Immigrants, the Budget, and Social Security

Many posts have discussed immigration.

  David J. Bier, Michael Howard, and Julián Salazar at Cato:

This paper updates a model of these effects first developed by the National Academies of Sciences, Engineering, and Medicine (NASEM) to shed light on how immigrants, both legal and illegal, and their children affect government budgets. This analysis is the first to estimate the cumulative fiscal effect of immigrants on federal, state, and local budgets over 30 years.

The government first began gathering detailed information on benefits use by citizenship status in 1994. \

• The data show:For each year from 1994 to 2023, the US immigrant population generated more in taxes than they received in benefits from all levels of government.
• Over that period, immigrants created a cumulative fiscal surplus of $14.5 trillion in real 2024 US dollars, including $3.9 trillion in savings on interest on the debt.
• Without immigrants, US government public debt at all levels would be at least 205 percent of gross domestic product (GDP)—nearly twice its 2023 level.

These results, which do not account for any of immigration’s indirect, tax-revenue-boosting effects on economic growth, represent the lower bound of the positive fiscal effects. Even by this conservative analysis, immigrants may have already prevented a fiscal crisis.

....

 Immigrants cost less as retirees: First, the savings on old-age benefits are not because immigrants are significantly less likely to retire. Instead, it is because they are far less likely to receive a government pension, since they were less likely to have government jobs and thus less likely to receive expensive government pensions. The main reason, though, is that they were simply barred from applying for Social Security and Medicare because they either arrived too late in life to earn the necessary qualifying work history, or they are here illegally or in a temporary status and ineligible for that reason.

A 2024 ITEP report by  Carl Davis, Marco Guzman, Emma Sifre:

• Undocumented immigrants paid $96.7 billion in federal, state, and local taxes in 2022. Most of that amount, $59.4 billion, was paid to the federal government while the remaining $37.3 billion was paid to state and local governments.
• Undocumented immigrants paid federal, state, and local taxes of $8,889 per person in 2022. In other words, for every 1 million undocumented immigrants who reside in the country, public services receive $8.9 billion in additional tax revenue.
• More than a third of the tax dollars paid by undocumented immigrants go toward payroll taxes dedicated to funding programs that these workers are barred from accessing. Undocumented immigrants paid $25.7 billion in Social Security taxes, $6.4 billion in Medicare taxes, and $1.8 billion in unemployment insurance taxes in 2022.

Federal Taxes Are Progressive

As many posts have pointed out, the federal tax system is more progressive than many people believe.  Higher-income people do pay higher rates and bear a larger share of the tax burden than people with lower incomes.

 Congressional Budget Office The Distribution ofHousehold Income, 2022 :

The average federal tax rate for households in the lowest four income quintiles increased in 2022, largely because of the expiration of two policies—the recovery rebate credits and expanded child tax credit—that reduced average tax rates in 2020 and 2021 for all quintiles (though households in the top quintile were generally less affected). Without those two policies, federal tax rates would have remained more stable from 2019 to 2022. Despite increasing in 2022, the average federal tax rate for each income group declined over the 1979–2022 period. The decline was largest for households in the lowest quintile and smallest for households in the highest quintile. 

...

 The share of federal taxes paid by households in the top quin tile increased from 55 percent in 1979 to 70 percent in 2022. Most of that increase is attribut able to the change in the share of federal taxes paid by the top 1 percent of the income distribu tion, which grew by 13 percentage points—from 14 percent in 1979 to 27 percent in 2022

 

Mitt Romney: Curb Spending and Raise Taxes

Many posts have discussed federal deficits and the federal debt.

Mitt Romney at NYT:

In 2012, political ads suggested that some of my policy proposals, if enacted, would amount to pushing grandma off a cliff. Actually, my proposals were intended to prevent that very thing from happening.

Today, all of us, including our grandmas, truly are headed for a cliff: If, as projected, the Social Security Trust Fund runs out in the 2034 fiscal year, benefits will be cut by about 23 percent. The government will need trillions of dollars to make up the shortfall. When lenders refuse to loan the money unless they are paid much higher interest rates, economic calamity will almost certainly ensue. Alternatively, the government could print more money, inducing hyperinflation that devalues the national debt — along with your savings.

