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Adam N. Michel and Vanessa Brown Calder

First introduced by Republicans as part of the Contract with America, the child tax credit (CTC) has won wide bipartisan support as an income‐​transfer program to fight poverty, a subsidy to middle‐​class families, and a tool to boost declining fertility, yet it is poorly suited to meet each of these goals.

Republicans doubled the CTC in their 2017 tax reform, and Democrats temporarily expanded it again in their 2021 COVID package, increasing the dollar value and removing the de facto work requirements. Republicans and Democrats agree that the CTC should be larger, the only disagreement is on how much the credit should be enhanced. There are bipartisan efforts in the House and the Senate to expand the CTC, while some states have moved forward with their own child tax credit programs.

The CTC is a costly transfer program for taxpayers with kids who do not need government handouts and who do not meaningfully change their fertility decisions in response to larger payments. As an anti‐​poverty program, the CTC is poorly targeted, and without income requirements, regular no‐​strings‐​attached payments from Washington are counterproductive for the most vulnerable families.

There are better ways to support families by reducing the regulations and other barriers that increase the costs of core child‐​related goods and services. Without substantial deregulation, increasing direct government payments to families will simply lead to higher prices rather than expanded supply.

By making payments through the tax code, the CTC allows Republicans to support spending they would otherwise oppose since tax credits operate outside the annual Congressional appropriations process. Democrats support the CTC because they recognize it for what it is, a subsidy program administered through the tax code. Congress should repeal the CTC and use the savings to lower tax rates for Americans broadly. It certainly should not be expanded.

History of the CTC

The child tax credit was first introduced in 1997 as part of the Taxpayer Relief Act. It quickly increased from $400 to $1,000 while lowering the earned income requirement from $10,000 to $3,000. The credit was further expanded in 2017 as part of the Tax Cuts and Jobs Act, which increased the credit to $2,000 per child, lowered the earned income threshold, and raised the beginning of the income phaseout from $110,000 to $400,000 for married taxpayers ($75,000 to $200,000, single). The 2017 reform also eliminated the child and dependent exemption, which was more than offset by the $1,000 increase in the CTC for a taxpayer at or below the 25 percent income tax bracket (about $150,000). Along with a majority of the other changes enacted in 2017, the CTC and additional exemptions return to their previous values in 2026.

In 2021, the American Rescue Plan Act temporarily increased the CTC for just one year to $3,600 for children under 6 years old and $3,000 for children under 18 years old. The full credit was also made temporarily fully refundable by removing the earned income requirements, and half of the credit was delivered as advance payments directly into taxpayers’ bank accounts each month. Figure 1 shows the maximum CTC amount from its introduction through 2026 for 0–5‑year-olds, including the scheduled reduction under current law.

Is the Child Tax Credit an effective subsidy?

The CTC provides a large subsidy to families with children. Unlike the earned income tax credit (EITC), cash aid (TANF), food aid (WIC, SNAP), and public health care (Medicaid and the Children’s Health Insurance Program), the CTC is primarily a subsidy for middle‐ and upper‐​income Americans. As currently designed, the CTC is not primarily an anti‐​poverty program. Only 19 percent of child tax credit expenditures are claimed by the lowest quintile of income earners. Jacob Goldin and Katherine Michelmore find that 87 percent of filers in the bottom income decile of AGI are completely ineligible for the CTC, and “the majority of filers in the bottom thirty percent of the distribution are only eligible for a partial credit.”

Arguments for expanding the CTC usually assume that the cost of raising a child has increased and affordability has broadly declined. Relatedly, some proponents worry that U.S. fertility is below the replacement rate and believe that expanding government subsidies will meaningfully increase women’s lifetime fertility. Still, others focus on how larger income transfers could reduce poverty. The CTC is poorly targeted to meet each of these goals.

Poverty

Because the CTC phases in for filers with income over $2,500 at a 15 percent rate, the credit creates an incentive to work by adding a 15‐​cent subsidy to each additional dollar earned, until the full credit is reached. As is the case with the EITC, the work incentives are often partly or fully offset by the “income effect,” under which the subsidy allows a worker to meet his material needs with fewer hours worked.[1] Expanding the dollar value of the credit will have income effects that at least partially offset the work incentive.

