigation would take years to resolve. Congress itself should act.
 
Senator Rand Paul (R-KY) has introduced the “No Taxation Without Representation Act” (S.5066), which would reclaim Congress’s tariff authority. Passing this legislation would restore separation of powers on tariffs and make tariff policy subject to deliberation and consent rather than presidential whim.
 
Whether you support or oppose tariffs, all constitutionalists should agree: the power to tax resides with Congress. Reclaiming tariff authority is vital to preserving the Constitution’s design and the role of Congress in self-government.

In public policy there are, as the economist Thomas Sowell has said, no solutions, only tradeoffs.
 
Except, apparently, for tariffs. It turns out that tariffs are magic.
 
Consider: 

• Though tariffs are paid by American importers when foreign goods arrive in the United States, and those higher costs are passed through to consumers, it turns out that other countries are actually paying the tariff. Magic!
  
  
• Though tariffs are described as an endless source of federal revenue from imports, tariffs are intended to reduce the number of imports coming into the country. So, somehow, tariffs will reduce imports while maintaining steady federal revenue. Magic!
  
  
• Everyone knows that imposing tariffs will result in new retaliatory tariffs imposed by other countries on U.S. exports, and that federal spending will increase in order to provide relief. Yet tariff revenue is a freebie that comes without cost. Magic!
  
  
• In a time when inflation and high consumer prices helped turn an election, tariffs will somehow raise the cost of imports without being passed through to consumers, without further raising prices, and without causing political problems for the new administration. Magic!
  
  
• An administration that wants to root out corruption and the Deep State can impose tariffs while also entertaining a constant parade of lobbyists and well-connected businesses asking for exceptions from tariffs imposed by that administration. Magic!

Hopefully the sarcasm is obvious. Tariffs are an example of magical THINKING, not magic.

There is a reason why trade liberalization in latter half of the 20^th Century raised living standards and helped reduce poverty across the globe. Adam Smith is still right, comparative advantage is still a thing, and consumer benefit should always be prioritized above producer benefit.

Thinking that tariffs will not incur significant tradeoffs and unanticipated consequences is magical thinking, not magic.

With the election less than a week away, both presidential candidates have been making a lot of tax promises to specific voting groups that they are trying to attract. 

Donald Trump has promised to eliminate taxes on tips, taxes on Social Security benefits, and even to undo part of his own 2017 tax reform—the SALT cap, which limited the federal tax subsidy for high-tax states. 

Meanwhile, Kamala Harris is promising special tax breaks and tax subsidies for families with children, first time home buyers, and even for black men starting businesses. 

Trump’s promise to eliminate taxes on tips came while he was campaigning in the swing state of Nevada, where tipped employees are populous. Harris’ promised subsidies to black men came a week after reports that she was polling poorly with . . . black men. 

Seems like the principle of tax neutrality has been tossed overboard. So let's talk about it. 

Tax neutrality is a key principle of tax reform that was at the forefront of the Reagan tax policy in the 1980s, and that continued through the 1990s and the 2000s. Tax neutrality means that the tax code should not be used to reward or punish any specific behaviors, but rather should be neutral toward household and business decisions. 

In other words, the tax code should not encourage or discourage individuals from buying a home, from going to college, from having children, from marrying, and it should not reward or punish businesses for whether they choose to purchase equipment or lease equipment, etc. 

The core philosophical idea behind tax neutrality is that in a free economy, it is not the government’s job to direct you to behave in a way that it prefers. You should be able to run your household, and run your business, based on your own criteria, and not based on the details of the tax code. 

Furthermore, government does NOT know best. If the tax code is used to influence household and business decisions, it might be influencing those decisions in the wrong way. And that wrong way might have serious unintended consequences for innovation and economic growth. 

Essentially, tax policy should raise the necessary revenue for government while introducing as few distortions as possible. It will never be perfectly neutral—the home mortgage interest deduction for instance creates a pro-housing distortion—but it should be as neutral as possible. And that means politicians should not use the tax code to buy votes or to reward favored constituencies. 

But that would require candidates who operate from principle, and sadly that’s out of fashion in 2024 America. 

In the run-up to the 2010 passage of the Affordable Care Act (ObamaCare) then-House Speaker Nancy Pelosi (D-Calif.) said, “We have to pass the bill so that you can find out what is in it.” Now many Democrats are urging that same approach with respect to electing Democratic presidential candidate Kamala Harris: Voters have to elect her to find out what she’ll do. 

You won’t find out much about her policies from the unveiling of Harris’s economic plan last Friday. It would be more accurate to call her speech an “economic platitude.” The dictionary defines a platitude as “a flat, dull, or trite remark, especially one uttered as if it were fresh or profound.” And that pretty much sums up Harris’s economic plan so far. 

She promised she would provide more detail in the coming months, but that may mean after the election. Politico says many Democrats would prefer she stick with her detail-free campaign.   

According to Politico reporters Nicholas Wu and Daniella Diaz, Harris is “leaning into a general positive message that has wider appeal, specifically because it’s light on the details.” And they report that’s just fine with Democrats: “Democratic lawmakers call it a savvy strategy. They’d rather lay out a specific plan post-November, when a potential President-elect Harris would have to staff up her administration and determine her governing priorities.” 

Get it? Don’t confuse the voters with details about how Harris would achieve all the promises she made in her speech. Better to keep the voters ignorant of any facts that might raise embarrassing questions — questions that Harris can’t answer. 

There are at least three reasons why the Harris campaign is “light on the details” of her policies. 

First, the generous explanation. It has been only a month since President Biden announced he wouldn’t be running for reelection and threw his support behind Harris. That’s not much time to develop a comprehensive agenda. That said, she no doubt saw Biden’s physical and mental decline better and sooner than most — though she repeatedly denied it — and surely was working behind the scenes with her closest advisers to develop a contingency plan. 

Second, she has no idea how to implement all the policy platitudes she’s proposing. For example, she says she will initiate the “first-ever federal ban on price-gouging on food and groceries.” But how would Harris actually impose price controls on food? Are we talking about prices at the wholesale or retail level? Can she force grocery stores to not raise their prices while ignoring the prices charged by their suppliers? Or would she target the wholesale companies that buy and process food from farmers and ranchers and sell it to the grocery stores?  

And when would she implement her price-gouging restrictions? Prices often rise briefly in the wake of natural or manmade disasters, but they usually return to normal long before bureaucrats are able to act. And what if prices rise because of arbitrary shortfalls created when her union backers go on strike? For that matter, since wages are the price of labor, is it price-gouging when unions demand unreasonably high wage increases? 

Even as Harris proposes to monitor and micromanage the prices of what could be thousands of food and grocery items, she claims “I will focus on cutting needless bureaucracy and unnecessary regulatory red tape.” But then, who is going to be monitoring nationwide grocery prices? Who’s going to decide if they’re a result of price-gouging?  

