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The Peterson Institute held a “” event last week that included a vigorous debate over wealth taxes. The heavyweight match between Emmanuel Saez – the leading advocate for wealth taxes these days – and Larry Summers in particular is worth watching. One aspect missing from the debate, however, was how wealth taxes would handcuff successful private businesses. Summer briefly touches on the challenge his family’s hardware store would have paying the tax, but there is so much more to it. Wealth taxes: Are far larger than their headline numbers suggest; Paid on top of all existing taxes; Hit hardest when the economy is bad; and Target illiquid, private companies the most. Add it all up, and it’s hard to see how successful family businesses can survive an aggressive wealth tax. Wealth Tax — Bigger than it Looks Senator Elizabeth Warren likes to describe her plan as just “” but it’s so much more than that. The tax would be two percent on the cumulative wealth of families worth more than $50 million, and three percent on those worth more than $1 billion. So a family business worth $100 million would pay $2 million dollars, per year, every year. Two million dollars a year is obviously a lot of money, but to understand the scale of the tax, you need to compare it to an income tax. As AEI scholar Alan Viard for the Aspen Institute: A useful way to interpret wealth tax rates is to translate them into equivalent income tax rates. For a taxpayer who holds a long-term bond with a fixed interest rate of 3% per year, a 3% per year wealth tax is equivalent to a 100% income tax because the tax captures 100% of the taxpayer’s interest income. Similarly, an 8% per year wealth tax is equivalent to a 267% income tax. The tax-rate translation is more complicated for risky investments. Suppose that, alongside her holdings of the 3% bond, the taxpayer holds a stock with an annual return that could fall anywhere between 2–10%, with an expected value of 6%. The 3% per year wealth tax could end up being anywhere from 30–150% of the stock’s return. It is not immediately clear what income tax rate the taxpayer would perceive as equivalent to the wealth tax in advance, when the stock return is uncertain. As Alan notes, returns on capital vary, but if the average return on capital in the US is 6 percent, then the Warren tax is the equivalent of a 33 percent income tax rate, not 2 percent. Pro-Cyclical While investments might earn 6 percent on average, they can lose money too. The wealth tax doesn’t account for losses – the tax is owed whether an investment earns positive returns or not. This “pro-cyclical” aspect of the wealth tax is particularly dangerous, as it can force investors to divest their capital interests at times when the economy is doing poorly, encouraging a vicious downward cycle. To counter this issue, the Warren tax allows tax payments to be deferred for five years, with interest. This provision mitigates the worst cyclical aspects of the wealth tax, but it doesn’t eliminate them. The tax is still owed, after all. For the family business worth $100 million, they could defer payment of one year’s tax for five years, but then they would owe $4 million in year five, plus interest on the deferred payment of $2 million. It’s effectively a loan that lenders will take into account when assessing the credit worthiness of the business. For credit constrained companies, there’s a limit to how much they can borrow. What if the business loses value over the five years the tax is deferred? Income taxes account for losses. A business that loses money in year two can get a refund for the taxes paid in year one. The idea is to accurately measure and tax the income of the business over time. This approach has the benefit of being counter cycle, meaning the income tax provides refunds when the economy is soft and business lose money, and taxes them when they earn money. Even with deferral, a wealth tax doesn’t have this valuable feature. Layer upon Layer of Tax The Warren wealth tax is layered on top of other taxes, so a 2 percent bond would be subject to both the wealth tax and the income tax. For a $100 bond that pays 2 percent, the income tax is 82 cents (the 37 percent income tax plus the 3.8 percent NIIT), while the wealth tax is $2 dollars. The bondholder is losing 82 cents for every $100 in bonds they hold, every year. If it’s a 10 year bond, then the bondholder will be left with just $91.80 of the original $100 they invested. Instead of earning money on the investment, they lose it. For private businesses, the layering effect will be similarly harmful. A 2 percent wealth tax is equal to a 33 percent income tax on a business earning 6 percent, which would be paid on top of the existing income taxes. In last year’s report, EY estimated the top marginal tax rates on S and C corporations were effectively equal at around 33 percent. For a successful S corporation earning 6 percent profits, then, the effective tax on its earnings, on average, would be 66 percent. Those businesses will also be subject to the estate tax. Every generation, they will be required to buy back a portion of their business from the federal government. At a 40 percent estate tax rate and a $12 million exemption, the tax on the $100 million business could be more than $30 million. Estate planning can help to reduce this tax and spread the costs out over time, it’s still a cost private companies will have to shoulder. If the total tax ends up being $20 million and the company passes from one generation to the next every 30 years, the annual tax would be an additional $666,000 a year, on top of the $2 million in income taxes and the $2 million in wealth taxes. The company’s effective rate is now 78 percent. Bullseye on Private Businesses This chart from the Visual Capitalist illustrates how the wealth tax targets private businesses. Most multi-millionaires or billionaires are not liquid and most of their wealth comes from private business interests. See all that dark blue area in the bottom two income categories? Those are private businesses that will need to pay the Warren wealth tax of 2 or 3 percent per year. They will owe the tax whether the business is profitable or not.

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It has become the two-word rallying cry at presidential campaign events: “Two cents! Two cents!” Warren’s wealth tax, which taxes wealth over $50 million at 2%, has quickly become the energizing force of her campaign and helped propel her rise in the polls. Her surge not only speaks to the popularity of the tax, supported by, but also Warren’s skills at turning wonky tax policy and debates over inequality into a catchy, simple slogan. One way she helped get her message across was to discuss it by saying it was only 2 cents on the dollar for the super wealthy. Now, there are “two-cents” T-shirts, “two-cents” buttons and “two-cents” refrigerator magnets. At a recent campaign event in Iowa, two staffers dressed as pennies to fire up voters. At rallies in New York and Iowa, crowds held up two fingers and chanted “Two cents! Two cents!” With those two words, Warren has managed to magically shrink a complex and confiscatory tax plan, which would grow the government coffers by more than $200 billion a year, to a simple calculation. Who can argue that the super rich can’t afford two cents? Especially if it means better health-care and education for struggling Americans? How could a mere two cents be called socialism? “All we’re saying is, when you make it to the top,” Warren said at a recent rally, “pitch in two cents so everybody else gets a chance to make it in America. Two cents! Two cents!” In reality,. It calls for an annual 2% tax on wealth over $50 million and 3% on wealth over $1 billion, with taxpayers expected to estimate the current value of everything from cars and real estate to art, private equity porfolios and private businesses. About 70,000 families would pay the tax – at a time when most European countries have abandoned wealth taxes because they fail to meet revenue targets. Lawrence Summers, a former Treasury secretary under, wrote a paper with law professor Natasha Sarin that the Warren tax would For now, however, Warren’s growing army of supporters are giving America their two cents worth.

The Washington Post reported this week that senior White House officials are considering a temporary payroll tax cut as a way to prevent an economic slowdown, revealing growing concerns about the economy according to top economic aides. However, the White House released a statement on Monday indicating that the idea for the payroll tax cuts are not currently under active consideration despite the deliberations that took place. “As [National Economic Council Director Larry Kudlow] said yesterday, more tax cuts for the American people are certainly on the table, but cutting payroll taxes is not something under consideration at this time,” the statement said. According to the Post, “President Trump and top aides have spent the past few days trying to convince the public that the economy is strong and that fears about a recession are misguided. But White House officials have begun scrambling for new ideas to reverse public concerns and boost business confidence.” Millions of Americans currently pay a 6.2% payroll tax on their earnings to finance Social Security programs. The payroll tax was last cut to 4.2% percent in 2012 during the Obama administration but the cut was allowed to increase back up to 6.2% percent the following year. Cutting the tax is a popular idea for many lawmakers seeking to deliver savings for middle-income earners but payroll tax cuts can also add dramatically to the deficit and potentially pull billions of dollars away from Social Security. Payroll tax cuts have remained popular with Democratic lawmakers because they are seen as targeting working Americans and the money is often immediately spent by consumers instead of saved which gives consumers more spending power while also helping businesses that rely on the income. White House officials have recently become focused on protecting strong levels of consumer spending, which is one reason they are exploring new tax cuts. That is because one of the biggest causes of economic downturns is a pullback in consumer spending which hurts businesses, which then lay off workers, who then cut back on spending which causes a troublesome economic loop. Despite a tumultuous week in the markets which suggested that the economy is unstable, the Trump administration has touted what they say are the economy’s strengths, particularly consumer spending, and predicted that a recession will not occur.