To better target the lowest income families, others propose permanently increasing the credit and eliminating the earned income requirement, as was temporarily done in 2021 during the pandemic. Proponents claim that such a permanent change would reduce child poverty by more than 40 percent. Such estimates fail to account for how newly eligible families will change their behavior.

Taking behavioral effects into account, Kevin Corinth, Bruce Meyer, Matthew Stadnicki, and Derek Wu estimate that the larger CTC without income requirements would lead 1.5 million workers to stop working (83 percent of whom would be the sole earner in the household). The net effect of expanding the CTC would reduce overall child poverty by 22 percent and would not reduce deep poverty (50 percent of the poverty line). Results from the Joint Committee on Taxation found that the expanded CTC would result in similar reductions in labor supply.

Corinth and Meyer estimate that any reductions in poverty from a larger CTC that is targeted at families without market income would come at a fiscal cost that is almost double that of other programs, such as food stamps. The CTC is neither an efficient nor an effective policy tool to reduce child poverty.

Cost of raising a child

Although Americans frequently cite affordability concerns as an obstacle to fertility, analysis indicates that family costs have not outpaced incomes and that the cost of raising a child has fallen, not grown, over time.

For example, Angela Rachidi compares family incomes to family‐​related costs and finds that family incomes have grown steadily since the 1980s and costs have generally not outpaced them. Instead, Rachidi suggests that family’s increasing expectations around—and consumption of—various goods and services (home size, vehicle ownership, clothing) drive perceptions of affordability decline. Moreover, various measures of social support and community support have declined in ways that may make it more difficult to raise a family.

Economist Jeremy Horpedahl similarly finds that the annual cost of raising a child in the United States has fallen from 21.8 percent of median family income in 1960 to 12.6 percent of median family income in 2020 for two‐​earner families, with the 2020 figure constituting the lowest cost yet (Figure 2). For single‐​earner families, the annual cost of raising a child in the United States fell from 27 percent of median family income in 1960 to 23.7 percent of median family income in 2020.[2]

Some proponents of the CTC argue that the presence of children reduces a family’s ability to pay and thus deserves an offsetting subsidy, regardless of whether the cost of raising a child is increasing or decreasing. While children do come with additional costs, so do many other decisions individuals and families make, such as living in a high‐​cost area for economic or educational reasons.

Lastly, subsidies could be counterproductive as they will tend to be captured as higher prices of child‐​related services without supply‐​side reforms to expand access. Although evidence indicates that family affordability is not broadly in decline, the price of core child‐​related goods and services could certainly be lower with regulatory reforms.

Fertility

U.S. fertility is below‐​replacement level and converging with the low fertility rates of other countries. Subsidies for families with children, including the CTC, have been proposed as one way to mitigate this decline. Such financial transfers or cash benefits are especially ineffective at reducing fertility decline.

A review of studies with experimental or quasi‐​experimental designs finds that financial transfers result in a short‐​term increase in births while leaving the long‐​term total unaffected. A United Nations working paper finds that financial transfers’ “impact on completed fertility is rather small… Furthermore, the effects of financial transfers usually have the biggest influence on fertility of the low educated, low‐​income, or jobless for whom public transfers are of higher value.”

As stated elsewhere, these low‐​income households rarely qualify for the CTC’s middle‐ and upper‐​income benefit. The CTC is thus doubly ineffective at increasing fertility: not only do financial transfers have a small or insignificant effect to begin with—altering fertility timing rather than total births—but the CTC does not target the demographic that would be most influenced to increase their fertility behaviors in the presence of financial benefits. Targeting low‐​income households comes with other costs to labor force participation and more fundamental questions about the prudence of governments’ involvement in fertility decisions.

A better way?

Although the CTC fails at many objectives, there are numerous options for state, local, and federal policymakers interested in supporting families and making family life easier. To increase affordability, reforms to housing, food, formula, and childcare policy should be enacted. To reduce stress, increase opportunity, and reduce the cost associated with buying a home in the “right” neighborhood, further reforms to educational choice must be adopted.

Parents typically have limited financial resources, but just as importantly, limited time. Enacting reasonable independence laws and reforming home supervision laws would reduce the time cost of parenting while providing growth opportunities for school‐​age kids. Overly burdensome car seat requirements, with little associated safety benefit, should also be reconsidered.