Typically, Democrats insist on higher taxes, and Republicans insist on lower spending. But given the magnitude of our national debt as well as the proximity of the cliff, both are necessary. DOGE took a slash-and-burn approach to budget cutting and failed spectacularly. Europe demonstrates that exorbitant taxes without spending restraint crushes economic vitality and thus speeds how fast the cliff arrives.

And on the tax front, it’s time for rich people like me to pay more.

Butt-legging Soars

 Alexander Hamilton wrote in Federalist 21:

It is a signal advantage of taxes on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, "in political arithmetic, two and two do not always make four .'' If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds. This forms a complete barrier against any material oppression of the citizens by taxes of this class, and is itself a natural limitation of the power of imposing them.

A release from Rutgers University:

New York City has the highest cigarette taxes in the nation, but Rutgers Health research indicates that many smokers illegally avoid them.

Most cigarette packs littered on city streets came from out-of-state sources or bore no tax stamps, according to a study that suggests widespread evasion of the city's steep tobacco taxes.

Researchers who collected 252 discarded cigarette packs from across the city's five boroughs found that only 16.6% bore the proper New York City tax stamp, down from 39.3% in 2011 and 23.7% in 2015 when other teams conducted the same experiment.

The findings, published in Tobacco Control, based on systematic collection from 30 census tracts in February 2024, offer a unique window into consumption patterns by using litter as a proxy for where smokers obtain cigarettes.

“It’s arbitrage,” said Kevin Schroth, a researcher at Rutgers Institute for Nicotine and Tobacco Studies and lead author of the study. “If something is cheaper in one place and more expensive in another, people will find ways to profit by purchasing in the cheap place and selling in the expensive one. And because we can compare our findings to prior work, we can see that it may be a growing problem for New York City’s tax collection. What’s interesting, though, is that despite this trend, New York City’s smoking rates are still declining. This might mean that part of a shrinking smoking population is very determined to get cheap, untaxed cigarettes.”

The research revealed a notable geographic shift in cigarette trafficking patterns. Georgia emerged as the primary source of illicit cigarettes, accounting for 27.8% of the littered packs and surpassing Virginia’s 20.6%. Packs with no tax stamps (which likely come from North Carolina or Indian reservations) comprised 20.2% of the sample, nearly doubling from 12.1% in 2015.

The study also highlighted the outsized role of Newport, a menthol brand that made up 43.3% of all collected packs. Some 89.9% of Newport packs lacked New York City tax stamps. This high percentage of menthol packs raises issues about smuggling’s impact on health equity, the researchers said. Menthol use is far higher among Black and Latino smokers than white smokers, and cheaper illicit menthols may make it more difficult for people to quit.

With state and city taxes totaling $6.85 per pack plus a $1.01 federal tax, cigarettes sold legally in New York City are among the highest taxes in the nation. By contrast, cigarettes face 37 cents in taxes in Georgia and 60 cents in Virginia, allowing smugglers and their customers to split more than $6 in tax savings on every pack. (New Jersey’s tax of $3 per pack might make it a destination for individual city smokers who want to save money without going far, but it appears to be too high for smugglers.) North Carolina imposes a 45-cent tax and does not require tax stamps. Indian reservations do not impose taxes or require stamps.

Schroth, who previously worked with the New York City Health Department on cigarette tax enforcement, described a retail system where legitimate and illicit cigarettes operate side by side. Some store owners hide untaxed cigarettes in secret compartments beneath counters or above drop ceilings, he said, while customers use code phrases like "special price" to signal their interest in tax-free products.

Local agencies conduct store sweeps, but cracking a supply chain that stretches down Interstate 95 is difficult.

Schroth said the most promising fix lies upstream. He pointed to a federal “track and trace” system Congress authorized in 2009 that would assign unique identifiers to packs and record transfers from manufacturer to distributor to retailer.

“With track and trace, you could pick up a littered pack in New York and see that it moved through a specific warehouse and into a specific store in Georgia,” Schroth said. “That lets you focus enforcement on the points feeding the illicit market. It could also reveal sources of unstamped packs. The FDA would have to follow its rule-making process to execute this Congressional mandate.”