Harris’s policy platitudes raise lots of other questions. She wants to expand the child tax credit from the current $2,000 per child to $3,600, and perhaps $6,000 for families with newborns. The Tax Foundation estimates that proposal would cost taxpayers $3 trillion over 10 years. How does Harris plan to pay for that proposal? With bigger federal deficits? Higher taxes? The answer is almost certainly both. 

When a reporter posed that question, her answer was a rambling word-salad that made no sense with respect to the question asked.

The third and most disturbing reason Harris will be light on specifics is that she and her party need low-information voters. Informed voters ask too many questions and demand too many answers — answers this presidential candidate is not capable of providing.  

For years, we’ve heard Biden, Harris and the Democratic Party whine about the growing threats to democracy. Well, one of the biggest threats to democracy is low-information voters. Now we learn that that’s exactly what Democrats want and need.  

What are the economic policies being proposed by Vice President Kamala Harris, the Democratic presidential nominee? We don’t actually know what “Kamalanomics” looks like because the veep has been more focused on offering platitudes with attitude. Will Kamalanonics be similar to Bidenomics? Or is it just Bidenomics on steroids?  

So far, her campaign website has zero policy proposals, so that’s no help. But you can buy a Harris-Walz camo hat the media have been effusing over. Wait until someone tells the candidates that “camo” is short for camouflage, which is something typically worn by hunters and soldiers who carry…guns. 

Probably the best we can do at this point is drill down on her platitudes. 

Harris recently said at a campaign rally, “We fight for a future with affordable housing, affordable health care, affordable child care, paid leave.” So let’s start with those. 

Housing: Housing costs have risen significantly under the Biden-Harris administration. There are several factors behind those increases, including house prices, rising interest rates and insurance costs, property taxes, etc. Fortunately, a recent paper from Harvard University’s Joint Center for Housing Studies looked at monthly payments for a median-priced home, including taxes and insurance. It estimates the current monthly payment at $3,096. That’s down from about $3,300 in mid-2023, but significantly higher than $2,100 at the beginning of the Biden-Harris administration.

In short, all-in monthly housing costs have increased about 50 percent under Biden-Harris. No wonder the president and now Harris have started talking about addressing high housing costs. They realize it’s an election-year liability.

The way to lower housing costs is to reduce regulations, allow builders to charge a fair price that covers costs and makes a profit, and reduce interest rates (which the Federal Reserve Bank will likely do soon). But Harris would almost certainly do the opposite, increasing regulations and attempting to impose price controls, which would lead to fewer houses and higher prices. 

Health care: Virtually all progressives want a government-run, single-payer health care system. That includes Harris. 

She was quick to support Sen. Bernie Sanders’ (I-Vt.) “Medicare for All” bill when she was in the Senate, though that title is misleading. The bill does not put everyone in the federal Medicare program. Rather, the government takes over the health care system, raising taxes to pay for it. You would not be able to keep your employer-provided health insurance nor opt out of the government system. “Kamalacare” would likely be very similar.   

Now would be a good time to recall humorist P.J. O’Rourke’s famous observation, “If you think health care is expensive now, wait until you see what it costs when it’s free.” 

Before you decide on whether Kamalacare is a good idea, look at the challenges in the two countries most often pointed to as models for U.S. reform: England and Canada.  

Childcare: Progressives don’t want to reduce the cost of childcare. Rather, they want the private sector or government to pay for it. Indeed, the Biden-Harris CHIPS and Science Act requires companies taking government subsidies to “include child care plans that meet the Department of Commerce’s standards for affordable, accessible, reliable, high-quality care that is responsive to employees’ needs.”  

The way Harris would make childcare “affordable” is by having the government hand out even more money directly to families, or by attaching strings to corporate subsidies so that companies pay for it. 

Paid leave: What is it with progressives’ obsession with paying people not to work?  According to the Department of Labor, “Thirteen states and the District of Columbia have laws that create paid family and medical leave programs for eligible workers.” In addition, many employers provide paid leave. But Harris wants to create a new federal entitlement program. 

The Green New Deal: Harris fully embraces the Green New Deal, a massive social justice program disguised as a way to save the planet from greenhouse gases. As the New York Times explains, “Supporters of the Green New Deal also believe that change can’t just be a technological feat, and say it must also tackle poverty, income inequality and racial discrimination.”

But Biden-Harris, like Obama-Biden before them, have poured trillions of taxpayer dollars into their green dreams, and yet consumers are increasingly shunning electric vehicles and numerous subsidized green energy companies have either gone belly up or soon will. 

Fiscal Policy: Here’s one facet of Kamalanomics you can be sure of. She will increase federal spending at an even faster rate than Biden and try to pay for it with higher taxes. If you liked Biden’s  $8 trillion total in annual deficits and $35 trillion federal debt, you’ll love Harris. 

There are obviously many as-yet unannounced policy positions, and you can be sure they all will give the government much more control over our choices and our lives. But Harris will likely stick to unoffensive platitudes as long as voters, and especially the media, don’t demand specifics. 

Republican presidential nominee Donald Trump tossed out several reforms in his mega-long acceptance speech on Thursday night. But his best reform proposal, and one that would improve economic growth, is cutting the corporate income tax rate from 21 percent to 15 percent.  

As a reminder, Trump proposed a 15 percent corporate rate in his 2016 presidential campaign, but Republicans in Congress thought that was a bridge too far. Some Democrats suggested a compromise rate of 28 percent. Republicans settled on 21 percent instead of Trump’s 15 percent when they passed the The Tax Cuts and Jobs Act of 2017 (TCJA). Not one Democrat voted for the bill. 

Now, Trump has returned to his initial 15 percent proposal. Democrats want to raise it to 28 percent — though that would likely be their first tax-increasing step. 

If Trump wins in November and Republicans take control of the Senate and keep the House — which at this point looks likely — they should let Trump have his 15 percent. 

Democrats, progressives and the media will have a meltdown because they want high taxes to help fund their big-spending agenda. But a low corporate tax rate is good for the economy for several reasons. 

First, it gives the U.S. a competitive advantage. In addition to the 21 percent current federal corporate income tax rate, state and local corporate taxes push that rate up to an average of 25.8 percent, according to the Tax Foundation. By contrast, the average corporate income tax rate for European countries is 21.3 percent, and Ireland’s rate, which has become a tax destination, is 12.5 percent. The worldwide average is 23.45 percent.  

A 15 percent rate — which would be more like 18 to 19 percent with state taxes included — would make the U.S. a very attractive place to locate businesses, which takes us to the second point. 

It keeps companies in the U.S. and attracts even more. Trump wants companies building factories and headquartering in the U.S.  The best way to achieve that goal isn’t his proposed tariffs or Biden’s taxpayer-provided subsidies, but having a low corporate tax rate and light regulations. 

Before the TCJA, lots of large U.S. companies were “inverting.” That’s “a process by which companies relocate their legal location overseas to reduce their income tax burden.” After TCJA passage, corporate inversions largely ceased.  