Adopting these reforms would do much more for parents and children than expanding the CTC. On the other hand, expanding CTC spending without deregulating the goods and services that parents demand would be counterproductive and regressive. Ultimately, Congress should repeal the CTC entirely.

Jeffrey Miron and Jacob Winter

This article appeared on Substack on July 27, 2023.

In fiscal year 2022, the federal government spent $76 billion subsidizing nondefense, scientific research. This component of federal expenditure is modest relative to the $6.27 trillion total or the $632.7 billion private sources spent on research and development in 2021. It nevertheless merits scrutiny.

The standard argument for these subsidies distinguishes two types of research.

Basic research expands human knowledge but without easily captured commercial benefit. Examples include probing the origins of the universe, the composition of protons, or the fundamental laws of physics. Once known, these “pure ideas” spread easily, so the creator cannot earn a monetary return.

Applied research generates marketable innovation: improved crop production, treatments for specific diseases, or improved energy efficiency. Crucially, according to the standard model, this research builds on the theoretical foundations derived from basic research.

Without subsidies for basic research, therefore, applied research might suffer.

This model of the innovation process plausibly describes much innovative activity (or lack thereof). Yet the standard model is not the whole story.

Many scientists (e.g., Michael Faraday) investigate for the joy of discovery, not to earn a financial return. Further, many esteemed inventors received no government funding, including Thomas Edison, Nikola Tesla, and the Wright brothers (who were competing with government funding to the Smithsonian Institution to develop aircraft).

Even if financial incentives are important for generating basic research, moreover, universities and private charity provide alternative sources of funding. At institutions of higher learning, including ones historically funded privately, scientists earn a living by teaching, while getting time for their research.

Private charity also funds basic research. The American Cancer Society, 100 years old this year, collects personal donations and invested more than $145 million in cancer research in 2022, and more than $5 billion since 1946. Its history suggests that private charities are willing to invest in research that government might avoid. When the ACS was founded, it was taboo to even discuss cancer in public.

Private charities fund numerous areas of research. The Howard Hughes Medical Institute funds about $660 million in medical research per year, and countless charities focus on specific diseases (the Alzheimer’s Association, $90 million in 2022; the Parkinson’s Foundation, $24.9 million). The Bill & Melinda Gates Foundation distributed $3.6 billion in 2021 for global health research and development. Additional examples include the Alfred P. Sloan Foundation (economics, energy, the environment, and physics; $48.1 million in 2022), the Andrew W. Mellon Foundation (arts and humanities; $592 million), and the Ford Foundation (drivers of socioeconomic and political inequality; $713 million).

Moreover, much innovation does not rest directly on basic research: Microsoft Windows, TurboTax, and the iPhone did not spawn from some grand theory but instead grew from ongoing trial‐​and‐​error processes in response to pressing needs.

Regardless of these issues, the long‐​term record suggests little impact of federal research funding on the U.S. economy. The graph below plots real GDP per capita since 1870 along with federal nondefense research and development spending since 1949, when the government began reporting this statistic. Funding existed prior to 1949 but was small and embedded in other parts of the budget; in 1940, it was under $105 million (in 2012 dollars).

The growth of GDP per capita seems unaffected even as research funding rose dramatically following World War II. The average annualized growth rate of real GDP per capita was 1.96 percent between 1870–1948 and 2 percent between 1949–2022.

Thus, the standard model likely overstates the need for government funding to generate innovation. In addition, government funding generates substantial costs beyond its monetary expenditure.

If government funds research, it must decide which projects to fund, allowing political forces to influence the choice. President George W. Bush limited federal funding for stem cell research that used human embryos in response to pressure from anti‐​abortion forces. The recent affirmative action case against Harvard is a legal issue because Harvard accepts federal research funding. The National Institute on Drug Abuse has been criticized for displaying bias in favor of drug prohibition.