The persistence of illicit trade creates a paradox for public health officials: While cigarette taxes are designed both to generate revenue and discourage smoking, the study's findings suggest they are high enough that a significant portion of the city's estimated 565,000 adult smokers may be circumventing the price increases meant to push them toward quitting.

Still, smoking rates in New York City have continued to decline even as tax evasion appears to have increased. Adult smoking fell from 14.3% in 2015 to 9.7% in 2022, below both the national average of 11.6% and the rest of New York State at 12.3%.

The researchers acknowledged limitations in their methodology, noting uncertainty about whether people who litter cigarette packs are more likely to buy smuggled cigarettes than others. However, they argued that comparing litter samples over time using identical methods provides valuable insights into changing patterns of tax compliance. rule-making

Court: Trump Tariffs Are Illegal

Many posts have dealt with tariffs and trade.

Tony Romm and Ana Swanson at NYT:

A federal appeals court ruled on Friday that many of President Trump’s most punishing tariffs were illegal, delivering a major setback to Mr. Trump’s agenda that may severely undercut his primary source of leverage in an expanding global trade war.

The ruling, from the U.S. Court of Appeals for the Federal Circuit, affirmed a lower court’s initial finding in May that Mr. Trump did not possess unlimited authority to impose taxes on nearly all imports to the United States. But the appellate judges delayed the enforcement of their order until mid-October, allowing the tariffs to remain in place so that the administration can appeal the case to the Supreme Court.

The adverse ruling still cast doubt on the centerpiece of Mr. Trump’s trade strategy, which relies on a 1970s law to impose sweeping duties on dozens of the country’s trading partners. Mr. Trump has harnessed that law — the International Emergency Economic Powers Act, or IEEPA — to raise revenue and to pressure other countries into brokering favorable deals. The law has typically been reserved for sanctions and embargoes against other nations.

From the ruling: 

The Constitution grants Congress the power to “lay and collect Taxes, Duties, Imposts and Excises” and to “regulate Commerce with foreign Nations.” U.S. Const. art. I, § 8, cl. 1, 3. Tariffs are a tax, and the Framers of the Constitution expressly contemplated the exclusive grant of taxing power to the legislative branch; when Patrick Henry expressed concern that the President “may easily become king,” 3 Debates in the Several State Conventions 58 (Jonathan Elliot ed., 1836), James Madison replied that this would not occur because “[t]he purse is in the hands of the representatives of the people,” id. at 393. 

... 

IEEPA provides that, after declaring a national emergency pursuant to the NEA, the President may “investigate, block during the pendency of an investigation, regulate, direct and compel, nullify, void, prevent or prohibit, any . . . importation or exportation of . . . any property in which any foreign country or a national thereof has any interest.” 50 U.S.C. § 1702(a)(1)(B). Notably, IEEPA does not use the words “tariffs” or “duties,” nor any similar terms like “customs,” “taxes,” or “imposts.” IEEPA also does not have a residual clause granting the President powers beyond those which are explicitly listed. 

Four Point One Trillion

 Many posts have discussed federal deficits and the federal debt.

CBO:

CBO responds to a request from Senator Merkley for information about how federal deficits and debt held by the public would be affected by Public Law 119-21, an act to provide for reconciliation pursuant to title II of H. Con. Res. 14, and then additionally by making permanent 10 tax provisions that are temporary in that law.

CBO and the staff of the Joint Committee on Taxation (JCT) estimate that over the 2025–2034 period deficits will increase by $3.4 trillion for the legislation as enacted, excluding any macroeconomic or debt‑service effects.

CBO estimates that the additional debt-service costs under the legislation as enacted will total $718 billion over the 10-year period. That change will increase the cumulative effect on the deficit to $4.1 trillion. As a result, and net of any changes in borrowing for federal credit programs, the agency estimates that the legislation will increase debt held by the public at the end of 2034 by 9.5 percentage points relative to CBO's January 2025 baseline budgetary projections of gross domestic product (GDP). Other factors, such as administrative actions affecting tariffs and immigration, also have affected deficits and debt since January 2025 and will be reflected in CBO's next baseline.