However, with an attractive 15 percent corporate tax rate, we’re likely to see multiple large foreign corporations shift their headquarters or manufacturing to the states. 

Third, there is a longstanding belief among many economists that corporations don’t pay taxes, people do — i.e., that business taxes are just passed on to consumers in the form of higher prices. For example, economist and former Sen. Phil Gramm (R-Texas) and Mike Solon argue, “A corporate entity is a ‘pass through’ legal structure — a piece of paper in a Delaware filing cabinet. When the corporate tax rate increases, corporations try to pass the cost on to consumers… To the degree that the entire cost of the tax increase can’t be passed on to consumers, those costs are borne by employees and investors.”  

But aren’t these corporations just run by greedy fat-cats who don’t want to pay their “fair share,” as Biden often claims? In fact, corporate income tax revenue is higher than ever, $410 billion in 2023. But ask yourself this question. Are you being greedy when you seek to legally limit your personal income tax obligation, thinking you earned the money and can spend it better than the government? Corporations are no different in that regard. 

But won’t the 15 percent rate reduce federal revenue? Maybe. While the Tax Foundation claims the rate cut would be pro-growth, it also estimates it would reduce federal revenue by $460 billion over 10 years. 

There are two responses to this objection. First, critics also claimed the TCJA would reduce federal revenue, and yet federal revenue rose after passage, except in 2020 when the economy shut down. Second, Trump has also promised, without providing specifics, to cut federal spending. That’s important because, as the Wall Street Journal explains, the exploding federal debt is the result of a spending problem, not a revenue problem. 

There’s reason to be skeptical of the spending-cut claim, but if Trump cuts corporate tax rates and federal spending, those would be the kindest cuts of all. 

In two previous PolicyBytes, we’ve outlined the problems with expecting the federal government to voluntarily surrender power to the states and to make critical fiscal reforms, especially entitlement reform. Today, we’ll explain how such a convention would work, and answer common objections.
 
In order to hold an Article V convention, the Constitution requires two-thirds of the states, or 34 states, to make application. That means the legislatures of 34 states pass such an application, or resolution, and submit it to Congress.
 
Now, two-thirds is considered a “supermajority” in our system, whereas a simple majority is 50 percent plus one. Supermajorities are required of each house of Congress to overturn a presidential veto, while a 60-vote supermajority is required to break a senate filibuster. A supermajority is a high threshold to overcome, but that’s its purpose.
 
But for an Article V convention to make any changes, the Constitution requires a super-duper majority of three quarters of the states, or 38 states.
 
In other words, only 13 states can block anything in an Article V convention, because they can simply walk out. The constitutional requirement is not three-quarters of the states present, but three-quarters of the total number of states.
 
Finally, and this is the real kicker, each state has only a single vote, regardless of the state’s population or number of electoral votes. In other words, California has the same power as Wyoming at an Article V convention. This reflects the Founders’ concern, which shows up many places in our political system, about large states running roughshod over smaller states.
 
Once you understand the constitutional requirements for an Article V convention, the objections melt away. What about the scope and topics for a convention? If thirteen states object to consideration of a particular topic, it’s out of scope. How about the rules for the convention? If thirteen states don’t like a rule, it won’t pass. The Founders’ design ensures that no changes are made to our precious Constitution unless there is very broad consensus among the states.
 
Which takes us to the primary objection: What prevents a “runaway convention?” In other words, what’s to stop a small number of blue states to, say, weaken the Second Amendment, or what’s to stop a small number of red states from passing an amendment outlawing abortion or something? The fear is that radical change might happen at an Article V convention that would irreparably damage the Constitution.
 
But now you understand why that is impossible. With each state delegation having only a single vote, and with three-quarters of the states required to do anything, the likelihood is that nothing would pass at the convention, or only a few changes that had broad, bi-partisan, pan-regional support. Nothing radical stands a chance.

In our last PolicyByte we began to make the case for an Article V convention of states for the purpose of amending the Constitution to rein in the federal government and restore fiscal controls.
 
Many grassroots conservatives have opposed the idea of an Article V convention out of misplaced concern about a “runaway convention.” We’ll explain in the next PolicyByte why a runaway Article V convention is impossible. But many conservative thought leaders, including people respected by the grassroots like radio and TV host Mark Levin, support the idea. In his book, Levin even proposes 11 amendments intended to “restore our founding principles.”
 
The Founders expected and anticipated the need to amend the Constitution, and in Article V created two means for doing so. While both methods require the approval of three-quarters of the states (now 38), the first method originates with Congress and is run by Congress.
 
But the second method, which has never been used, is initiated and run by the states, with Congress having only the ceremonial role of calling the convention. The states themselves would determine the scope of the convention and its rules, but of course all within the text and limits of Article V.
 
The Founders wisely understood that there might come a time when the states had to take action in the face of an unresponsive federal government that, for whatever reason, needed to be acted upon. A convention of states is a way of doing an end-run around Congress, rather than leaving the states powerless, since powerless states were the last thing the Founders intended.
 
Remember, it was the states that created the federal government, and not the other way around. Had we adhered to the Ninth and Tenth Amendment reservations of power to the states, an amending convention would probably not be necessary, but thankfully the Founders supplied us with a means of remedy.
 
In other words, an Article V convention of the states is legitimate, was designed by the Founders, and was intended to be used. And those who think it’s a terrible idea, well, they disagree with the Founders and think the Constitution is flawed, at least in Article V.
 
Now, ask yourself this question: Have you seen any evidence that the federal government is capable of reforming itself? That it’s capable of reducing its power and returning power to the states? That it intends to get spending under control and set its fiscal house in order? Neither have I.
 
There’s never going to be a magic election where Republicans win enormous majorities in the House and Senate, win the White House, AND then are willing to voluntarily reduce their power. Not gonna happen.
 
If change is to happen, it will have to be the states that do it.

Last April, I wrote about a Washington state Supreme Court decision, by a lopsided majority of seven to two, to ignore the plain meaning of the state’s Constitution and let an income tax stand.
 
The good news is that opponents of that income tax have achieved the requisite number of signatures to put repeal on the November ballot.
 
Some quick history here. In 2021, Washington’s legislature passed a bill to impose a special 7-percent tax on capital gains. This is in direct violation of the state’s Constitution, which states, “All taxes shall be uniform upon the same class of property within the territorial limits of the authority levying the tax.” Income in Washington has been defined as property. So the state government could tax capital gains, but it would have to do so uniformly. But the capital gains tax applies only to the part of the gain in excess of $250,000. There goes uniformity.
 
Another part of the Constitution limits the property tax rate to 1 percent. News flash: seven is more than one.
 
How did the seven justices get around these two pesky provisions of Washington state’s Constitution? By claiming the tax is not on income but, instead, is an excise tax. Even Joe Biden understands that capital gains are income.
 
