Governments should have strategic reserves for the same reason families keep a spare tire or an emergency fund: not because it’s exciting, but because it’s useful when something goes wrong.

A real strategic reserve exists for a concrete, predictable reason: The thing you’re stockpiling is something you must be able to access in an emergency. Petroleum reserves hedge oil supply shocks. Medical stockpiles hedge shortages of critical supplies. Even foreign-currency reserves hedge a very specific risk: paying foreign-currency liabilities when markets seize up.

Bitcoin matches none of those use cases. There are no sovereign liabilities denominated in bitcoin, which means there’s no obvious emergency for which “having bitcoin on hand” is the solution. Reserves should be built around the liabilities and risks you’re trying to hedge — and bitcoin’s volatility tends to amplify risk rather than reduce it.

If you want an asset to be there in a crisis, it helps if it doesn’t routinely plunge 50 percent at the worst possible time.

Some proponents argue bitcoin is “digital gold” and will shore up dollar dominance. But that argument collapses the moment you ask the practical question: What liability does bitcoin help the United States pay? What emergency does it solve? We do not run a bitcoin-denominated economy.

In other words, a government bitcoin “reserve” is really government chasing fads and making highly speculative bets with taxpayer dollars. And gambling with taxpayer dollars is not a legitimate function of government.

In late 2025, Texas seeded its new bitcoin reserve fund with $5 million, buying bitcoin at a market price of $91,336. Less than two months later, that initial purchase has lost more than 28 percent of its value. Was that a good use of taxpayer dollars?

Of course, governments buying massive quantities of bitcoin would drive up the price, creating a windfall for existing holders. That’s undoubtedly why some crypto bros are pushing the idea — but that’s cronyism and wealth transfer, not sound strategy.

If a government comes into possession of bitcoin through forfeiture, it should be disposed of transparently and applied to legitimate public priorities. Locking it away indefinitely under an executive order that declares it must not be sold is the opposite of sober stewardship.

America’s strength is not that Washington is a better speculator than the market. It’s that we have the rule of law, deep capital markets, and an innovation economy that doesn’t require the federal government to run a hedge fund.

The problem with zombies is that, even though they are dead, they’re still dangerous.

Currently, the Consumer Financial Protection Bureau (CFPB) is a zombie federal agency — deprived of funding and personnel, yet still legally in existence and still functioning. Congress should put a stake through its heart at the earliest opportunity, but until then, the CFPB continues to pose a threat, especially since everyone thinks it is already dead.

The CFPB was then-law professor Elizabeth Warren’s “big idea” in the wake of the 2008 financial crisis. Warren conceived and helped design the CFPB, but when the Senate refused to confirm her as its first head, she decided to run for the Senate instead.

The design of the CFPB was a constitutional nightmare, as it ignored the separation of powers and was statutorily immune from accountability to either Congress or the president. And while the DC Circuit Court of Appeals found that the CFPB’s construction was unconstitutional, the Biden administration did its best to reanimate the agency, initiating, among other things, a rulemaking on Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Biden’s Section 1033 proposed rule was yet another nightmare. Instead of simply fulfilling the requirements of Dodd-Frank Section 1033, the Biden CFPB drafted a breathtakingly broad rule that would have been a disaster for consumer financial privacy, as well as for the delivery of efficient financial services. It was so problematic that a court order barred the CFPB from enforcing its order until it could be reissued in a revised form.

Since then, the Trump administration has zombified the agency, removing almost all funding and personnel. But despite the courts and the Trump administration determining that the agency itself is effectively illegitimate, the CFPB has continued drafting the rule. 

Any new rule dictated by even a Trump administration zombie CFPB would almost certainly be overly broad and would claim sweeping new powers for the CFPB, which would be all a future administration would need to revivify this dangerous agency.

Ironically, as this Section 1033 regulatory drama has been unfolding, the financial services industry has not only continued to function well but has also been providing consumers with new and innovative products and services. Bilateral private agreements between banks and fintech companies are an area of intense growth and investment in application programming interfaces (APIs) for the safe and secure transfer of consumer data, all of which occurs without the need for governmental interference. 

If there’s no need for the CFPB, there’s no need for this rulemaking.

As an agency targeted for elimination, the CFPB should be put out of its misery. The Trump administration should instruct the few remaining bureaucrats at the CFPB to cease drafting rules and finally seal the coffin shut.

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 . . . 

Today's TaxByte was written by IPI President Tom Giovanetti.

• Who Pays Tariffs?
• Trump’s Tariffs Will Refill the Swamp
• Trump’s Astonishingly Wrongheaded Notions about Trade and Tariffs
  ______________________________________

Today's TaxByte was written by IPI President Tom Giovanetti.

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. 

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.

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.

You don’t have to study federal budget data closely to know that the only way to reduce the huge budget deficits over the next 10 years, while avoiding tax increases, is to cut the growth rate of spending. The Congressional Budget Office estimates that federal spending in 2023 will come in at a whopping 24.2 percent of GDP, up from an average of 21.0 percent between 1993 and 2022. So a good way to judge various Republican and Democratic candidates for the presidential nomination, if they were governors, is to examine their record on state government spending.
 
Doing so leads to two interesting conclusions. First, there are important differences among the Republicans who were or are governors. Second, although the old saying is that there’s not a dime’s worth of difference between Republicans and Democrats, on spending there sometimes are billions of dollars of difference. In fact, all the Republican governors or former governors performed better than the Democratic governors.
 
Currently, six former or current Republican governors are running for the presidential nomination: Asa Hutchinson of Arkansas, Ron DeSantis of Florida, Mike Pence of Indiana, Chris Christie of New Jersey, Doug Burgum of North Dakota, and Nikki Haley of South Carolina. According to the Cato Institute’s fiscal policy economist Chris Edwards, the best of the six, whether measured in annual average increase of government spending or in annual average per capita increase are, Mike Pence (2.1% and 1.7%) and Asa Hutchinson (2.2% and 1.8%). Next are Doug Burgum (2.7% and 2.2%) and Chris Christie (2.9% and 2.8%). Coming in fifth is Ron DeSantis (6.4% and 4.8%) and dead last is Nikki Haley (6.7% and 5.5%).
 
No former or current Democratic governor is currently running against President Biden for the Democratic nomination, but the two governors most talked about for that slot are California’s Gavin Newsom and Michigan’s Gretchen Whitmer. Their records are not good. Newsom comes in with a dismal 9.8 percent annual growth of government spending and, given that California has lost population, 10.2 percent annual growth of government spending per capita. Whitmer comes in at 7.5 percent and 7.4 percent.
 
Of course, there are complications on both the Republican and Democratic sides. Governors don’t have total say on spending and must deal with legislatures. Also, it was harder to get a handle on spending during the Covid lockdown years than earlier.
 
Past performance is no guarantee of future success. The constraints on state governments are much tighter than on the federal government: (1) state governments can’t print money and (2) most state governments have a balanced-budget requirement. Still the differences between Republicans and Democrats, and among Republicans, are telling. 

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.