Desmond Lachman at The National Interest:

A fundamental weakness of the US economy is that it relies on the kindness of strangers to finance its twin budget and trade deficits. Indeed, of the $29 trillion in outstanding U.S. Treasury bonds, foreigners own over $8 trillion. This makes it of paramount importance that the United States maintains investor confidence that it will not try to inflate or tax its way out from under its debt mountain. If it fails to maintain that confidence, the country could face a crisis in the bond or dollar markets

 

Blowing Up the Federal Debt

 Many posts have discussed federal deficits and the federal debt.

Sahil Kapur at NBC:

President Donald Trump’s “big, beautiful bill,” which he signed into law this month, will add $3.4 trillion to the U.S. national debt over the next decade, according to a report the nonpartisan Congressional Budget Office published Monday.

The report found that the law, which Republicans passed along party lines, will also “increase by 10 million the number of people without health insurance” by 2034.

The budget office scrutinized the final version of the bill after Republicans made a series of last-minute changes to cobble together the votes needed in the Senate; it passed 51-50. That revised version subsequently passed the House on a vote of 218-214. Trump enacted it on July 4.

The package extends Trump’s 2017 tax cuts while providing tax deductions for tips and overtime pay for the next four years. It includes hundreds of billions of dollars in new spending for the military and to carry out Trump’s mass deportation agenda. And it pays for some of that with cuts to Medicaid, SNAP benefits (which help low-income families purchase groceries) and clean energy funding.

The analysis found that the law’s net spending cuts of $1.1 trillion are outstripped by the $4.5 trillion in decreased revenue, compared with if the measure had not passed.

Endorsing from the Pulpit

Many posts discuss the connections between churches and politics.

David A. Fahrenthold at NYT:

The I.R.S. said on Monday that churches and other houses of worship can endorse political candidates to their congregations, carving out an exemption in a decades-old ban on political activity by tax-exempt nonprofits.

The agency made that statement in a court filing intended to settle a lawsuit filed by two Texas churches and an association of Christian broadcasters.

The plaintiffs that sued the Internal Revenue Service had previously asked a federal court in Texas to create an even broader exemption — to rule that all nonprofits, religious and secular, were free to endorse candidates to their members. That would have erased a bedrock idea of American nonprofit law: that tax-exempt groups cannot be used as tools of any campaign.

Instead, the I.R.S. agreed to a narrower carveout — one that experts in nonprofit law said might sharply increase politicking in churches, even though it mainly seemed to formalize what already seemed to be the agency’s unspoken policy.

...

The ban on campaigning by nonprofits is named after former President Lyndon B. Johnson, who introduced it as a senator in 1954. President Trump has repeatedly called for its repeal.

College Lobbying

Many posts have discussed the politics of colleges and universities in the United States.

Daniel Barnes at Politico:

Some of the nation’s small liberal arts colleges are hiring Washington lobbyists for the first time — seeking to distinguish themselves from the Ivy League universities at the center of President Donald Trump’s attacks on higher education.

While managing government relations has always been a main responsibility for college presidents, at least five of U.S. News & World Report’s top 20 liberal arts colleges have recently hired lobbyists for the first time in their histories, according to lobbying disclosures: Williams College, Pomona College, Claremont McKenna College, Davidson College and Washington and Lee University. All five schools declined to comment or did not respond to interview requests.

“There are some institutions that have decided that because of the risk, they feel like they need to hire some outside expertise to bolster what they’ve already been doing,” said Steven Bloom, assistant vice president for government relations at the American Council on Education.

Firms hired to lobby on education-related issues for those five schools include Lewis-Burke Associates for Williams College, theGroup DC for Pomona College and Brownstein Hyatt Farber Schreck for Davidson College. Holland & Knight has received the largest payday of the firms hired by those five schools, netting $80,000 in the first quarter from Washington and Lee University and Claremont McKenna College, according to disclosure reports. The lobbying firms declined or did not respond to requests for comment.

A key factor driving the K Street hires, according to disclosure reports and people familiar with the matter, is worry about an expanded endowment tax — the 1.4 percent tax on university investment income that was first adopted in 2017 to help offset Trump’s broader package of tax cuts.