For small businesses, taxes are a financial and administrative burden that directly impacts their ability to invest in their business, their employees, and compete in the broader economy. In fact, 77% of small business owners reported that federal business income taxes were very or moderately burdensome according to NFIB’s 2021 Tax Survey. This was followed by payroll taxes (69%) and state and local income taxes (66%). The survey also found that 64% of small business owners reported that federal business income taxes create an administrative burden in operating their business. Payroll taxes (60%) and state and local income taxes (58%) followed. Tax related issues also rank high among small business problems. Of the top ten most burdensome problems small business owners report, four are tax related. At the top of the tax list, federal taxes on business income ranked as the third most severe problem, with 20% reporting it as a critical issue. Property taxes followed in fourth place, state taxes on business income ranked seventh, and tax complexity ranked eighth in problem importance. Why are taxes so challenging for small business owners? Taxes reduce profits, and profits are the primary source of financing for small businesses – financing owners use to increase wages, for capital investment, and expansion opportunities. And for small business owners, profit levels are not always consistent or predictable year to year. Owners rely on strong profits to often support times of profit declines, which many owners continue to experience in the pandemic. Almost one-third (32%) of small businesses report revenues still below 75% of pre-pandemic levels. Congress is considering these tax increases and new mandates that will impact small businesses: · the Small Business Deduction (IRS Section ) Raising the corporate tax rate from 21% · Raising the top income tax rate on individually- and family-owned businesses from 37% to 39.6% Expanding the estate tax’s reach · Increasing the top capital-gains tax rate · Imposes the 3.8% tax (NIIT, SECA) on all business income earned by S corporations, partnerships, and LLCs · Enacting elements of the Protecting the Right to Organize Mandating that employers provide paid sick leave and retirement accounts · Establishing a complicated and inflexible new federal-government-run family and medical paid leave program One proposed mandate is limiting the Small Business Deduction (IRS Section 199A) which would make it difficult for employers to invest in their business and employees. Congress is also discussing raising the corporate tax rate and raising the top income tax rate on individually and family-owned businesses from 37% to 39.6%. Adding to owner uncertainties, the Biden Administration has proposed expanding the estate tax by repealing the use of stepped-up basis. This would hurt family-owned businesses across the country. Congress is also discussing increasing the top capital-gains tax rate. The Biden Administration suggested raising the top capital gains tax rate to 43.4% which would be problematic to many small businesses. Uncertainty is the enemy of economic growth, and there is plenty of that coming from Washington these days. Raising taxes and adding new tax mandates will hurt small businesses’ ability to recover from the Covid-19 pandemic, invest in their business, and hire new employees and raise their compensation. The economy is performing better since the onset of the pandemic, but strong headwinds persist. Tax increases will only add to the challenges small business owners are already having to navigate with widespread labor shortages and supply chain disruptions.

The government yesterday rejected claims by business leaders that it had reneged on a deal to help firms cope with the administrative burdens of expanded parental leave. Sir Digby Jones, the director-general of the Confederation of British Industry, withdrew earlier support for an increase in paid parental leave and greater flexibility in the system which would allow fathers to take over some of the paid leave previously given only to mothers. He said business confidence was undermined when Gordon Brown, the chancellor, announced he was dropping what the CBI calls a "key element" and would not give employers the option of handing administration of statutory maternity pay to HM Revenue and Customs. In a letter to Alan Johnson, the trade and industry secretary, which was obtained by the Financial Times, Sir Digby complained: "Given that the burdens on employers will now not be compensated through adequate additional support, I regret the CBI can no longer support your proposals." Sir Digby argued that the CBI had backed extending paid maternity leave from six to nine months - subject to passage of the work and families bill - from April 2007 as "part of a package that also offered a real reduction of the administrative burden on employers". Last night a DTI statement said that it was simplifying the system to help businesses - smaller ones find such costs onerous - as part of a wider plan to cut £1bn worth of unneeded regulation. The Treasury's reaction was even sharper. What the CBI had interpreted as a clear policy of transferring the scheme to Revenue and Customs had been no more than an option being examined. Officials backed off when they found that it would cost £75m to set up such a central scheme and £50m to run it. The Treasury stance is reinforced by the claim that the offsetting savings to industry through such a scheme would be barely £1m a year, only £400,000 of that saved by small and medium-sized firms whose costs are most vulnerable to government-imposed paperwork of all kinds. The Federation of Small Businesses complained this week that the hidden costs of family leave included the finding and training of replacement staff. The hotel trade was especially vulnerable and the "administrative nightmare" of new rights brought fresh burdens. Labour has become increasingly sensitive to family-friendly issues since coming to office in 1997 and was rewarded by a slow acknowledgement among Conservative politicians that they have some catching up to do. David Cameron's accession to the Tory leadership has accentuated that trend, though Mr Cameron is also trying to court the CBI which has made itself much more amenable to a government of the centre left under Sir Digby and his predecessor, Adair Turner, now Lord Turner, author of the recent pensions report. Ministers argue that a modern economy needs to address work/life issue in a fair and flexible way that encourages women to have children, see them properly cared for and to return with their skills to the workplace, either full- or part-time. They point to the success of the national minimum wage introduced gradually since 1997 with a high degree of consensus, as proof that employers can both cope with and benefit from such innovations. In the same spirit flexible working rights for carers of adults are also part of the work and families bill. According to government statistics only 9,000 to 16,000 of the 600,000 new fathers each year will take up additional paternity leave. But the option stresses the importance of their role in the raising of children in an era of family break-up.

“The way we fund the Social Security system, I think, needs to be examined. What we fund it for, chronic or long-term care, has not been addressed, and that’s one of seniors’ major needs,” he told NBC’s “Meet the Press.” Thomas dismissed the idea of raising the limit on payroll tax deductions from the current $90,000, which would make wealthier people pay more into the system. “Why even bother looking at the payroll tax? That was a solution in the 1940s and the 1950s,” he said, when the rate was 2 percent of income. “Now that it’s 12 percent, we actually are dealing with a job-killer. The higher the payroll tax, the fewer people are hired. ... Let’s find revenue that doesn’t continue to kill jobs but also meets our needs,” said Thomas, chairman of the House Ways and Means Committee.