Another concern is that a central source of funding may limit which projects can access funds, reducing research variety. Special interest groups can successfully lobby for funding that supports their research even if it is not the most deserving. Indeed, private research funding is distributed more widely: between 2010 and 2019, 200 organizations received 80 percent of NIH and NSF grants, whereas the top 200 recipients of private funding received only 33 percent of donations. Scientists have explained how private funding has enabled them to explore new ideas, adjust budgets, and avoid lengthy bureaucratic approval processes.

Finally, much government funding goes toward applied, not basic, research. In FY 2022, 38 percent of nondefense federal R&D funds were earmarked for applied research. This piece cannot be justified on the grounds that private actors will systematically undersupply it due to a lack of monetary incentive.

Milton Friedman famously argued for abolishing the National Science Foundation, the National Institutes of Health, and all government funding of higher education (even though his own field received funding). Friedman believed that private sources would fund science, as evidenced by major research that took place before government research funding began. He also believed the efficiency and quality of research would improve when privately funded because government officials’ goals divert research from the topics that fit researchers’ talent and interests.

We agree.

Michael F. Cannon

A week or so ago, friend and HuffPost reporter Jonathan Cohn emailed me:

Consumers frequently don’t understand what they’re buying [when it comes to short‐​term, limited duration insurance (STLDI)], or how STLDI might be different from an ACA‐​compliant plan. In part, because companies selling STLDI aren’t always clear on what the plans do/​don’t cover. [In other words], there’s an inherently high risk for confusion—and opportunity for exploitation/fraud—in the way the market exists now. What do you think about this argument?

Cohn ultimately turned that topic into this article.

It contains a number of inaccuracies and misleading characterizations.

Cohn laments gaps in STLDI plans without noting that government regulation was responsible for many of those gaps. When Jeanne Balvin lost her STLDI plan in the middle of an episode of diverticulitis, leaving her with $97,000 in unpaid medical bills, it was because the Obama administration required her carrier to drop her after just three months.
Cohn fails to note similar gaps in ObamaCare plans. When Obama threw Balvin out of her STLDI plan, ObamaCare denied her coverage until the following January. Indeed, for 10 months out of the year, STLDI plans have fewer gaps than ObamaCare plans because, with few exceptions, ObamaCare denies coverage to everybody outside of a narrow window in November and December. I guess ObamaCare’s coverage gaps don’t matter?
Cohn portrays rules that President Trump put in place in 2018 as widening such gaps. In fact, Trump’s rules increased consumer protections in STLDI plans by filling in the gaps that Obama had created. Trump’s rules would not have required Balvin’s insurer to drop her.
Cohn inaccurately casts the new STLDI rules that President Biden just proposed as an effort to “intervene in markets, in order to protect people from risk and guarantee a level of economic security.” In fact, Biden’s proposed rule deliberately exposes sick people to greater risk by stripping them of their health insurance after just four months and leaving them with no health insurance for up to 12 months, much as Obama did. Biden’s rules would make health insurance less universal. Congressional Budget Office estimates suggest they would leave some 500,000 consumers who would otherwise have health insurance with no coverage at all.
Cohn writes that while ObamaCare imposed new regulations on most forms of health insurance, “The Affordable Care Act…made an exception for ‘short term/​limited duration’ plans…But it allowed the federal government to regulate these plans.” Nothing in that quote is true. Congress exempted STLDI from nearly all federal health insurance regulations not in 2010 when it passed the ACA but back in 1996 when it passed the Health Insurance Portability and Accountability Act (HIPAA). ObamaCare didn’t create the exemption for STLDI, touch that exemption, or give regulators any more authority over those plans than HIPAA already did. If anything, ObamaCare signaled that Congress wanted to protect patients from coverage cancellations, not mandate coverage cancellations, as Obama did and Biden seeks to do. ObamaCare’s silence on the STLDI exemption suggests Congress had no problem with the rules at the time, which allowed such plans to last 12 months.

You get the idea.

The main reason I’m here today, though, is to give a fuller response to the question of whether STLDI plans mislead consumers. Cohn quotes me in his article. (Thanks, friend!) But he used only part of my response to his question. Here’s my full response, which I have lightly edited for public consumption.

Barack Obama misled more people about ObamaCare plans than insurers will ever mislead people about short‐​term plans. ObamaCare plans are themselves notorious for misleading consumers via inaccurate provider directories. So are Medicare Advantage plans. Medicare’s trust funds are an institutionalized, ritualized lie. Do any of the people who want to eliminate short‐​term plans propose eliminating those plans?