 

Deficit 2025

 Many posts have discussed federal deficits and the federal debt.

Fatima Hussein at AP:

The U.S. budget deficit has grown to more than $1.3 trillion in the first half of the 2025 fiscal year — the second highest six-month deficit on record, according to Treasury Department data released Thursday.

The deficit for October through March spans the administrations of President Joe Biden and President Donald Trump. The previous high in the four decades of recordkeeping was $1.7 trillion in the first half of fiscal year 2021, when the government was tackling the COVID-19 pandemic.

A Treasury official who spoke on the condition of anonymity to preview the data said the increased spending was in part due to a mix of expenditures, including cost of living increases to Social Security payouts, higher Medicare and Medicaid costs, increased disaster assistance to the Federal Emergency Management Agency and Defense Department spending.

Jacob Bogage at WP:

Senior tax officials are bracing for a sharp drop in revenue collected this spring, as an increasing number of individuals and businesses spurn filing their taxes or attempt to skip paying balances owed to the Internal Revenue Service, according to three people with knowledge of tax projections.

Treasury Department and IRS officials are predicting a decrease of more than 10 percent in tax receipts by the April 15 deadline compared with 2024, said the people, who spoke on the condition of anonymity to share nonpublic data. That would amount to more than $500 billion in lost federal revenue; the IRS collected $5.1 trillion last year. For context, the U.S. government spent $825 billion on the Defense Department in fiscal 2024.

“The idea of doing that in one year, it’s hard to grapple with how meaningful of a shift that represents,” said Natasha Sarin, president of the Yale Budget Lab and a senior Biden administration tax official.

Opinion on Inequality

Many posts have discussed economic and educational inequality. The effects of inequality reach many corners of American life.

Karlyn Bowman at AEI:

Inequality isn’t back as a political issue. It never left the stage. It’s not top of mind or a high priority for most Americans because it’s complicated. Americans don’t resent the rich, but most don’t admire them a lot either. They have long felt the wealthy have too much influence on government and the White House. Two-thirds in a recent Economist/YouGov survey believe Musk has a lot of influence on this administration. In another question, 44% wanted him to have no influence, 27% a little, and 17% a lot. In the new NBC News poll, 39% of registered voters had a positive feeling about him and 51% negative.

Americans don’t believe the rich pay their fair share of taxes, and they are content to tax them. While they agree the wealth gap is a problem, they are skeptical about government efforts to address it. In four Bloomberg questions from the past decade that asked if it was better for the government to implement policies to shrink the gap or better for government to stand aside and let the market operate freely even if the gap gets wider, people split evenly.

We’ll hear a lot more about inequality during Sanders’ tour and the debate to extend Trump’s tax cuts. Throughout the campaign, Trump led Harris as better able to handle taxes, and his sweeteners (such as no tax on tips or Social Security benefits) may dilute Democrats’ traditional lead on tax fairness. It is striking, however, how little our complicated views on inequality have changed over the last half century.

The DOGE Dodge

Americans vastly overestimate the amount of waste in the budget

Brian Riedl:

“Why aren’t you cheering Trump & DOGE? I thought you wanted spending and deficit cuts!" Because I’ve been doing this for 25 years and can’t be tricked by gimmicky nonsense. Trump’s first term added $8 trillion in enacted spending hikes and tax cuts to the deficit - half of which was unrelated to the pandemic. This time around, Trump has proposed roughly $8 trillion more in tax cuts and spending hikes over the decade. And right now, a GOP Congress is preparing to abandon most reconciliation cuts and instead add $325 billion this year in new spending. We’re headed towards $4 trillion deficits within a decade. So, no, I don’t get excited when DOGE cancels $1 billion in govt contracts. Or saves $3 billion in federal workforce reductions out of a $7,000 billion budget. Not when Trump and Congress are also preparing to add $800 billion more annually in proposed new tax cuts and spending. And no, the huge savings are not coming. Even (unrealistically) eliminating 20% of the federal workforce would save $60 billion, and overhauling federal systems to sharply reduce payment errors may save perhaps $80 billion (and is probably unlikely too). For all of DOGE’s bluster, administrative and executive reforms would at best save 1-2% of federal spending and offset only a small fraction of Trump’s red ink agenda. That leaves trying to unilaterally impound spending such as USAID—which is wildly illegal—or actually going to Congress to pare back spending the constitutional way. But Trump has already taken Social Security, Medicare, defense, veterans, border (and interest) off the table, which is 2/3 of all spending and is driving deficits. And the GOP Congress seems ready to give up on cutting the remaining one-third of spending. Want to cut spending and the deficit? How about they stop passing budget-busting bills. Don’t brag about your coupon-clipping frugality at the same time you are buying a $250,000 Ferrari. I’m not going to cheer Trump and DOGE for adding “only” $750 billion to deficits instead of $800 billion. We’re still going backwards. I’ve spent decades studying the federal budget. I know that $7 trillion(!) behemoth inside and out – where the money really goes, and where the savings opportunities lie. So I can also detect bullshitters who talk tough about trillion-dollar spending cuts without doing their homework. It’s the ones who claim most spending goes to undefined “waste,” federal salaries, immigrants, foreigners, Ukraine, or non-working welfare recipients. It’s the ones who claim we can easily balance the budget or cut $1 trillion without specifying exactly what line-items to cut. Or that we can return to 2019 spending levels for each program, which means a 20% inflationary cut, defaulting on the federal debt, and kicking off every senior who has since retired into Social Security and Medicare. It’s all hot air and empty bluster. Tough talk without following through on anything substantive. Just wait until you see the final deficit numbers in October. And this is why GOP movements to cut spending always fail. They make absurdly ambitious promises without doing their homework, understanding where the money goes, and specifying real plans to fix it. You can’t significantly cut the deficit just by cutting waste, firing bureaucrats, and defunding immigrants and foreigners. There are no easy short cuts. You have to stop cutting taxes and then address Social Security, Medicare, defense, and a lot of other popular programs. Wake me when the GOP goes there. So, no, I will not get excited about a couple billion in DOGE savings on one hand while Trump pushes Congress to add $8 trillion over the decade in tax cuts and spending with the other hand. I’m not that gullible.

Tax Rates in 2021

CBO,The Distribution of Household Income in 2021 

Average federal tax rates for households in the lowest quintile, which were already negative in 2020, fell by an additional 6 percentage points in 2021. (A tax rate can be negative because of refundable tax credits, which can result in net payments from the federal government that offset other taxes paid by those households.)14 That decrease was mainly attributable to the recovery rebate credit and the expanded child tax credit. Had it not been for those credits, the tax rate for the lowest quintile would have been 23 percentage points higher, at about zero.

Average federal tax rates remained constant in 2021 for households in the middle three quintiles and increased by about 1 percentage point for households in the highest quintile. Households in those income groups received smaller benefits from the expansion of the child tax credit.

The figures confirm that federal taxes really are progressive. The higher the income group, the higher the effective federal tax rate.

Trends in the Distribution of Household Income From 1979 to 2021

Tariffs Are Bad

 Phillip W. Magness at Cato:

• James Madison viewed tariffs as necessary to raise revenue but was caught off-guard by early attempts to enact tariffs for industry protection.
• Alexander Hamilton and Henry Clay supported the use of tariffs to stimulate infant industries. However, there’s little evidence the American System of tariffs and industrial subsidies was responsible for American economic growth in the 19th century.
• Contrary to the “national conservative” narrative, many of the leading figures of the American Founding opposed the protectionist arguments of Hamilton and Clay.
• From 1789 to 1934, tariff-seeking industries were notorious for diverting resources into rent-seeking, or the lobbying of Congress for preferential rates with bribes and backroom deals.
• Corruption associated with protectionist tariff policy of the late 19th century directly led to adoption of the 16th Amendment and the federal income tax as an alternative revenue system.
• Modern American trade policy was restructured in 1934 to bypass the disastrous Smoot–Hawley Tariff Act of 1930, which exacerbated the Great Depression and illustrated the tendency of protectionist tariffs to serve corrupt interest groups.

The Politics of the Federal Debt

Many posts have discussed federal deficits and the federal debt.