Americans need thoughtful proposals for Social Security reform. Absent changes to the program, Social Security will be insolvent in a decade and benefits will be cut by 23 percent for all Social Security recipients. With $20.4 trillion in unfunded obligations—the equivalent of $157,000 per household—maintaining the program without structural changes would be incredibly costly. Anyone who puts forward a thoughtful Social Security reform proposal should be applauded for attempting to fix a popular, but broken, program. Policymakers who promise not to touch Social Security benefits and fail to put forward viable solutions to fix the shortfall are, by default, supporting current law, which will result in 23 percent, across-the-board, and permanent benefit cuts for more than 65 million Social Security recipients in 2033 and beyond.1 A new proposal from a group of Democratic lawmakers attempts to make Social Security solvent while adding to its liabilities and imposing $33.8 trillion in new taxes.2 On paper, the proposal appears to make Social Security solvent over the next 75 years, but that is based on a narrow cost analysis that ignores the damaging effects the plan would have across the entire economy, reducing output, destroying jobs, and restricting income growth that could otherwise boost Social Security’s revenues. As part of an economically illiterate, socialist agenda, these reverberating consequences would cause younger and future generations to be more dependent on government and less free to pursue their own goals. Social Security Expansion Act: Big Benefit Increases, Super-Sized Tax Hikes The Social Security Expansion Act—introduced by Senators Bernie Sanders (I–VT) and Elizabeth Warren (D–MA), along with Representatives Jan Schakowsky (D–IL) and Val Hoyle (D–OR)—includes four benefit expansions and three massive tax hikes.3 The Social Security Expansion Act’s benefit expansions include: 1. A Large and Permanent Benefit Increase for all Social Security Recipients Beginning in 2024. The Social Security Expansion Act would apply a larger percentage factor to Social Security’s first step of its benefit formula—raising the current 90 percent to 95 percent—and would also increase, by 22 percent, the amount of income to which that 95 percent factor applies. Based on the current benefit formula, that would translate into an extra $210 per month, or $2,520 per year, for nearly all Social Security recipients, including millionaires and billionaires.4 2. Application of a Narrow Inflation Measure that Results in Larger Cost-of-Living Adjustments (COLAs). Social Security recipients receive an annual COLA based on the consumer price index for urban wage and clerical workers (CPI-W). In 2023, Social Security recipients received an 8.7 percent benefit increase—an extra $1,750 per year for the average beneficiary.5 Meanwhile, the average worker received only a 3.6 percent wage increase over the past year (and a 2.7 percent wage cut after accounting for inflation).6 The Social Security Expansion Act would replace the CPI-W with the consumer price index for the elderly (CPI-E). This change is estimated to increase annual COLAs by 0.2 percentage points per year. That difference is small initially but rises exponentially over time. By the 75th year, a 0.2 percentage point difference grows to a 15.8 percentage point difference. That means that a worker who retires 60 years from now and collects benefits for 15 years would receive an extra $53,000 in total benefits compared to the current inflation adjustment that already overstates inflation.7 Beginning in 2002, the Bureau of Labor Statistics (BLS) began calculating a new inflation measure—the chained CPI—that tracks what people are purchasing on a monthly basis, instead of only updating what people purchase every two years. According to the BLS, the chained CPI “is designed to be a closer approximation to a cost-of-living index than other CPI measures” because it accounts for how consumers’ purchases respond to changes in prices.8 Essentially, the chained CPI reflects the actual purchasing power experience of American households and thus should be used to adjust Social Security benefits and across other government programs. Presidents George W. Bush and Barack Obama both proposed using the chained CPI for Social Security adjustments and Congress recently adopted the chained CPI to adjust income-tax brackets. According to the Congressional Budget Office, applying the chained CPI would reduce Social Security’s shortfalls by about $150 billion over the next 10 years while the CPI-E would increase Social Security shortfalls by about $150 billion.9 3. An Increase in the Special Minimum Benefit. For individuals who are newly eligible for benefits in 2024 and beyond, the Social Security Expansion Act would increase the special minimum benefit to 125 percent of the federal poverty level for individuals with 30 or more years of earnings. This would translate into a roughly 37 percent increase in the special minimum benefit. As of 2019, the Social Security Administration reported that only about 0.05 percent—one of every 2,000 beneficiaries—received the special minimum benefit. This significant increase would bring the special minimum benefit to just 10 percent below the current average benefit of all Social Security and Disability Insurance recipients and would, consequently, result in far more individuals receiving the minimum benefit. This proposed increase would effectively eliminate the “earned benefit” component of Social Security for a significant number of workers who would no longer receive larger Social Security benefits as a result of earning higher incomes and working more than 30 years. This change would act as a tax that reduces lower-income workers’ labor force participation. 4. Continuation of Children’s Benefits Through Age 22, Instead of the Current Age 18. Beginning in 2024, the Social Security Expansion Act would extend benefits for children of disabled or deceased workers until age 22 if they are in high school, vocational school, or college. To the extent that current student financial aid packages consider students’ household incomes, these additional benefits could be partly offset by reduced student aid. According to the Social Security Actuaries’ analysis, these benefit increases would add $12.8 trillion in new costs over the next 75 years.10 To pay for all those benefit increases and cover the program’s existing $20.4 trillion shortfall, the Social Security Expansion Act would impose three massive new taxes on workers, savers, and small business owners. Those three tax increases are: 1.Raising and Then Eliminating Social Security’s Payroll Tax Cap. Currently, Social Security’s 12.4 percent tax rate applies to the first $160,200 of workers earnings. The Social Security Expansion Act would add Social Security’s 12.4 percent tax to all earnings above $250,000 without any increase in benefits for the newly taxed earnings. Initially, there would be a “donut hole” of earnings between the $160,200 cap and $250,000 threshold that would not be subject to the 12.4 percent tax, but because the cap will continue to rise with inflation and the $250,000 threshold remains constant, all earnings would be subject to the Social Security tax after about 15 years. Eliminating the payroll tax cap is counter to Social Security’s original intent, which was to prevent poverty in old age, and not to serve as Americans’ primary source of retirement income. When President Franklin Roosevelt’s Committee on Economic Security designed the Social Security program, it proposed exempting people making over $3,000 annually—the equivalent of about $66,000 in 2023—from the Social Security system altogether because those workers were expected to be saving on their own. The House Ways and Means Committee decided to instead include most workers in the program, and to cap contributions at the first $3,000 of income. That $3,000 cap did not increase until 1950. In inflation-adjusted dollars, the current maximum of $166,200 is nearly 2.5 times Social Security’s original taxable maximum and four times the program’s 1950 maximum. Raising and eliminating the payroll tax cap would also make the U.S. an anomaly among other industrialized countries that apply Social Security taxes to a significantly lower level of earnings.11 Canada, for example, caps its Social Security tax at incomes at $66,600 per year, which is equal to the average wage.12 Finally, subjecting all earnings to payroll taxes and ignoring large amounts of taxes paid in benefit calculations would eliminate any illusion that Social Security acts like a pension where people get out of the program what they put in. The Social Security Expansion Act would bring the top federal tax rate on wages to 49.4 percent in 2024 and 51.8 percent in 2026 and beyond.13 Combined with state and local income taxes, the top rate on wages would become 63.1 percent in 2024 and 65.6 percent in 2026 and beyond.14 High marginal tax rates on work will reduce the amount of work that is done by higher-income earners. That reduction in effort and output among high-income earners will reduce demand and investment, which will mean fewer jobs and lower incomes even for those not directly subject to higher tax rates. As history demonstrates, high marginal tax rates on the high earners does not lead to higher total tax revenues and, in fact, reduces the share of taxes paid by the highest earners.15 2. A New 12.4 Percent Investment Surtax. The Expansion Act would add a 12.4 percent surtax to investment income of individuals making over $200,000 and married couples making over $250,000. In addition to the current 3.8 percent Obamacare surtax and the top 20 percent marginal tax rate, this would raise the top rate on long-term dividends and capital gains from 23.8 percent to 36.2 percent, and the top federal rate on interest income and short-term capital gains from 40.8 percent to 53.2 percent. Combined with state and local capital gains tax rates, the top rate would reach 68 percent.16 These rates do not include other various layers of potential wage and corporate tax rates that apply prior to capital gains realization. Taxpayers are very responsive to investment income taxes, making them an inefficient and even destructive means of raising tax revenues.17 The Penn Wharton Budget model estimated that increasing the 20 percent statutory tax rate on capital gains and dividends to 39.6 percent would decrease tax revenues by $33 billion over 10 years.18 3. A New 16.2 Percent Tax on Small Business Owners. Currently, S-corporations, limited partnerships, and other businesses that file taxes as “pass-through entities” (which pay taxes at the individual level and not at the corporate level) are subject to these Social Security, Medicare, and Obamacare taxes only on the salaries and certain compensation paid to employees or owners (and only up to the current taxable max for Social Security), but not on owners’ share of the active business income, which carries more inherent risk. The Social Security Expansion Act would impose a new, 16.2 percent “net investment income” surtax on all such entrepreneurial profits of these business owners above $200,000 for individuals and $250,000 for married couples. Of the new 16.2 percent tax, 12.4 percent would go to Social Security and the other 3.8 percent would go to general tax revenues. This would mark an unprecedented tax increase on small businesses, stifling their growth prospects, handicapping their ability to stay afloat in downturns (such as the COVID-19 pandemic), and impeding innovation. Small businesses are the engine of America’s growth and multi-trillion-dollar tax hikes on them would surely suppress innovation, entrepreneurship, jobs, incomes, and economic growth. According to the Social Security Actuaries’ limited analysis, these three tax hikes would increase Social Security’s tax revenues by $33.8 trillion.19 Social Security Expansion Act’s Widespread Economic Consequences Senator Sanders stated that the Social Security Expansion Act will not raise “taxes by one penny on over 93 percent of American households that make less than $250,000.”20 That is not true. For starters, the bill’s tax hikes apply to individuals making $200,000 or more, which includes many people making less than $250,000. Moreover, that claim refers to a snapshot in time and does not account for the proposal’s unavoidable economic fallout. According to the Social Security Trustees, only about 7 percent of people make over the taxable maximum in a given year, but “between 20 percent and 25 percent of individuals will earn above the tax max at some point during their working careers.”21 That only considers wage earners; factoring in all the small business owners (many of whom make less than $250,000 in wages) and savers and investors that would also be subject to higher taxes under the Social Security Expansion Act would increase the percentage of individuals who directly pay higher taxes. Regardless of who pays higher taxes, the Social Security Expansion Act’s massive tax hikes would ripple destructively across the entire economy, including all other government revenues. Taking into account how people would respond to these new tax increases, it is almost certain that the Social Security Expansion Act would fail to make the program solvent and would cause large declines in other government tax revenues. At a bare minimum, employers who have to pay higher Social Security taxes for their workers will reduce those workers’ wages by a near equivalent amount to the taxes, which will mean lower incomes subject to federal income, state and local income, Social Security, and Medicare taxes.22 A study by Jeffrey Liebman and Emmanuel Saez that looked at workers’ earnings responses to changes in payroll taxes estimated that this shift in taxable wages to account for higher taxes on employers would reduce static revenue estimates by 20 percent to 25 percent.23 Although the Social Security Actuaries note that this change would cause employers to redistribute total compensation to accommodate for employers’ higher employee tax costs, the analysis does not include the impact of employers reducing workers’ wages on non–Social Security federal and state tax revenues. Based on the Social Security Actuaries’ estimate that this provision would generate $15.7 trillion in new revenues, upwards of $3 trillion of that could be lost to lower state and local tax revenues. Adding in the negative impacts from behavioral changes would further reduce the actual revenue gains. Liebman and Saez estimated that the likely behavioral impacts of eliminating the payroll tax cap (as the Social Security Expansion Act fully accomplishes after about 15 years) would result in revenues equal to less than half of the static revenue estimates and could be so large as to result in zero net new tax revenue.24 By reducing economic output, jobs, and incomes, the Social Security Expansion Act would limit Americans’ ability to pursue what they desire and instead make them more reliant on the government. As rising federal deficits and debt increase the risks of a fiscal crisis, greater dependence on the government would make Americans more vulnerable to the consequences of a fiscal crisis, which could include significant cuts to government programs and even higher tax rates, or inflationary policies that make everyone poorer. Social Security Expansion Act Is Only a Fraction of the Progressive Agenda The Social Security Expansion Act’s $33.8 trillion in tax hikes over the next 75 years would only cover a small portion of progressives’ socialist agenda. Providing other things—like Medicare for all, free college, a universal basic income, and the “Green New Deal”—would cost roughly another $50 trillion to $90 trillion over just 10 years. As Heritage Foundation analyst David Burton explained: Even using lower cost estimates, confiscating every dollar earned by every taxpayer with incomes of $200,000 or more would only pay for about half of the progressive agenda. And that figure is based on the false assumption that people would continue to work, save, and invest when subject to a 100 percent flat tax. The reality is that progressive promises can only be funded by increasing taxes on the middle class from three to 10 times their current level, or, for a limited time, by dramatic and unsustainable increases in federal borrowing.25 The Social Security Expansion Act is a big step toward Bernie Sanders’s mathematically impossible and economically inconceivable socialist agenda. As history repeatedly demonstrates, socialist governments depress economic output and consign everyone but the ruling elite to drastically lower standards of living.26 The only reason that the Social Security Expansion Act’s proposed tax hikes could appear to generate $33.8 trillion in new tax revenues is because there has been sufficient private-sector economic growth and activity in America’s market-based democracy to generate enormous wealth and well-being that continues to grow from generation to generation. By proposing to bite the hand that feeds it, the Social Security Expansion Act would so drastically alter American entrepreneurship, work, and innovation that future policymakers would be grasping at straws to fund even a fraction of the size of government that exists today.