It’s a complete[ly disingenuous] argument. Health insurance is complex. Few consumers will ever have full information. Every health insurance plan will have enrollees who didn’t understand what they were getting.

When there is an information problem, you don’t ban the product. You fix the information problem. Many car dealers are shady. Do we ban cars? No. We don’t even ban used cars. We deal with the information problem.

The 2018 Trump rule mandates that short‐​term plans disclose that they are not ObamaCare plans. I imagine this mandate ironically makes short‐​term plans more attractive to consumers as often as it makes them less attractive.

I italicized the two sentences Cohn selected for his article. As you can see, those two sentences don’t really capture my broader point that complaints about STLDI plans misleading consumers are disingenuous. In any case, such deception in no way justifies throwing patients out of their STLDI plans after four months.

Worse, those two sentences in isolation could give the impression that I don’t care about the costs of people misleading consumers about their health plans. I would go so far as to say I care a lot more than STLDI opponents do because I also care when Medicare or Medicaid or Medicare Advantage plans or ObamaCare plans or Medicare’s trustees or Congress or Obama, Trump, or Biden do it.

The irony of Cohn’s article is that, while purporting to explore the important issue of shadowy figures misleading consumers about health insurance, he ignores the biggest example of that problem in this whole fracas.

When he was running for president in 2019, Biden, like his former running mate, promised that he would let people keep their health plans:

@michaelfcannon A new proposal from President #Biden would *mandate* the very practice of canceling #HealthInsurance for the sick that Biden promised #Obamacare would end. More: https://​the​hill​.com/​o​p​i​n​i​o​n​/​h​e​a​l​t​h​c​a​r​e​/​4​0​8​7​3​9​6​-​b​i​d​e​n​s​-​n​e​w​-​p​l​a​n​-​t​h​r​e​a​t​e​n​s​-​h​e​a​l​t​h​-​c​o​v​e​r​a​g​e​-​f​o​r​-​m​o​r​e​-​t​h​a​n​-​h​a​l​f​-​a​-​m​i​l​l​i​o​n​-​p​e​ople/ #CatoHealth @C@Cato Institute ♬ original sound — Michael F. Cannon

Biden’s STLDI proposal breaks that promise. Turns out what Biden meant was, “If you have private health insurance, you can keep it–but only for four months.”

Biden misled millions of health insurance purchasers. More than any STLDI insurer ever will. But HuffPost readers would never know.

Marc Joffe

According to the United Nations, the world population surpassed the eight billion mark on November 15, 2022, and reached 8.045 billion on July 1 of this year. But these figures vary significantly from US Census Bureau estimates which placed the global population at just 7.979 billion at the beginning of July.

Population and especially population growth estimates are an important basis for policy. The UN projects that the population will continue to grow into the 2080s when it will reach 10.4 billion. Reacting to these figures, Liu Zhenmin, UN Under‐​Secretary‐​General for Economic and Social Affairs observed: “Rapid population growth makes eradicating poverty, combatting hunger and malnutrition, and increasing the coverage of health and education systems more difficult.”

Writing in The Guardian, the newspaper’s former environment editor John Vidal concluded “The hard fact is that in an age of climate breakdown, human numbers matter. And the ecological impact of another 2–3 billion humans will be immense.” He went on to note that the Intergovernmental Panel on Climate Change had identified global population growth as one of the two biggest drivers of growing CO2 emissions, the other being increasing GDP per capita.

Concerns about climate change, hunger, and inadequate service provision may be mitigated if the world’s population is growing more slowly and is on course to stagnate earlier than the UN expects.

A country‐​by‐​country comparison of the UN and US Census figures reveals some large discrepancies in both directions. The accompanying table shows all cases in which the respective estimates differed for a given country by five million people or more.

The UN’s estimate for China is especially doubtful. China’s official population estimate was 1,412 million at the end of 2022 reflecting an 850,000 person drop from the previous year. And the decline is likely to have accelerated in 2023 with demographers forecasting a lower number of births than in 2022 and perhaps a million excess deaths from COVID-19 following the termination of pandemic restrictions.