Because of all the exemptions for various types of capital assets, only about 5,000 people, according to Kelley R. Taylor of Kiplinger, will pay the tax. This is out of a total state population of about 7.8 million.
 
What if, say, 10 percent of these 5,000 people decide to move to avoid the stiff tax? Then the government won’t collect as much as it thought it would. Moreover, those people who move will no longer pay sales taxes.
 
What this means is that repeal, if it passes in November, will not only return Washington state to the rule of law, but will also cost the government less than many people think.

As IPI’s own Merrill Matthews has so ably reported, the federal Congressional Budget Office now estimates that the federal budget deficit will exceed $1 trillion annually over the next 10 years.
 
Almost all the news is bad. But there’s one little bit of good news in the CBO’s February report. The CBO’s economists estimate that because of higher immigration, growth of real GDP will be higher. Specifically, says the CBO:
 
Most of the increase in the projected population reflects larger net immigration. That greater immigration is projected to boost the growth rate of the nation’s real gross domestic product (GDP) by an average of 0.2 percentage points a year from 2024 to 2034, leaving real GDP roughly 2 percent larger in 2034 than it would be otherwise.
 
Immigrants tend to be younger and, therefore, tend to be employed. Without this higher number of immigrants, estimates the CBO, economic growth over the next 10 years would have averaged about 1.8 percent annually. But higher immigration would increase economic growth during those years to a slightly less anemic annual rate of 2 percent. In other words, we pay a price in terms of economic growth for a lower supply of labor.
 
With higher growth, of course, come higher tax revenues, although reading the CBO’s report is like looking at the output of a black box. CBO Director Phill Swagel elaborated on the effect of immigration earlier this month. He stated:
 
The labor force in 2033 is larger by 5.2 million people, mostly because of higher net immigration. As a result of those changes in the labor force, we estimate that, from 2023 to 2034, GDP will be greater by about $7 trillion and revenues will be greater by about $1 trillion than they would have been otherwise. We are continuing to assess the implications of immigration for revenues and spending.
 
A $1 trillion reduction in the federal debt is no longer a lot, but it’s nothing to sneeze at.
 
Of course, the status quo is highly dysfunctional: Allowing immigrants to come into the country while forbidding them to work. We could do much better: get rid of the regulation that says people seeking asylum—unless they’re from Cuba, Ukraine, Haiti, Nicaragua, or Venezuela—must wait six months before working. If other asylum seekers were put on the same footing as people from those five countries, they could work right away and would be contributing to economic growth even sooner. That would also save on a lot of food and housing expenses paid for by local governments.
 
There are, of course, other factors in the debate over immigration. But it’s good to see the CBO acknowledges that immigration is a net plus for economic growth.

Among the most important and lasting insights of economist Thomas Sowell is the observation that “there are no solutions—there are only tradeoffs.” Sowell’s axiom is intended as a corrective to the idea that there is some achievable ideal that we are only slightly missing, but with the right idea or the right leader, we can correct our mistake and return to the ideal.
 
Unfortunately, the truth is that we are imperfect creatures in an imperfect universe, and therefore our knowledge is incomplete, our problems are poorly understood, our leaders are imperfect, as are We the People ourselves. So, no leader, no election outcome, no law and no government program is going to be a solution. Everything is a tradeoff.
 
This especially seems to apply to legislation. No legislation is perfect, and all legislation involves consensus based on compromise and tradeoffs. In most circumstances, one political faction cannot simply force its will on the country—to get some of what the faction wants, it must be willing to give the other side some of what THEY want. And we’re currently faced with a perfect example.
 
House Ways and Means Chairman Jason Smith has moved the  Tax Relief for American Families and Workers Act of 2024 (H.R. 7024) out of committee on an overwhelming 40-3 majority. The proposed legislation would extend tax provisions that are prized by business and that we believe contribute to increased economic growth.
 
But—and here comes the tradeoff — it also includes provisions that Democrats prize, particularly an increase and extension of the refundable child tax credit that was implemented as part of Covid-19 relief. “Refundable” means families get the tax credit even if they have no federal income tax liability—i.e., they’re receiving money from the government. It’s welfare through the tax code.
 
So, tradeoffs.
 
The Wall Street Journal has editorialized against the legislation, judging that entrenching the child tax credit in law is more harmful than allowing the business tax credits to expire. You may be forgiven for being surprised to see the Journal editorializing against business tax cuts. On the other hand, Americans for Tax Reform supports the legislation because it is an overall reduction in taxes.
 
The full Sowell quote goes like this:

 “There are no solutions, there are only trade-offs; and you try to get the best trade-off you can get, that’s all you can hope for.”  

Is trading an expanded and extended child tax credit for extensions of business tax credits “the best trade-off you can get”? That is the task of the legislature, which in our system is where tradeoffs take place and consensus is formed. And which is accountable to the people.

In 1992, Colorado voters approved the TABOR Amendment to Colorado’s state constitution. TABOR is a loose acronym for “Taxpayers’ Bill of Rights.”

TABOR, explains Colorado’s legislative council staff, “allows the state to retain and spend an amount based on the prior fiscal year's actual revenue or limit, whichever was lower, grown by Colorado inflation and population growth and adjusted for any ‘voter-approved revenue changes.’”

In short, TABOR is a way to limit the growth of government. Under the amendment, revenue in excess of the TABOR limit must be returned to taxpayers, though it appears the legislature has some discretion in how it distributes those funds.
 
But Colorado’s legislature, chafing at TABOR’s limits, has been trying to undercut the amendment. It recently succeeded and, in doing so, redistributed revenues from the most productive people to the least productive.
 
Last November, Colorado voters soundly defeated, by about a 60 percent to 40 percent vote, Proposition HH, which would have allowed the state government to increase spending and use some of what would have been tax refunds to reduce property taxes.
 
But that didn’t stop the legislature. In a special session after the November election, it voted to use some of the $3.3 billion excess in revenues on reducing property taxes slightly and expanding Colorado’s earned income tax credit. It also changed how refunds are allocated. Under TABOR, refunds were approximately proportional to the amount each person paid in taxes. If you paid more in taxes, you got a bigger refund. But the legislature voted to change that so that each tax filer gets the same refund.
 
That’s a big difference. A high-income Colorado taxpayer making $235,001 would have gotten $1,143 back. A Colorado taxpayer making $51,000 or less would have received $586. But now each will get $800. Democratic governor Jared Polis signed the bill equalizing refunds in November, shortly after the legislature passed the bill.
 
In 1866, Gideon John Tucker, a lawyer and politician in New York state, famously stated, “No man’s life, liberty, or property are safe when the legislature is in session.” Colorado’s legislature is a case in point.

Switzerland recently announced it plans to eliminate tariffs on 95 percent of all imports. Donald Trump recently announced that as president he would impose tariffs of at least 10 percent on virtually all imports to the United States. The Swiss have it right on both the economics and the politics.
 