“Expanded Social Security,” a New America Foundation (NAF) by Michael Lind, Joshua Freedman, Robert Hiltonsmith, and Steven Hill, argues for expanding Social Security by paying each retiree a flat annual benefit of $11,669 in addition to their traditional Social Security benefits. The idea is to provide the typical retiree with a guaranteed “replacement rate” of 60 percent of his pre-retirement earnings, with higher replacement rates for low earners. The supplement would cost around 3.7 percent of GDP. Added to Social Security’s forecasted cost of 5.6 percent of GDP in 2035, total outlays would reach 9.3 percent of GDP. I like anyone who is willing to look at Social Security reform, and I have some affinity for the simplicity and universality of flat benefits. But the NAF paper misses a few important factors in thinking about Social Security reform and the pros and cons of expanding the program. Some of these may seem obvious — for example, if we can’t afford the entitlements we have now, where do we get almost 4 percent of GDP for a new expansion? — so I’ll focus on two things they have not given due attention. First, Social Security is more generous than you think. No, I don’t mean that you’ll live in style on Social Security benefits. But in terms of their main purpose — replacing pre-retirement income so individuals can smooth consumption between work and retirement — it’s more adequate than the NAF folks assume. The NAF authors base their calculations on “replacement rate” figures published by the Social Security Administration. The SSA states that “most financial advisors say you’ll need about 70 percent of your pre-retirement earnings to comfortably maintain your pre-retirement standard of living. Under current law, if you have average earnings, your Social Security retirement benefits will replace only about 40 percent.” Using these SSA figures, the NAF team calculates the size of a flat supplementary benefit that would push a medium earner to a replacement rate of 60 percent — within spitting distance of financial advisors’ 70 percent target. Few people in the real world seek to replace 70 percent of the average of their 35 highest years of wage-indexed earnings when they retire. But here’s the problem: financial advisors measure replacement rates relative to final earnings — say, your benefit at age 65 divided by your salary at age 64 — while the SSA measures replacement rates relative to the wage-indexed average of your highest 35 years of earnings. This latter figure is higher than final earnings, so it makes Social Security’s replacement rates look lower. Thus, the SSA’s talking point is simply inconsistent — apples and oranges. More importantly, there’s no economic rationale for how the SSA calculates replacement rates. No person in the real world seeks to replace 70 percent of the average of their 35 highest years of wage-indexed earnings when they retire. The SSA took this approach only because, when it adopted more realistic earnings patterns for its stylized low, middle, and high earners in 2001, replacement rates calculated relative to final earnings — as the SSA had done for years — would have looked a lot higher. Government agencies like nothing more than consistency, so the SSA changed the denominator of its replacement rate calculation to maintain the 40 percent replacement rate they advertise for the typical worker. But this is not something to base policy on. In a 2008, the SSA’s Glenn Springstead and I calculated actual Social Security replacement rates relative to final earnings. The typical household had benefits equal to 69 percent of their earnings immediately preceding retirement — very close to the 70 percent mark — while low-income households were well above that level. The 70 percent of final earnings benchmark may not be the best way to measure retirement income adequacy (we looked at several in our paper), but it is a widely used rule of thumb, and the one the NAF authors seem to rely on. And by that standard, Social Security benefits aren’t nearly as stingy as you’d think. So is there a prima facie case for nearly doubling the size of the Social Security program? I don’t see it. [Graph omitted] Second, the New America Foundation plan would drastically reduce private saving. The current Social Security program already decreases the amount that people save for retirement, since Social Security benefits substitute for “real” saving. The problem is that real saving provides the capital that businesses use to build factories, buy computers, conduct research and development, and more. Tax-and-transfer “saving” doesn’t, as there isn’t any actual saving going on. Social Security already owes around $24 trillion in benefits that have been earned but not yet paid. A 1998 by the Congressional Budget Office concluded that one dollar of future Social Security benefits crowds out between zero and 50 cents of private saving; more using better data settles on the higher end of that range. Let’s assume that, in the absence of Social Security, individuals would have saved around half of that $24 trillion on their own. If the return to capital is around 8 percent, then the current Social Security program reduces annual GDP by almost $1 trillion. I would think carefully about doubling down on that bet. Current private retirement savings for Americans total somewhere around $20 trillion, according to the Investment Company Institute. When you raise Social Security benefits significantly, Americans will be less inclined to save. Let’s say private savings are reduced by half — in that case, you’re losing another $800 billion or so in GDP each year, and around a quarter of that amount in federal tax revenues. And, of course, the higher taxes levied to finance the additional benefits would also depress economic activity. Real saving provides the capital that businesses use to build factories, buy computers, conduct research and development, and more. Tax-and-transfer saving doesn’t. The authors of “Expanded Social Security” lament that our current system is “skewed toward private savings.” But it should be, since private saving is what helps drive the economy. To the degree that Americans need to save more for retirement, we should promote more private saving by improving 401(k)s or introducing new savings vehicles, not by increasing a tax-and-transfer approach that subtracts from national saving. Social Security accomplishes many things well, but nevertheless falls short in a lot of areas. Its progressive benefits do raise many Americans out of poverty, but far fewer than could be helped if the benefits were more reliable and better targeted. Moreover, in many ways Social Security works at cross-purposes with itself. As a pay-as-you-go program, it relies upon a strong economy to finance the benefits it provides. Yet there is good reason to believe that Social Security depresses savings, reduces the labor supply, encourages early retirement, and even lowers the birth rate. Moreover, the unnecessary complexity of the program makes it difficult to understand — even many near-retirees have no idea what they’ll receive from Social Security — and complicates Americans’ decisions on how much to save and when to retire. We won’t fix these problems by doubling the size of Social Security, as the New America Foundation authors propose. Most of them would be made even worse. But we also won’t fix these problems merely by cutting Social Security benefits, whether through the chained consumer price index, raising the retirement age, or other oft-proposed reforms. Social Security needs imaginative, far-reaching reforms to improve its social insurance value to low- and middle-income Americans while reducing the drag it places on the economy. Watch this space over the next several months to read about some.