Brian Riedl nails it at Reason:

Paradoxically, the faster government debt escalates toward an inevitable debt crisis, the less politicians and voters seem to care. In the 1980s and 1990s, more modest deficits dominated economic policy debates and prompted six major deficit reduction deals that balanced the budget from 1998 through 2001. That era is long gone. In the past eight years, President Donald Trump and then Biden enacted $12 trillion in deficit-expanding legislation even as Social Security and Medicare shortfalls drove baseline deficits higher. When even liberal economists warned politicians that the post-pandemic economy faced a modest degree of rising inflation and interest rates—and that a federal spending spree would pour gasoline on that fire—lawmakers responded by enacting the $2 trillion American Rescue Plan. When inflation and mortgage rates resultantly surged to 9.1 percent and 7.8 percent, respectively, lawmakers brazenly continued the inflationary spending spree.

Why are we no longer responding to soaring debt and its economic consequences? While there are many factors, the three most important are these: 1) We've convinced ourselves that deficits do not matter; 2) partisan politics and the collapse of lawmaking have turned deficits into a weapon to be politicized rather than a problem to be solved; and 3) few of us are willing to face the unpopular reality that this issue cannot be resolved without fundamentally reforming Social Security, Medicare, and middle-class taxes.

Social Security Trust Fund Hits Zero in 9 Years

Many posts have discussed Social Security.

CBO’s Director, Phillip Swagel, testifies before the House Ways and Means Committee’s Subcommittee on Social Security:

Social Security faces a significant financial challenge in the coming decade. Its two components, Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), are financed by revenues from payroll taxes and from income taxes on Social Security benefits. But those revenues, which are credited to the components’ separate trust funds, are not sufficient to cover the benefits that are due under the program

• .In the Congressional Budget Office’s projections, the balance of the OASI trust fund reaches zero in fiscal year 2033, and the DI trust fund is exhausted in 2061. If the two trust funds were combined, they would be exhausted in fiscal year 2034.
• The trust fund balances would be sufficient to pay benefits as scheduled under current law through 2098 if payroll tax rates were increased immediately and permanently by about 4.4 percentage points or benefits were reduced by an amount equivalent to that change. A combination of changes to taxes and benefits or a transfer from the Treasury’s general fund could also be sufficient.
• Such long-term projections are uncertain. Demographic and economic factors are key sources of that uncertainty. For instance, if the economy grew more quickly than projected, the trust funds’ annual revenues would be greater, and the changes to taxes or spending that would be necessary to pay benefits as scheduled under current law through 2098 would be smaller. If, instead, the economy grew more slowly than projected, revenues would be smaller, and the necessary changes would be larger.

The Cost of Good Intentions in California

 Dan Walters at CalMatters:

Each tax, each appropriation and each regulatory action has a financial impact, thus motivating those affected to seek favorable treatment.

A classic example is the California Coastal Commission, created by voters more than a half-century ago with the stated goal of maintaining public access to beaches and other coastal property by regulating development. The commission holds immense authority within a 1.6 million-acre “coastal zone” that runs from Oregon to Mexico, superseding the land use powers of local governments.

From the onset, the commission has been besieged by lobbyists for and against specific projects, and its actions have often been tinged by scandal. Three decades ago commission member Mark Nathanson, a Beverly Hills real estate broker, pleaded guilty to soliciting almost $1 million from Hollywood entertainment barons seeking building permits.

During the early years of its existence, meanwhile, the Legislature saw numerous attempts to revise the coastal zone’s dimensions because land outside its borders became more valuable. One state senator even carried a bill removing his own family’s business from the zone.

Another hoary example is California’s “tied house law” that supposedly battles monopolies in the liquor business by making it illegal for someone in the production, distribution or retail levels to engage in more than one.

The law has long outlived whatever rationale it once had and should have been repealed, but it remains on the books and thus generates a brisk trade in legislation to carve out exemptions for particular businesses.

Still another: If a Californian buys some off-the-shelf computer software – such as the TurboTax, for example – sales tax is added. But three-plus decades ago, the Legislature bowed to pressure from Silicon Valley and exempted custom software, which can cost millions of dollars, from taxation.

Budget Infographic, Fiscal 2023

 Many posts have discussed federal deficits and the federal debt.