In regard to Switzerland, Bloomberg News has reported, “Starting in January, 95% of all imports will enjoy duty-free status, promising more affordable goods like cars, household appliances and clothes. That’s up from 81% currently.” Only agricultural products will retain some tariffs.
 
Why are the Swiss taking this step? Even though the country concedes it will lose some revenue, the measure is “expected to boost competitiveness and moderate the elevated prices for everyday items.”
 
Swiss consumers, like consumers in most countries, have been struggling under the rising prices associated with inflation. Eliminating tariffs will likely lead to lower prices for consumer goods and services. Not huge decreases, to be sure, but any price reductions will help struggling families.
 
That’s because tariffs are a tax imposed on individuals and companies that buy imports. Tariffs are not paid by the countries exporting the items, as Trump frequently asserts. Tariffs are paid by those in the importing countries.
 
The point is that eliminating tariffs in inflationary times is good for an importing economy like Switzerland—and the United States.
 
Which leads us to why eliminating tariffs is good politics: it’s a tax cut. Since tariffs are a tax, cutting tariffs is a tax cut that will help many businesses that import products.
 
By contrast, Trump has proposed a 10 percent across-the-board tariff on all imports. If he were to succeed—and remember, he unilaterally imposed tariffs on steel and aluminum without congressional approval—Americans would be forced to pay higher prices for imported goods. Those higher prices would trickle down through the economy, putting upward price pressure on everything.
 
And it’s Americans, not the exporting countries, who would be paying those tariff/taxes. In other words, Trump is proposing what amounts to an across-the-board tax increase.
 
Lower prices and lower taxes—the Swiss model—are good for the economy and economic growth. Higher prices and higher taxes—the Trump model—are bad for the economy and economic growth.
 
There is very little reason to think that this explanation will have any bearing on Trump’s thinking. He had several good economists around him in his first term, notably Larry Kudlow, who understand tariffs’ negative impact on an economy.
 
Yet it’s still worth pointing out: The Swiss have it right, Trump has it wrong.

George Shultz, secretary of state in the early 1980s, was also a first-rate economist. As a good economist, he put out a press release showing how little the average taxpaying household paid for aid to El Salvador. As I recall, it was about $34. (I can’t find a source.) Shultz seemed to think that $34 was a small number. But he quit talking about it pretty quickly. My guess is that he got a lot of feedback from average Americans expressing outrage at paying $34 a year for something that they valued less than that.
 
Steven E. Rhoads, in The Economist’s View of the World, points out what seems to be a constant in opinion polls. When people are asked whether they want the government to do something, a majority says yes. But if they are asked whether they want the government to do that same thing if it means their taxes will increase, that majority shrinks to a minority. There’s a lesson here: If you want to make a case against a government program or an increased government expenditure, tell people what that will cost an average family.
 
Consider a hypothetical proposal for the federal government to spend $100 billion in a year. It could be to help Ukraine, or it could be anything. That sounds large—and it is large. Unfortunately, Congress and the president often propose such large expenditures.
 
What would that $100 billion cost the average family? In the United States there are approximately 131 million households. So, the average family would pay about $763.
 
You might not be average. Based on a Tax Foundation study using 2019 data, I calculated high-income households, those in the top 20 percent of the income distribution, paid about 65 percent of all the tax revenue the feds collected. To be in the top quintile that year, you needed to have an income of $125,748 or more.
 
Assume for simplicity that these numbers, adjusted for inflation, are about the same today. Also, I’ll assume, even though I know it’s false, that this $100 billion will be paid entirely out of taxes rather than new debt. It’s not as bad an assumption as it looks. To the extent it’s paid out of new debt and to the extent future taxes pay off that debt, based on a progressive tax structure such as the one we have now, it’s a pretty good assumption.

So, the top quintile would pay 65 percent of $100 billion, which is $65 billion. That works out to $2,481 per top-quintile family.

Ask a family in the top quintile, “Is that $100 billion expenditure worth $2,481 to you?” Chances are the answer is no.

Even Massachusetts has got into the tax reduction act, albeit in a complicated way.
 
Earlier this month, Massachusetts Democratic governor Maura Healey touted the tax cuts she signed into law, stating in a press release: “$1 billion in tax cuts includes savings for seniors, businesses, renters, and the most generous Child and Family Tax Credit in the country.”
 
Not all tax cuts of $1 billion are equal. Because I’m an economist who realizes that incentives are important, I think the best tax cuts are those that reduce a marginal tax rate or increase a threshold beyond which a tax rate applies. Both kinds of tax cuts increase the incentive to make money or save money.
 
By that standard, there are two particularly good components in Massachusetts’ complicated tax-cut law. First, it cuts the tax rate on short-term capital gains from a whopping 12 percent to a less-whopping but still high 8.5 percent. Second, it reduces the death tax, increasing the threshold beyond which the estate tax applies from $1 million to $2 million. Both measures will give an increased incentive to save and invest and will also marginally raise the chance that relatively wealthy people will stay in Massachusetts.
 
There’s one other tax cut that’s pretty good: the lower tax rates “on a broadened class of beverages.” That reduces the “tax wedge” between what buyers pay and what sellers receive, which reduces the deadweight loss from the tax.
 
The rest of the tax cuts are good but not as good. They’re good because they really do cut taxes. They’re not as good because to get the tax cut, you must be in a particular category.

One example, which the governor highlights, is the Child and Family Tax Credit. Until now, you could get a tax credit for no more than two dependents, and it was $180 per dependent child, disabled adult, or senior. The tax cut measure eliminates the “two-dependent cap” and raises the credit to $310 in 2023 and $440 in 2024 and beyond.

It’s understandable that the government would want to increase a tax credit for people who are disabled, assuming that the “disabled” category is well-defined. It’s much less justifiable to use the tax code to discriminate against the childless and the young.
 
I give the governor a C+ or maybe a B-. If you think that’s too generous, remember that I live in California. Here, a Democratic governor and a heavily Democratic legislature are still busy raising taxes.

In the old days before the web, I used to go through the Reader’s Digest almanac to find interesting facts. One thing that always grabbed my attention was the tax tables for various states. Hey, I’m a nerd, spelled e-c-o-n-o-m-i-s-t. I remember being surprised at how heavily Iowa’s government taxed income.
 
In 1987, Iowa’s top state income tax rate was 9.98 percent, and that rate kicked in at an income of $45,000. That put Iowa into California territory. In California that same year, the top tax rate was 11 percent. But California Republican Governor George Deukmejian and the legislature dropped the top rate to 9.3 percent in 1988, and that rate kicked in at $47,000. I don’t know which part of the previous sentence is more surprising: that California’s government dropped the tax rate or that California once had a Republican governor. The two facts are connected.
 
Back to Iowa. Since 1996, when the government indexed the tax rates to inflation, Iowa has been moving in the right direction on taxes. In 1998, all tax rates were cut by 10 percent, making the top rate 8.98 percent. Then all rates were cut in 2019, making the top rate 8.53 percent.
 