New analysis produced by the Joint Committee on Taxation (JCT) finds that extending the American Rescue Plan’s (ARP) Child Tax Credit (CTC) expansion would result in costly economic consequences.

Last year’s CTC expansion increased the credit up to $3,600 per qualifying child (from $2,000), including a bonus for children under six years old. The expansion also eliminated the income (read: work) requirement and allowed the full value of the credit to be refunded. This ensures that the tax “credit” functions more like a welfare program administered through the tax code.

Some business leaders are hopping aboard the Medicare for All bandwagon. The Business Alliance for a Healthy California, for example, calling for universal healthcare. But any businessman considering getting behind Medicare for All should know the sales pitch is flawed. The architects of Medicare for All promise everything to everyone. No insurance premiums. No co-pays. No deductibles. No limits on care. For employers, less time and money spent dealing with health coverage. A deeper look at Medicare for All shows that it will cost businesses a fortune. And their employees won't like the care they receive. True, Medicare for All will eliminate the health insurance line item on businesses' budgets. But it'll vastly increase their tax bills. Senator Bernie Sanders, the pied piper of single-payer health care, has floated several ideas for paying for Medicare for All. Among them: a that will extract $3.9 trillion over ten years from employers. Large financial institutions could be hit with over ten years. Sanders has even called for that would result in $112 billion in additional corporate taxes. Those are just the taxes that hit businesses directly. Many business owners take low salaries but realize most of their income as capital gains or dividends. Sanders would for those who make more than $250,000 a year. Individual employees will not be exempt from Medicare for All's flurry of new taxes. Sanders proposes to raise $3.5 trillion over a decade by on every American household. All these new taxes will be insufficient to cover Medicare for All's tab. Former Medicare trustee Charles Blahous estimated that Sanders's 2017 Medicare for All plan, which covers fewer benefits than the one he introduced in 2019, would increase federal spending over ten years. receipts still wouldn't reach that lofty figure. And as Blahous has pointed out, it's likely that "the actual cost of M4A would be substantially greater than these estimates." The plan assumes the government will be able to administer Medicare for All at the same low rate of cost as it does the existing Medicare program. But that's unlikely. The legacy program's administrative costs appear low as a percentage of total expenditures because the Medicare population has higher per-capita health costs. That makes sense—Medicare's beneficiaries are older, and thus consume more health care. In other words, Medicare isn't uniquely efficient—it just spends a lot on health care. Second, one of the trade-offs for low administrative costs is high rates of fraud. In 2016, the Government Accountability Office discovered in Medicare and Medicaid. That's administering all its health programs. Under Medicare for All, the federal government will have to get aggressive about policing fraud, and thus sacrifice much of its supposed administrative efficiency, or get comfortable with hundreds of billions of dollars in improper payments. Neither scenario is appealing—or cheap. Medicare for All also presumes providers will acquiesce to reimbursement rates that are 40% lower than those paid by private insurers. Payment cuts like that and force them to close their doors. Historically, Congress has postponed Medicare payment cuts to doctors and hospitals just about every time it's had the chance. If those lower payment rates never come about, then businesses and individuals will be looking at much higher taxes than Sanders and company suggest. Finally, Medicare for All would take away one of the primary ways employers differentiate themselves in the quest for talent—their benefits plans. According to the U.S. Census, received health insurance through work in 2017. Research from Gallup shows that are satisfied with their plan. They won't be satisfied under Medicare for All. That's in part because they'll have to wait for care. Look to Canada, whose single-payer system bears a close resemblance to Medicare for All. Our neighbors to the north wait a median of nearly 20 weeks to get treatment from a specialist after receiving a referral from a general practitioner. Patients in certain areas wait even longer. In New Brunswick, it takes to get specialist treatment. Many patients aren't willing to wait. So they head abroad. SecondStreet.org, a Canadian think tank, estimates that left Canada in 2017 to seek care. Medicare for All sounds like a good deal. But it will only hurt businesses, their employees, and all Americans.

Because of abnormally high valuations, along with increased uncertainty and volatility, loss of business confidence and selling pressure from those in distress, the market would likely fall more than proportionally to earnings. Accurate market predictions are impossible and will in any event depend not on what is proposed but on what the market expects will actually take place. There is, however, the real risk of economic contraction following a sharp market decline, especially given that the current very low level of interest rates puts the Fed in a weak position to pursue counter-cyclical policy. For decades, I have emphasized that corporate profits and the market do better when progressives are in power and have dismissed conservative fear-mongering about progressive policies. This time seems different. Judged relative to gross domestic product, the Medicare-for-all program dwarfs the federal spending hikes of the New Deal and the Great Society. Presidents Franklin D. Roosevelt and Lyndon B. Johnson emphasized that their new benefits would be paid for by contributions from their middle-class beneficiaries. With Warren’s plan, it is the combination of vast new entitlements with total reliance on the top 1 percent for revenue that puts us in uncharted and, I fear, dangerous territory.