From CBO:

California: The Exodus of the Affluent

 Don Lee at LAT: 

In 2021 and 2022, about 750,000 more people left the state than moved in, according to recently released Census Bureau data. That was about as many as the total net loss of residents for all five years before the COVID-19 pandemic in early 2020.

But it’s not just the sheer numbers of people who have left. What’s different is that in each of the prior two years, more than 250,000 Californians with at least a bachelor’s degree moved out, while an average of 175,000 college graduates from other states settled in California, according to an analysis of census data by William Frey, a demographer at the Brookings Institution.

In prior periods over the last two decades, that balance was about even or slightly in California’s favor, even though the state consistently lost many more residents overall to other states than it gained from them. The recent out-migration has been particularly pronounced among Californians with graduate and professional degrees.

California is heavily dependent on high earners to meet government fiscal needs. Tax filers in the top 1% of income, earning around $1 million and above, have typically accounted for 40% to 45% of the state’s total personal income tax revenue, said Brian Uhler, deputy legislative analyst at California’s Legislative Analyst’s Office, which estimated the $68-billion budget deficit.
...

In the tax filing years 2020 and 2021, the average gross income of taxpayers who had moved from California to another state was about $137,000. That was up from $75,000 in 2015 and 2016, according to migration and personal income data from the Internal Revenue Service.

IRS and other data show that Texas has long been, by far, the top destination for Californians. And in the years 2015-16, an individual or couple who had moved from California to Texas reported an average income of $78,000, about the same as Texans who relocated to California. But by 2020-2021, California transplants in Texas reported an average income of about $137,000, while tax returns from former Texans who moved to California showed an average income of $75,000.

The income gap between those coming into California and those going out is even bigger when it comes to Florida, which, as far away as it is, has become a top five destination for emigrating Californians. Statistics show more older Californians are likely to move there. Florida, like Texas and Nevada and Tennessee, another more recent hot spot for Californians, doesn’t have a personal income tax.

In California, the top tax rate for personal income is 12.3%.

Progressivity

Timothy Vermeer et al. at the Tax Foundation:

• The U.S. system of taxes and transfers is highly progressive.
• Measuring comprehensive income, inclusive of market-based income and government taxes and transfers, illustrates the total fiscal burden created by a fiscal system.
• Income transfer programs amplify the U.S. federal tax system’s progressivity, move the state and local system from moderate regressivity to moderate progressivity, and result in a highly progressive fiscal system overall.
• The lowest quintile experienced a combined tax and transfer rate of negative 127.0 percent, meaning that for each dollar they earned, they received an additional $1.27 from the government, netting transfers (gains) and taxes (losses), while the top quintile had a rate of positive 30.7 percent, meaning on net they paid just under $0.31 for every dollar earned.
• The top quintile funded 90.1 percent, or $1.6 trillion, of all government transfers in 2019. For each dollar of taxes paid, the top quintile received $0.11 in gross government transfers.
• Government transfers account for 59 percent of the bottom quintile’s comprehensive income. For each dollar of taxes paid by the bottom quintile, they received $6.17 in gross government transfers.
• Before transfers, total effective fiscal incidence rates were generally progressive: 24.6 percent for the bottom quintile, 24.7 percent for the middle quintile, and 34.5 percent for the top quintile.
• After transfers, total effective fiscal incidence rates were markedly progressive: 10.1 percent for the bottom quintile, 22.4 percent for the middle quintile, and 41.4 percent for the top quintile.
• Including transfers in income decreased the effective state and local fiscal incidence rate for the bottom quintile by more than 11 percentage points to 7.8 percent. The middle quintile saw a 1 percentage point decrease to 9.9 percent, while the top quintile saw an increase of 2 percentage points to 12.1 percent.
• About one-sixth of the tax burden borne by households in the lowest quintile is not personal taxes—like income, sales, and property taxes—but taxes remitted by businesses that are economically borne by taxpayers—like corporate income taxes, tariffs, severance taxes, and a variety of taxes on capital. Property taxes account for nearly one-third of the tax liability for this cohort, which includes both property taxes remitted directly by lower-income homeowners and those borne indirectly by renters.