But current Republican Governor Kim Reynolds is not done. She and the legislature dropped the top rate to 6 percent in 2022. Tax rates are scheduled to go to a flat 3.9 percent by 2026.
 
Reynolds also understands that corporate income tax rates matter too. Iowa has a graduated corporate income tax system that punishes success. Before she was governor, the top corporate rate was a whopping 12 percent, and kicked in at a relatively modest income level of $250,000. In 2018, Reynolds signed a bill that dropped the top rate in 2021 to a still substantial 9.8 percent, starting at an income of $250,000. This year, the top rate is 8.4 percent, and in 2024 it will fall to 7.1 percent, still starting at an income of $250,000.
 
Reynolds has vowed to end the individual income tax by 2027.
 
How has she delivered these cuts? By reining in the growth of state government spending. During her time in office, from 2017 to 2024, state government general fund spending has risen by an annual average of 2.3 percent, and state government spending per capita has risen annually by an average of 2.0 percent.  
 
The message is clear: If you want your government to cut tax rates, push it to reduce the growth rate of spending.

In my last TaxBytes column, I laid out the strange economics of so-called “tax expenditures.” I gave as an example the tax deduction for mortgage interest. That provision leads some people to own rather than rent and others to buy a more expensive house than they would have. Those are bad effects. But, I noted, it would be more straightforward for economists and politicians to say that those provisions have bad effects rather than using the convoluted language of tax expenditures.
 
It gets worse. Sometimes economists and politicians use the term tax expenditures to refer to tax provisions that have good effects on economic growth. They do that because they are stuck in the Haig-Simons view of income. According to this view, named after early 20^th century tax scholars Robert M. Haig and Henry C. Simons, it doesn't matter whether income comes from working or from interest and capital gains—all should be taxed equally. This view has sometimes been summarized as “A buck is a buck.”
 
Other scholars have pointed out that if the tax system treated all this income the same, it would tax saving more than consumption, which would discourage investment, thus hurting economic growth.
 
How so? Assume someone earns $1,000 from working and pays a 24 percent income tax rate on it. He keeps $760 and spends it on food, clothing and entertainment. On some of those expenditures, he pays a sales tax, but the sales tax rate is typically under 10 percent.
 
But what if he takes the $760 and invests it in a company? Then the company does well and it pays dividends. Its stock price also increases, and he sells the stock, making a capital gain. If the dividends and capital gains are taxed at the same 24 percent rate that ordinary income is taxed, or even at a 15 percent rate, that means he is taxed more by saving than if he had just spent the $760. That’s how taxing according to the Haig-Simons method systematically favors consumption over saving.  
 
Many tax economists say that failing to tax dividends and capital gains creates a “tax expenditure.” Their implicit assumption is that dividends and capital gains should be taxed at the same rate as ordinary income. But by using the term “tax expenditure,” they avoid having to make the case and dealing with the bad consequences for saving and economic growth.
 
Beware tax scholars and politicians using the term “tax expenditures.”

If you follow discussions about tax policy that academics and politicians engage in, sooner or later you’ll come across the concept of a “tax expenditure.” The term seems internally contradictory. How could something be both a tax and an expenditure?
 
It can’t.  The term is contradictory. And thinking in terms of tax expenditures can lead you to some strange conclusions.
 
Here’s an example to show what the term means. Imagine that John Smith is in the top federal tax bracket, paying a marginal tax rate of 37 percent, and he switches from being a renter to a homeowner, financing his new home with a $500,000 mortgage. Assume that John’s mortgage interest rate is the current average of about 7.2 percent. Therefore, he pays approximately $36,000 in annual mortgage interest, which he can deduct. If he already itemized his deductions before buying the home, he will certainly itemize now. John can deduct the $36,000 in interest, saving himself 37 percent of $36,000, in taxes. That’s $13,320 in reduced taxes. Many tax policy people will say that he got a “tax expenditure” of $13,320 for having that mortgage. All they mean is that his taxes would have been $13,320 higher if he hadn’t got the mortgage.
 
Why do they call it a tax expenditure? Because their implicit assumption is that there shouldn’t be a deduction for home mortgages.
 
It’s true that deductions for home mortgages cause some people to buy instead of rent and also cause many people to buy a more expensive home than otherwise. So one can make the case that because this deduction distorts people’s decisions, there shouldn’t be a deduction for a home mortgage. But then they should simply say that a home mortgage deduction is bad policy, not that it’s a tax expenditure.
 
Moreover, notice something strange. What if Congress passed and the president signed a bill that reduced the top tax rate from 37 percent to 30 percent? Then the person’s tax break from the mortgage would fall from $13,320 to 30 percent of $36,000, which is $10,800. So cutting his marginal tax rate would actually reduce the tax expenditure.
 
Similarly, raising his tax rate would increase the tax expenditure. And then tax policy wonks would say that he benefited hugely from the tax expenditure even though the higher tax rate made him worse off.
 
Thinking in terms of tax expenditures, and using tax policy to reduce them, can lead someone to advocate some strongly anti-growth policies. More on that in my next TaxBytes.

You know the world has turned upside down when President Joe Biden is criticizing Donald Trump for a proposal to increase taxes.
 
Recently, Trump (aka Tariff Man) floated a 10 percent tariff on all imported goods.
 
Trump told Fox Business Network host Larry Kudlow, “I think, when companies come in and they dump their products in the United States, they should pay automatically, let’s say, a 10 percent tax.”
 
The White House responded to the proposal quickly, “President Biden strongly opposes plans to hurt hardworking families with higher prices and higher inflation—as even economists who served in the Trump White House warn such an agenda would,” according to Deputy Press Secretary Andrew Bates.
 
I don’t often agree with the Biden White House, but this is one of those times.
 
Trump opined that his tax wouldn’t really hurt trade that much, and it “would really make a lot of money.” What I think he means is that a 10 percent tariff on all imported goods would dramatically increase U.S. tax revenues.
 
How much money? The Tax Foundation provides an estimate. “Former President Donald Trump’s proposed 10 percent tariff would raise taxes on American consumers by more than $300 billion a year—a tax increase rivaling the ones proposed by President Biden.”
 
But note the Foundation’s really, really, really critical point about who pays that $300 billion tax: consumers.
 
The issue of who pays a tariff has been a perpetual point of confusion for Trump. For some reason, he thinks the country producing the products being imported by U.S. businesses and consumers pays the tax. That is not the case. U.S. businesses and consumers pay the tax.
 
It’s hard to know whether Trump is being dense on the issue of who pays tariffs, or just pretending to be dense. The interview cited above was with Larry Kudlow, an economist who served in the Trump White House.
 
Kudlow knows who pays the tax and has surely explained it to Trump, probably several times—as the Biden White House correctly points out. For whatever reason, Trump has consistently ignored that fact and continues to imply that countries producing the goods pay the tax.
 