The Business Roundtable, a large and powerful group consisting of prominent corporate leaders, said Tuesday that Democrats’ proposed corporate tax hike is one of the greatest threats to companies’ investment, hiring and growth plans in the foreseeable future. The organization said its third-quarter CEO survey showed that chief executives have three primary concerns: difficulty finding and retaining qualified workers, a possible rise in the corporate tax rate, and slow vaccine uptake. “Increasing taxes on America’s largest job creators by almost $1 trillion—nearly three times the net corporate tax cut from 2017 tax reform—would be one of the largest corporate tax increases in history,” said Business Roundtable President and CEO Joshua Bolten. “Tax increases on job creators would make it harder for U.S. companies to compete and would hinder investment in America.” The Biden administration and congressional Democrats are working to pass a $3.5 trillion bill to modernize and expand the U.S. public safety net that would impact most Americans. The legislation broadly seeks to tackle poverty, address critical climate risks and provide expanded worker benefits. To help pay for what would be one of the largest bills in the nation’s history, Democrats have proposed raising the corporate tax rate to 26.5%. Former President Donald Trump’s 2017 tax legislation lowered the rate to 21% from 35%. The party has also proposed a top individual income tax rate of 39.6%, a 3% surcharge on individual income above $5 million and a capital gains tax of 25%. The Business Roundtable conducts a survey each quarter of some of the nation’s CEOs to stay apprised of the hurdles and tail winds businesses are facing. The group conducted the current poll between Sept. 2 and Sept. 21 with 160 responses. The Roundtable survey also showed CEOs remain upbeat on the overall U.S. economy, but indicated they are now slightly less optimistic than they were in the second quarter given a decline in expectations for sales. The organization’s survey suggested CEOs are trying harder to bolster payrolls and continue to warm to big-ticket capital projects like new factories, equipment and the like. Walmart CEO Doug McMillon’s comments suggested there is widespread support among corporate leaders for the $1 trillion bipartisan physical infrastructure plan before Congress. “Investment in our nation’s infrastructure is urgently needed,” McMillon, who is also the Roundtable’s chairman, said in prepared remarks. “We applaud Congress for scheduling a vote on the bipartisan Infrastructure Investment and Jobs Act this coming Thursday,” he added. “We urge every member of the House of Representatives to vote yes on this once-in-a-generation opportunity to generate significant investment in America’s transportation, water, energy and communications systems.” House Speaker, D-Calif., said over the weekend that her chamber will vote on that bill on Thursday. The infrastructure proposal includes $110 billion in new funding for roads, bridges and other major surface projects, $39 billion for public transit, and $15 billion for electric vehicles and buses. Pelosi has been hard at work with a long list of critical votes not only to pass President’s economic agenda, but also to approve a funding bill before the government shuts down later this week and to avoid a looming U.S. default.

A. Breeding Complexity and Uncertainty The good Catholic Sisters who saw to my moral instruction in primary school devoted many hours to the Ten Commandments. They wanted my classmates and me to avoid sins. Their success in that regard is in doubt. But at least the Sisters could be confident that we did not sin out of ignorance or uncertainty. How they would have instructed us on one million commandments, I do not know. The delinquents in my school found it hard to absorb a mere ten. There is a serious point here: The sheer volume and complexity of statutes, regulations, regulatory guidance, and tax code provisions – and their instability over time – are barriers to knowledge and comprehension of the law, sound planning, and avoidance of legal jeopardy. Just staying on the right side of the law has become a much more challenging and burdensome undertaking, especially for businesses. Thus, the enormous expansion of the regulatory state breeds complexity and uncertainty in economic affairs. Moreover, as the regulatory state expanded, regulators acquired great power to interpret statutes, transform broad and vague legislative mandates into specific regulations (i.e., laws), and exercise discretion in crafting and enforcing regulations. As the system grew more complex, interpretation and enforcement became more uncertain and the scope for capricious regulator conduct grew. In this vein, Epstein (2011a, page 150) argues that an expansive regulatory state undermines the rule of law: This expansion of the government’s purview undoes virtually all of the procedural and structural features of the classical system: unbiased decisionmaking, judicial review of administrative actions on matters of fact and law, and retroactivity.... [A]s the scope of government activities increases, the far-flung nature of these activities leads to a great desire to take shortcuts in regulation, such that the older protections are treated as obstructions against the march of progress, and not as protections of individual rights. In a similar vein, Cochrane (2015) argues that dramatic expansion of the regulatory state poses a danger to our political freedoms. He sees an “emerging threat of large discretionary regulation, used as a tool of political control.... Just who gets that visit from the EPA can have a powerful silencing effect.” In sum, a large and complex regulatory state also breeds uncertainty in economic affairs by raising risks that regulators will exercise their discretion in a capricious manner, or use it as a tool of political control. B. Disproportionate Burdens on Younger and Smaller Businesses The burdens of regulation and regulatory complexity tend to fall more heavily on younger and smaller businesses for three reasons. First, there are fixed costs of regulatory compliance. Whether a firm has one employee or one thousand, for example, U.S. law requires regular paperwork or electronic submissions in conjunction with payroll taxes and tax withholdings on behalf of workers. The fixed cost elements of regulatory compliance favor larger over smaller businesses. Second, there are one-time costs of learning the relevant regulations, developing compliance systems and establishing relationships with regulators. Young businesses have had less time to develop the knowledge and internal processes required for compliance. Partly for this reason, our current regulatory and tax systems favor incumbents while disadvantaging entrepreneurship and young businesses. Third, compared to smaller, newer and would-be competitors, larger and incumbent firms have greater capacity and incentive to lobby for legislative exemptions, administrative waivers, and favorable regulatory treatment. For this reason as well, regulatory complexity tends to favor large incumbents and disadvantage new, younger and smaller firms. Figure 8 shows the employment share of young businesses, defined as firms that hired their first paid employee within the past 60 months. The young-firm employment share fell by more than half in recent decades, from about 18 percent in 1987 and 1988 to just over 9 percent in 2013. This drop in the young-firm share is pervasive across broad industry groups and U.S. states.31 Although other factors are also in play, this evidence fits the view that the growing scale of the U.S. regulatory system has discouraged the development of new businesses.32 These arguments also imply that regulatory and tax complexity discourage existing firms, even large ones, from expanding into new markets and products. For this reason, greater tax and regulatory complexity tend to soften competitive pressures and repress creative destruction more broadly. Indeed, ownership has become more concentrated in most U.S. industry sectors since at least the late 1990s.33 The scale and complexity of the regulatory system and the tax code are among the drivers of greater concentration and softer competition in product markets. C. Negative Economic Effects of Policy Uncertainty There are also sound reasons for concern about the harmful effects of policy-related uncertainty. Because it’s typically costly to reverse an investment or hiring decision, greater uncertainty naturally prompts businesses to pull back from capital expenditures and job creation.34 Uncertainty also raises financing costs, further discouraging investment and job creation.35 Weak investments in new technologies, capital goods, product development, and worker training undermine longer-run growth. Motivated by this reasoning, my work with Baker and Bloom investigates the effects of policy uncertainty. Using firm-level data, we find that policy uncertainty raises stock price volatility in policy-sensitive and regulation-intensive sectors like defense, healthcare, financial services and infrastructure construction. We also find that increases in policy uncertainty brings reduced investment and employment growth rates for firms in these sectors. At the macroeconomic level, we find that upward policy uncertainty shocks foreshadow declines in aggregate investment, output and employment in the United States and other large economies. In short, our results indicate that policy uncertainty hampers economic progress. As we discuss in our 2016 paper, many other studies also find negative economic effects of policy uncertainty. D. Regulatory Uncertainty Also Undermines Regulatory Goals Viscusi (1983) provides a useful theoretical framework for analyzing the effects of regulatory uncertainty on investments in production capacity and quality. Firms choose a unit output level and a quality level. For given quality, costs rise with unit output. For given output, costs rise with quality. Here, higher quality includes things like lower pollutants per unit of output and lower health risks per unit of output and consumption. Let x denote the regulatory penalty per unit of pollutant, health risk or other negative by- product of producing or consuming the good. When investments are fully reversible, the effects of regulation are straightforward: A greater regulatory penalty x causes the firm to choose lower output and higher quality. Regulatory uncertainty generates no anticipation and uncertainty effects in this special case. Instead, output and quality respond to the regulatory penalty in place at the time. In the realistic case when investments are not freely reversible, uncertainty about future regulatory policy depresses the firm’s investments in both production capacity and quality.36 Negative effects on capacity reflect the possibility of a high regulatory penalty x in the future. Negative effects on investments in quality reflect the possibility of a low regulatory penalty in the future. For example, uncertainty about the future regulatory penalty on power plant emissions discourages current investments that would reduce emissions. In this way, regulatory uncertainty undermines regulatory goals.

