9-17-24: Debaters Dodge Deficits (and Growth, and Lots More)

by Gary Alexander

September 17, 2024

Happy Constitution Day!  Never heard of it? That’s because it was renamed Citizenship Day in 1952 and faded quickly, but on September 17, 1787, the Constitution was signed by 38 of the 41 delegates present at the Constitutional Convention in Philadelphia. A miraculous document and nation were born.

For over 125 years, this great nation survived without an income tax, until the 16th Amendment passed in 1913, and yesterday marked the IRS’s quarterly tax due date for those of us who are self-employed. Sadly, the imposition of income taxes and the Federal Reserve in 1913 in no way helped to balance our budgets:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This brings us to the widely heralded Presidential debate last Tuesday, September 10. Earlier that day, the Congressional Budget Office (CBO) revealed that in August, the month Kamala Harris inherited the Democratic Party nomination, the Biden-Harris administration ran up a deficit of $381 billion, on the road to its second straight $2 trillion deficit (Fiscal Year 2024 ends September 30). The CBO says the deficit for the first 11 months of FY’24 is 11% higher than in FY’23. There is no problem with tax receipts, as income tax receipts are also up 11%, and corporate income tax receipts are up 29%, thanks to the lower top tax rates after the 2017 tax law, luring more corporations to repatriate their income back to America.

The problem is spending. Tax receipts totaled $4.4 trillion, but outlays are $6.3 trillion. Medicare spending is up 10%. Net interest on the public debt is up 35%, to $870 billion, more than all military spending, at $753 billion. Yet candidate Harris has three new programs of $50k, $25k and $6k per family ($81,000 total) to engorge the deficit in 2025 and beyond, hoping to pay for those plans with $5 trillion in new taxes in the next 10 years – the sorts of taxes that history has proven will chase income into hiding.

You would think that with this monstrous spilling of red ink that the journalists at ABC News would ask at least one question like, “What 2 or 3 things would you do to close the massive budget deficit gap?”

No such luck. In checking the transcript of the 90-minute debate, there is no question about debts or deficits, no mention of the word “growth” or “spending” or “government waste” (or Elon Musk) or “wealth tax” or “capital gains” or “price controls.” The hosts never once held the candidates’ feet to the fire over their multiple new grandiose spending plans or promises for massive new tax exemptions.

For instance, former President Donald Trump first promised no taxes on tips, then he upped the ante to no taxes on Social Security benefits, and last Thursday in a Tucson rally, he said there would be no taxes on overtime pay. Wow! Some 42% of all workers log 45 or more hours per week, but if Mr. Trump’s latest promise passes into law, you would quickly see 75% or more of workers managing to occupy a desk 50 or more hours a week in order to collect that 50% bonus pay with no taxes – with the 41st hour worth double the 40th hour, after taxes, even if it meant stretching the first 40 hours into slow-motion make-work.

Kamala Harris also announced an array of new spending plans announced in last week’s debate as: “(1) I intend on extending a child tax credit for families of $6,000, which is the largest child tax credit that we have given in a long time, so that those young families can afford to buy a crib, buy a car seat, buy clothes for their children; (2) A $50,000 tax deduction to start-up small businesses, knowing they are part of the backbone of America’s economy; (3) Help with a down payment of $25,000 for first-time home buyers.”

Real estate agents will love that third item, but they will privately tell you that a housing subsidy in a hot and rising market is inflationary. The $25,000 subsidy – in money the Treasury does not have – would only cause home-builders or homeowners to raise prices by $25,000. Home prices are already up 26% and rent costs are up 47% since 2000, but the rising cost of mortgages have forced the monthly debt service cost of owning a home to nearly double the 2019 levels. That’s where the real solution lies: Lower rates.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The total solution, as I mentioned earlier, is to increase the housing supply and lower mortgage interest rates. She must also reduce or eliminate the punitive regulatory barriers to construction of new homes.

Taxes STILL Have Consequences: Ask California, Florida, New York or Texas

As I mentioned two weeks ago, Ludwig von Mises wrote a massive economics classic, “Human Action,” in 1949, focusing on what he called “Praxeology,” human practices, our subjective response to changing facts and situations. When governments punish your hard work too much, you tend to cut back on work or find legal ways to shelter or delay payment of higher tax rates. You choose more leisure, if you can. When governments let you keep more of what you earn, you tend to work harder and earn as much as you can.

The same is true of states with high tax rates and low tax rates. People are leaving one to enter the other. Millions of Americans are voting with their U-Hauls. The top five states, net in and out, 2020-23, are:

These are American citizens moving between states, not newly arrived immigrants. The trend for young professionals is similar. Using IRS data, SmartAsset looked at where young, highly paid professionals (aged 26 to 35 and earning $200,000 or more) moved in tax-year 2022. The biggest losing state, by far, was California (-3,226), followed by Illinois (-1,323), Massachusetts (-1,102) and New York (-345), all high-tax blue states, overlapping the national totals cited above. The biggest gainers were also a match for the national totals: Florida (+1,786) and Texas (+1,660). The first list consists of very-high tax states, while Florida and Texas have no state income tax. Other big (top 10) gainers with no state income taxes were Washington (+383), Tennessee (+347) and Nevada (+162). State tax policies have consequences.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

California is the biggest loser because they punish taxpayers the most. According to The Wall Street Journal (“The High Tax State Brain Drain,” September 9, 2024), “the average adjusted gross income for California households in the ‘young and rich’ demographic is $480,776. These folks pay a top marginal tax rate of at least 9.3%, and those making more than $1 million pay 13.3%,” on top of federal tax rates.

And now comes Ms. Harris’s ultimate nuclear option, taxing “unrealized capital gains” as the inevitable outcome of her “billionaire’s minimum tax,” deceptively aimed at those worth one tenth of a billion ($100 million or more), so 99.99% of voters will say, “That’s not me, so go ahead and soak the rich.” However, dear friends, you will be soaked very wet in the process. For the rich to sell 25% of the theoretical value of their paper assets (each year!) requires selling those assets at “fire sale” (forced sale) prices, depressing the entire market, including your 401(k), IRA and other savings. Stocks would enter a tailspin, plunging the economy into a deep recession, with millions of job layoffs and a soaring deficit to fund big bailouts.

No matter whom you select as President, at least elect a responsible Congress to keep this madness at bay.