In his 2016 presidential campaign, Trump ran on cutting taxes. Campaigning on imposing a massive tax increase on all Americans sounds more like a Democratic than a Republican plan.

Republicans on the House Ways and Means Committee have proposed three tax bills under the umbrella titled “American Families and Jobs Act.” It’s impossible to do a comprehensive analysis in this short article. Instead, I focus here on one good thing: it keeps the State and Local Tax (SALT) limit, a key feature of the 2017 Tax Cuts and Jobs Act.
 
The SALT limit caps the amount of state and local tax that taxpayers can claim if they itemize their deductions. The cap is $10,000 annually for individual taxpayers and for married taxpayers filing jointly. Before the 2017 tax cut law, taxpayers who itemized faced no limit on the amount of state and local tax they could deduct. The change meant that high-income taxpayers who live in states with high income taxes took a huge hit. Even so, most taxpayers gained at least a little because the standard deduction was raised substantially to make up for the SALT limit, and marginal tax rates were cut somewhat for the vast majority of taxpayers. 
 
Of course, politicians from high tax states like New York and California don’t like the SALT limit. So why do I think it’s so good?
 
There are two main reasons. First, it will rein in wasteful spending by state and local governments. Second, the lower marginal tax rates that the SALT limit allows give people a greater incentive to make income.
 
For a given amount of revenue raised, the ideal tax system is one that doesn’t give people an incentive to do wasteful things. While none of us, unless we are legislators, chooses how much our state and local governments spend, our resistance to their spending is lower if we can deduct from our taxable income the taxes they impose. That deductibility gives those governments an incentive to do more spending, much of which is wasteful, than they otherwise would. Limiting the deductibility will, especially in the long run, cause taxpayers to question some government spending. As a bonus, it also means that taxpayers in low-tax states are not implicitly subsidizing taxpayers in high-tax states.
 
The second benefit of SALT is that, for a given amount of revenue raised, marginal tax rates can be lower. The 2017 tax cut reduced marginal tax rates at all income levels. The greater the portion of our additional income we can keep, the higher is our incentive to make more money. Moreover, a theorem in economics says that the distortions due to taxes are proportional, not to the tax rate, but to the square of the tax rate. That makes cuts in marginal tax rates especially valuable.
 
If we think of higher tax rates as broccoli, then raising or eliminating the SALT cap trades salt for broccoli. Let’s keep the SALT and pass on the broccoli.

At the end of June the Supreme Court agreed to hear what is likely the most important tax case in decades: Moore vs. United States. It’s a case that seems obscure but that will have enormous future consequences regarding the ability of Congress to levy taxes.
 
The 2017 Tax Cuts and Jobs Act (TCJA), crafted by a Republican Congress and signed into law by President Trump, included many reforms long-wanted by pro-growth conservatives. It also attempted to solve some long-standing problems with international taxation, including the problem of “stranded” overseas profits. U.S. companies were holding literally trillions of dollars of profits in overseas subsidiaries because repatriating those profits would subject them to double taxation (taxed locally and then again when the monies were brought back to the U.S.).
 
The TCJA’s unfortunate solution to this problem was to “deem” those overseas profits as having already been realized (even though they hadn’t been) and tax at a lower, more favorable rate. This provision raised eyebrows here at the Institute for Policy Innovation (IPI) and other policy research institutions because it seemed a clear overreach of the legislative branch’s power to tax.
 
But it caused practical harms as well. Charles and Kathleen Moore had invested in a business in India that helped low-income farmers obtain modern farming tools. The Moores did this at least in part for charitable purposes, reinvesting all of their profits in the company and never making a dime from their investment.
 
But because of the “deemed income” provision in the TCJA, the Moores received a gigantic tax bill, retroactive to 1986.
 
For the last 100 years of tax law, the courts have held that taxpayers cannot be taxed on the appreciated value of an asset or investment until they sell the asset or realize the income. That is what triggers a taxable event, not theoretical or paper appreciation or profit. The TCJA upends this long understanding, with immediate harms to the Moore family, and with huge potential future implications.
 
Imagine if Congress could tax you, now, on the increase in your home’s value, or on the paper profits on your investments? How about on the increase in value of a business you own?
 
You don’t have to imagine very hard, because that is EXACTLY what Elizabeth Warren and Bernie Sanders want to do through their “wealth tax” proposals. Tax wealth, not simply income. And not the income realized from assets and investments, but the assets and investments themselves.
 
Thankfully, the Supreme Court has agreed to hear the Moore’s appeal. But we all have much at stake in the outcome. A finding against the Moores will open the floodgate for Congress and the states to tax virtually any asset by deeming it as income.

I’ve reported before on TaxBytes on the mainly good news about state income tax rates. In the last few years, many state governments have reduced income tax rates and flattened the income tax structure while only a few states have gone the other way.
 
The progress since I last reported has continued. The state governments of Arkansas, Indiana, Michigan, Mississippi, Nebraska, North Dakota, and West Virginia have cut state income tax rates. Even Connecticut, whose Democratic governor, Ned Lamont, had to deal with a Democrat legislature, succeeded, with Republican support, in cutting all income tax rates except for the top rate paid by the highest-income people.
 
All of this matters for three reasons. First, as a moral matter, it’s important that people are able to keep more of their income. It’s theirs.
 
Second, even if cuts in tax rates cause state government revenue to be lower than otherwise, that will somewhat constrain the future growth in government spending. The reason is that, unlike the federal government, state governments can’t print money and almost all have some degree of a balanced-budget requirement.
 
Third, high income tax rates distort the economy, causing people to engage in tax avoidance (which is legal) and tax evasion (which is illegal.) Tax avoidance means not only aggressively finding legitimate deductions when you do your taxes; it also includes working less and making less money. Cutting tax rates reduces tax avoidance and tax evasion.
 
Here are the details: 

• In Arkansas, the top marginal income tax rate is now 4.7 percent, down from 4.9 percent, after it fell from 5.5 to 4.9 percent in 2022. 

• In 2024, Indiana’s government, which has a flat tax rate, will reduce the income tax rate from 3.23 percent to 2.9 percent by 2027. 

• Nebraska’s government will drop the top income tax rate from 6.64 percent to 3.99 percent by 2027.  

• On April 28, North Dakota Governor (and now GOP presidential candidate) Doug Burgum signed a law that cuts the top income tax rate from 2.9 percent to 2.5 percent and cuts the other lower rates also. 

• With a bill passed in March, West Virginia’s government cut the top marginal income rate from 6.5 percent to 5.12 percent and cut the lower tax rates across the board. 

• As noted above, even Connecticut’s Democratic governor cut tax rates somewhat. He and the legislature cut the lowest tax rate from 3 percent to 2 percent and the next lowest tax rate from 5 percent to 4.5 percent. Unfortunately, he left higher tax rates intact, including the top marginal tax rate of 6.99 percent. Still, that’s some progress.