4 As far as the control variables are concerned, higher real GDP per capita (higher income) and an increase in asset prices (higher wealth) are linked with a rise of consumer confidence. The effect of the real interest rate and inflation are insignificant, whereas an increase in unemployment, contrary to what one would expect, has a positive effect on consumer confidence. We should highlight here though the effects on unemployment are at least one order of magnitude smaller that the other effects documented. Regarding the effects of taxation, we find that higher total direct and direct business taxes lead to significant reductions of business confidence. However, the effect of total direct taxes is much more pronounced. Taken together with the government spending estimates, one could interpret these findings as evidence that the overall business prospects are negatively influenced by both higher spending and higher direct taxes, as they imply an increased tax burden for the business sector (including the cases where this is done in order to finance productive public investments). On the contrary, we find that higher indirect taxes have a positive effect on business confidence, possibly because in most cases these are eventually passed on to consumers via higher consumer prices, and hence are preferred relative to higher income taxes.5,6

The report highlights that there is risk of uncertainty discouraging investment. The effects of uncertainty on investment are ambiguous in theory. But the empirical evidence, while sparse, is more clear-cut—and does suggest adverse effects on investment and trade. The results of the business and the tax administration surveys presented in this report are instructive, with respondents to both reporting that tax uncertainty is a major concern: • Uncertainty in the corporate income tax and the VAT systems is reported by business as having an important influence on investment and location decisions. Over 60 percent of respondents to the OECD business survey indicate that uncertainty in the corporate income tax and the VAT is very or extremely important to investment and location decisions. • Tax certainty is a high priority for tax administrations, with over 80% of respondents to the tax administration survey identifying it as a very high or extremely high priority of their tax administration. While the sources of uncertainty are many and varied, the key findings from the surveys are: • According to businesses, issues related to tax administration were ranked as among the major drivers of uncertainty in tax systems, with the top two, and three out of the top 10, sources of tax uncertainty deriving from issues related to tax administration. In this regard, the main sources included bureaucracy to comply with the tax legislation, although this may also reflect concern over compliance costs, and inconsistent treatment. • Concerns over the inconsistent approaches of different tax authorities towards the application of international tax standards ranked high in the business survey. • Issues associated with dispute resolution mechanisms, including timescales, were also identified as an important driver of uncertainty. In particular, respondents to the business survey highlighted concerns about lengthy decision making of the courts—which may be an aspect of the wider judicial system, and not wholly under the tax authorities’ control. • Tax administrations identified taxpayer behaviour as an important source of uncertainty, in particular as a result of aggressive tax planning and a lack of cooperation. They also highlighted complexity in legislation, lengthy court procedures, unclear drafting and frequency of legislative changes. • A key area of agreement in both surveys was that legislative and tax policy design issues are a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes. The narrative analysis suggests there is considerable variation across advanced countries in both the frequency of corporate tax changes and the lag before implementation. Most corporate income tax changes, however, are announced at least ninety days in advance of implementation. There is no obvious trend towards less pre-announcement of corporate income tax changes.

Our second finding is that reductions in entitlement programs and other government transfers were less harmful to growth than tax increases. Such cuts were accompanied by mild and short-lived economic downturns, probably because taxpayers perceived them as permanent and so expected that the taxes needed to fund the programs would be lower in the future. Thus, the data suggest that reforms of social security rules aimed at reducing government spending are more like normal spending cuts than tax increases. Because social security reforms tend to be persistent, especially in countries with aging populations, they entail some of the smallest costs in terms of lost output. Private investment also responded very differently to the two types of austerity plans—positively to spending-based plans and negatively to tax-based plans. Business confidence behaved consistently with private investment. On the other hand, household consumption and net exports (the difference between exports and imports) did not appear to differ on average during the two types of adjustments. What about recent episodes of austerity that occurred after the crisis and started during a recession? Although the sheer size of some of these austerity plans was exceptional—not only in Greece but also in Ireland, Portugal, and Spain and to a lesser extent in Italy and the United Kingdom—the outcomes did not differ significantly from those of previous episodes. Countries that chose tax-based austerity suffered deeper recessions than those that chose to cut spending. Among the latter are Ireland, despite a massive bank bailout program, and the United Kingdom, whose economic performance was much stronger than the IMF had predicted. The UK plan consisted almost completely of spending cuts. These included cuts in government consumption and public investment; reductions in transfers, including more restrictive policies on employers’ pension contributions; support allowances; and public service pensions. Spending cuts (planned or immediately implemented) between 2010 and 2014 amounted to 2.9 percent of GDP—about 0.6 percent a year on average. Of all these measures, 87 percent were implemented within this five-year interval, with the rest deferred. The result: growth in the United Kingdom was higher than the European average. Investment growth recovered from the 21 percent drop of 2009 and increased almost 6 percent in 2010. Possible explanations There are at least three possible explanations for these striking results. One is that the difference between tax- and spending-based plans is due to a difference in accompanying policies. The most obvious candidate is monetary policy. Guajardo, Leigh, and Pescatori (2014) argue that differences in the response of monetary policy are largely responsible for the different effects of the tax- and spending-based corrections they analyzed. We, however, find only a small fraction of the difference to be related to monetary policy. A second possibility relates to the behavior of the exchange rate. A fiscal correction could be less harmful if preceded by a currency devaluation, which would make exports more competitive and support growth. We find that this was not the case: there was no systematic difference in the behavior of the exchange rate before the two types of fiscal adjustment. If the exchange rate had been a significant factor, then the difference between the two cases in terms of GDP growth should have been associated with higher growth of net exports following a devaluation, independently of the type of fiscal plan adopted. This was not the case. As mentioned above, the driving force was domestic private investment. Finally, large fiscal adjustments are often periods of deep structural reforms, which may include the liberalization of product and/or labor markets. If these were systematically occurring at the time of spending cuts, they might explain our finding. But in fact, these reforms did not occur systematically during periods of spending cuts. A more promising explanation points to the role of confidence and expectations. Imagine an economy on an unsustainable path with exploding public debt. Rising interest rates in countries with high debt may generate exactly this scenario. Sooner or later fiscal stabilization must occur. The longer the delay, the more taxes must be raised (or spending cut) in the future. Stabilization, when it occurs, removes uncertainty about further delays that would have increased the costs even more. Blanchard (1990) provides a simple model that illustrates this point. Stabilization that eliminates uncertainty about higher fiscal costs in the future stimulates demand today—especially from investors, who are more sensitive to uncertainty given the long-term nature of their plans. In their models, Blanchard (1990) and Alesina and Drazen (1991) do not distinguish between stabilization on the tax and the spending side. However, it is quite likely that the benefits of removing uncertainty are more likely to occur with spending-based, rather than tax-based, austerity plans. A tax-based plan that does not address the automatic growth of entitlements and other programs over time is much less likely to produce a long-lasting effect on the budget. If the plan doesn’t address automatic spending increases, taxes must be continually raised to cover the additional outlays. So the confidence effect is likely to be much smaller for tax-based plans, because of rising expectations of future taxes. Spending-based plans, on the other hand, produce the opposite effects. Our finding for the response of business confidence to austerity supports this view. Business confidence increases immediately at the start of a spending-based austerity plan, in contrast to what happens at the beginning of a tax-based plan.

So that means that taxes, most likely on income, will have to increase. Sales taxes will not work. They are regressive, meaning they fall hardest on the poor, and would simply raise prices, necessitating a higher UBI and thus yet higher sales taxes. It is a nonstarter politically and economi-cally. Ditto for corporate taxes, which companies usually can lay off onto workers and customers. To the extent that corporate taxes can be made to stick, shareholders (including most retired people) will be hurt by lower dividends or lower stock prices, neither of which bodes well for future business investment, one of the main drivers of economic growth (Sammeroff 2019, 33–34). Taxes on land alone, a la Henry George, would prove woefully inadequate as most wealth is held in other forms (Whaples 2015, 532).

Critics might be right that patents, copyrights, and other forms of corporate welfare have become too generous, but that does not mean that a UBI should be implemented to compensate the masses for the rents so created. For starters, the tax to fund UBI will have to be much broader than the rents so generated. If patent law is unjust, or subsidies for science are too generous, then they should be adjusted, not counte-nanced for the sake of justifying UBI (Standing 2017, 31–32). Moreover, taxes on patents and other forms of intellectual property would dampen incentives to invent and create, thus injuring economic growth.

Concerns on the tightening of the economy and rising inflation cause business confidence in the UK to fall for the third quarter in a row, ICAEW survey finds. ICAEW’s Business Confidence Monitor (BCM), which surveys 1,000 chartered accountants in the UK, has found confidence at 18.6 on the quarterly index for Q2 of 2022. This is down from a peak of 47 three quarters ago. Sales growth is up, but cost pressures and staff shortages are hampering expectations of a more positive outlook. “After reaching a record high in mid-2021 as we emerged from the third lockdown after the success of the vaccine rollout, business confidence has fallen back significantly,” says Michael Izza, ICAEW Chief Executive. “Sales growth has been healthy, following contractions during the pandemic, but businesses are aware that this could be derailed by the economic threats posed by the cost-of-living crisis, soaring inflation and global instability from the Ukraine-Russia war.” The survey results suggest that the government should take action with targeted, strategic financial measures to tackle the cost-of-living pressures and high inflation, to relieve households and stop issues spilling further into the economy, ICAEW adds. Izza says: “While none of these problems are of the government’s making, they must understand the emotional and financial toll on people and families. The Chancellor should address the high cost of living with targeted, strategic financial measures to prevent disastrous consequences for people’s standard of living and the amount of spending in the economy, which could result in real pressure on businesses.” Cost pressures mounting Businesses expect input price inflation to rise by 4.2% in the next 12 months, which would be the joint-highest rate since the survey began in 2004. This reflects ongoing supply-chain disruptions and the sharp rise in energy and commodity prices following Russia’s invasion of Ukraine, according to the survey. To support their margins, businesses are raising prices to pass costs on, with the 2.3% increase over the past year the fastest rise in the survey’s history. Businesses plan another record increase over the next 12 months. Higher selling prices, along with increasing sales, mean that profits continue to rise after declines in most of the past year. Staff turnover and the availability of non-management skills are the most frequently cited growing challenges, each affecting two in five businesses. This is possibly a repercussion of people not seeking a return to work following the pandemic, particularly at a time when demand in the economy is high. Sentiment in the quarter varies markedly by sector, and is highest in IT and communications, transport and storage and business services. It is lowest in construction, manufacturing and engineering and energy, water and mining. Chartered accountancy practice The Orange Partnership (TOP), which provides cost assurance on open book construction contracts, has seen costs increase especially over the last 12 months according to TOP’s Managing Director, Darren Ward. “From our professional indemnity insurance to our energy bills, our biggest cost by far is our people and we employ highly qualified and experienced people and remunerate them in line with this – to do otherwise would be a false economy,” says Ward. He adds: “Taking a wider perspective, current indicators for inflation in the construction industry are worrying. Tender prices are forecast to grow 4-5% year on year. Annual Producer Price Inflation (input prices) was at 19.2% in March 2022, the highest since records began. “We are seeing more and more requests to help clients understand inflation issues on their projects – construction could be in for a bumpy ride.” Strong sales growth matched with decade-high wage increases Nevertheless, domestic sales have risen year on year after declining in Q2 2021 and are forecast to increase further in the coming 12 months amid continued expectations of strong pent-up demand in the post-pandemic economy. Exports have grown more moderately, but growth is set to improve next year as coronavirus restrictions are gradually removed in key markets, ICAEW says. Chris Barlow, Partner at MHA, deals with manufacturing clients in particular and says that many of the firm’s clients have reported high sales projections. However, getting items produced and dispatched is proving more of an issue. He says: “The challenge of salary costs has become more prevalent in recent conversations. Most businesses see that they have little option but to pass such costs onto their customers.” Staff turnover and skills availability, combined with high inflation, has driven businesses to raise salaries to their highest point in 10 years, the BCM found. Wages are also expected to go up in the year ahead, adding further pressure to the economy. However, issues with recruitment are unlikely to impede employment growth, with companies planning to grow their workforce by 3.2%. The proportion of businesses operating below capacity is only slightly above the record low of last quarter, which could explain why companies are increasing capital investment at a near-record pace. “What business craves is some element of stability, however this seems some way off,” says Barlow. “Many are looking at the government to act in this situation but it is clear that the government is trying to wean businesses off the unprecedented support that was provided during the pandemic.” He adds: “But I suspect that we will have to see some form of action from the government in terms of incentives in the form of taxation relief to encourage businesses to invest in terms of training and innovation which could be seen as a way of reducing ongoing supply and skills issues. Businesses need to continue to assess and reassess their supply chains in particular.”

Drawbacks of a Universal Basic Income A UBI system is still a theoretical approach, one that comes with good intentions and noble goals. Still, widespread financial equality and independence offer the potential to cause some serious economic issues. One major issue with a universal basic income, raised by those who oppose such a practice, is inflation. It’s easy to see how the institution of a UBI may fuel inflation. If every individual is granted an unconditional income from the government, then there is money to be spent. Providing massive amounts of money to virtually every individual in the country translates to a massively expanded money supply. It means that there is a higher demand for goods and services that manufacturers and retailers produce and sell. The law of supply and demand dictates that, as demand pressure increases on producers and retailers, they must increase prices on the available supply of goods and services to avoid being overwhelmed by the increased demand. That is inflation. If the end result of a UBI turns out to be uncontrolled inflation, then the cost of living continues to increase. It would necessitate an increase in the level of universal basic income provided to all citizens or allowing the standard of living for UBI recipients to decline, as they are able to purchase fewer goods and services with the amount of UBI they receive. Unless something can be done to manage the situation, there would just be a vicious circle created of higher UBI leading to increased prices, leading to a necessary increase in the UBI amount, leading to still higher prices… you get the idea.

The inverse of the causes noted above can also place downward, or deflationary, pressure on prices. Cheaper inputs, negative inflation expectations, and decreased demand for goods and services — especially during an economic recession — can all lead to a decline in prices.

The various drivers of inflation can also influence how long inflation persists. For example, an oil shock or a . On the other hand, sustained periods of increased government spending or excessive printing of money can lead to longer periods with high inflation and potentially hard-to-control “spirals” where price increases feed subsequent price increases.