One of the best features of the 2017 Tax Cuts and Jobs Act was the introduction of “expensing” for capital investments. Translation: Corporations that made capital investments could deduct (i.e., expense) those costs from taxable income in the year they made those expenditures. The only condition for expensing was that the asset had to have a “life” of 20 years or less and had to be purchased after September 27, 2017, but before January 1, 2023.

 
Unfortunately, starting this year, the 2017 law also phases out the ability to expense. The phaseout will be complete on January 1, 2027.  As expensing phases out, the effective tax rate on capital will rise substantially. That, in turn, will lead to less investment. With less investment, the capital stock won’t grow as quickly as it would have. That means that worker productivity won’t grow as much, which means that real wages won’t grow as much.
 
The advantage of being able to expense capital is that the corporation gets the full deduction. What were the rules before the 2017 tax cut? Most capital investments had to be “depreciated,” that is, deducted in stages over a certain number of years that was related to the life of the asset.
 
The idea of depreciating over multiple years might sound reasonable, but two facts make it not so reasonable. First, even with zero inflation, a dollar a few years from now is worth less than a dollar today. If you don't believe that, please, even if inflation falls to zero, lend me $1,000 for 10 years at a zero interest rate.
 
Second, any inflation, but especially the kind of high inflation we are likely to have for the next few years, makes the future deductions for capital purchased today even less valuable. For both reasons, the effective tax rate on capital will be higher than otherwise.
 
In a June 2023 study, economist Adam N. Michel, director of tax policy studies at the Cato Institute, points out that a “delayed deduction is a partially denied deduction that artificially increases taxable profits and decreases investment returns.” Michel has also done the math. He points out, for example, that if an asset with a life of 10 years is depreciated over 10 years, then, even with zero inflation and assuming a real interest rate of 3 percent, the present value of the deduction is 91 percent of the amount invested. If the inflation rate for the next 10 years were 5 percent, admittedly a likely worst case, the present value of the deduction would be only 78 percent of the amount invested.
 
A 2020 study by the Tax Foundation finds that making the 2017 expensing reforms permanent would increase the capital stock by 2.2 percent, real wages by 0.8 percent, and gross domestic product by 0.9 percent. That sounds like a good idea.

May 30, 2023

The undersigned organizations strongly encourage consideration of a simple policy to quickly address the impacts of inflation on working families, investors, and businesses across America--capital gains indexing.

Congress long ago addressed “bracket creep” by indexing personal tax rates, and other parts of the tax code are also indexed to inflation (alternative minimum tax, estate and gift taxes, earned income tax credit, retirement plan contribution limits, and others), but has failed to index capital gains taxes. Doing so would provide immediate relief from the ravages of inflation.

Even if the current inflation moderates, the couple of years that taxpayers have already endured will create ripple effects for years as people sell capital assets. Some policymakers seek to increase taxes and double down on inflationary policies, but the better answer for millions of Americans is to free investment capital and tax people fairly on actual gains, not artificial “paper gains.”

Government should not profit from inflation. The costs basis for capital gains should be indexed to inflation, like other income taxes.

Wil Armstrong, Chairman
The Armstrong Project

Pete Sepp, President
National Taxpayers Union

Grover Norquist
Americans for Tax Reform

Saul Anuzis, Jim Martin
60 Plus Association

Bob Carlstrom
Association of Mature
American Citizens Action

Horace Cooper, Chairman
Project 21

Ryan Ellis, President
Center for a Free Economy

Tom Giovanetti, President
Institute for Policy Innovation

Heather R. Higgins, CEO,
Independent Women’s Voice

Jeff Hunt, Director
Centennial Institute

Phil Kerpen, President
American Commitment

Karen Kerrigan, President
Small Business and Entrepreneurship Council

Travis Korson, Public Policy,
Frontiers of Freedom

Andrew Langer, President
Institute for Liberty

Carol Platt Liebau, President
Yankee Institute

Mario H. Lopez, President
Hispanic Leadership Fund

Gary Marx, President
Concord Fund

David McIntosh, President
Club for Growth

Steve Moore
Committee to Unleash Prosperity

Seton Motley, President
Less Government

Alfredo Ortiz, President
Job Creators Network

Steve Posiask, President/CEO
American Consumer Institute

Charles Sauer, President
The Market Institute

Richard Stern, Preston Brashers
The Heritage Foundation

Greg Sindelar, President
Texas Public Policy Foundation

James Taylor, President
Heartland Institute

David Williams, President
Taxpayers Protection Alliance

Nick Yaksich, Government Relations
Land Improvement Contractors of America

Cesar Ybarra, V.P. for Policy
Freedom Works

Tyler Yzaguirre, President
Second Amendment Institute

Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman
Yeah, I'm the taxman

These are the opening lyrics of the 1966 Beatles song “Taxman,” written by George Harrison. Why did he write it? Here’s my hypothesis. 

The Beatles, living in high-tax England, started making serious money in 1963 and really serious money in 1964. As a result, they paid a top marginal tax rate of about 90 percent on their earnings. But of course, they didn’t spend it all and so they invested some of it. They would have gotten a real shocker in 1965 when they learned that the tax rate on the dividends from their investments was a whopping 95 percent. 

So, George Harrison was probably hopping mad. Thus, the song.

I love numeracy, which is literacy with numbers. That’s why I love the second line in “Taxman.” If the taxman is getting 19 pounds and the person taxed is keeping 1 pound, that implies a marginal tax rate of 95 percent, which is the actual rate they paid on their “unearned” income. I put “unearned” in quotation marks because, of course, it was earned—the Beatles earned it on their investments. 

George Harrison also knew on whom to blame these high tax rates: Britain’s politicians. That’s why in the background, you can hear the singer castigating greedy, grasping Mr. Wilson and Mr. Heath. Harold Wilson, of the Labor Party, was prime minister from 1964 to 1970, when Harrison wrote the song. Ted Heath led the Conservative Party from 1965 to 1975. He was prime minister from 1970 to 1974, but that was well after the song was written.  

Fortunately, Margaret Thatcher became prime minister in 1979. At the time the top rate on both earned income and “unearned” income (you can tell that I hate that term) was a hefty 83 percent. That same year, as well as cutting rates at lower income levels, she cut the top rate to 60 percent and in the late 1980s cut it again to 40 percent. 

In the United States, we don’t have the high tax rates that George Harrison wrote about in 1966. But we do have pretty high rates. The top combined federal and state tax rates for a Californian is 37 percent federal, plus 13.3 percent state, plus 3.8 percent on net investment income, for a total of 54.1 percent. If President Biden got his way, which, fortunately, he probably won’t, the top federal income tax rate would be 39.6 percent. That would bring the top marginal tax rate for a Californian with investment income to 56.7 percent. 

Where is our George Harrison? I’ve even got the background lines: “Ya, ya, Mr. Biden; ya, ya, Mr. Newsom.”