Chinese authorities have not been forthcoming about COVID deaths adding to suspicions that they are overstating the nation’s population. One independent expert, Yi Fuxian of the University of Wisconsin‐​Madison estimates China’s population at no more than 1.28 billion which is at least 130 million below the official figure. Fuxian offers evidence that the Chinese authorities have been systemically overstating births for decades.

He also casts doubt on the UN’s estimate of India’s population. That nation’s last Census, in 2011, found 1.211 people, or about five million less than the UN data show for that year. If fertility has plummeted more than the UN expected the gap between more recent estimates and reality will likely be magnified. We will only know for sure when India conducts its next Census in 2024.

While US Census estimates appear to be better than UN estimates for China and India, both are flawed in the case of the third most populous country, the United States. Both sources place US population at slightly under 340 million as of July 1, 2023 (for the US Census, I’m referring to its International Database data file; a lower number is shown on the Census Bureau’s World Population Clock web page).

However, the US Census Bureau’s July 1, 2022 domestic population estimate was 333 million, reflecting a 1.2 million increase over the prior year and a 1.9 million increase over the 2020 decennial Census. Even with the bounce‐​back in population growth post‐​pandemic, it is hard to imagine US population totaling more than 335 million as of July 1, 2023, suggesting a five‐​million‐​person overestimate in both global datasets.

So, there is good reason to believe that the global population did not exceed 8 billion last year and may still be below that milestone in late July 2023. Given the lower 2023 level and apparently slower growth in recent years, the UN’s projection of a 10.4 billion peak in 2086 should also be called into question.

Other researchers have more modest growth expectations. The Institute for Health Metrics and Evaluation projects a peak population of 9.7 billion in 2064, while Earth4All expects a peak of less than 9 billion around 2050 with an even lower maximum if development in poorer nations accelerates.

Whether we should welcome slower population growth is open to debate. While the mainstream view focuses on the threats of overpopulation, Cato’s Marian Tupy welcomes new people as a source of innovation. As Tupy wrote when the world population purportedly hit the 8 billion mark last November: “Every new human being comes to the world not only with an empty stomach, but also a pair of hands, and, more importantly, a brain capable of intelligent thought and new knowledge creation.”

But regardless of whether one welcomes or fears population growth, the policy debate is impoverished by stale and inaccurate data. We often hear that we’re entitled to our own opinions, but not our own facts (a quote often attributed to the late Senator Daniel Patrick Moynihan but which appears to have earlier origins). Yet in this case, the very foundational question of how many people now reside on earth, there is no reliable source of ground truth.

Nicholas Anthony

From codifying definitions to tackling the Infrastructure Investment and Jobs Act, the latest bill from Senators Cynthia Lummis (R‑WY) and Kirsten Gillibrand (D‑NY) has a full section dedicated to taxing cryptocurrency (see Figure 1). There is a lot of ground to cover here so let’s focus on some of the most important pieces.

Removing Capital Gains Taxes from Purchases (Sort of)

Capital gains taxes have been a long‐​standing issue for cryptocurrency users. If cryptocurrency is to be used as an alternative money, capital gains taxes pose a significant barrier to adoption since each transaction would have a greater tax burden in terms of both filing and monetary costs. Therefore, the Lummis‐​Gillibrand bill kicks things off with an amendment to 26 U.S.C. Part III that would exclude cryptocurrencies from capital gains taxation for “small” purchases. This de minimis exemption from capital gains taxes applies so long as the cryptocurrency in question is being used for the purchase of goods or services and the total value of the sale is under $200. This $200 threshold mirrors what is currently used to exempt gains on foreign currencies.

Concerningly, the bill proposes an aggregation rule so that multiple sales are included as one transaction. This step might make sense when thinking about counting a coffee, a sandwich, and a donut purchased in the same sitting as being one transaction. Yet it’s not clear what the limits would be to this aggregation as the bill later notes that even “a series of related transactions” should be treated as one sale. With that said, the senators did well to include an inflation adjustment. It would be much better to have no limit, but at least the adjustment would ensure the $200 (low as it is) does not decrease over time.

Fixing the Infrastructure Investment and Jobs Act

The next section tackles the infamous broker provision from the Infrastructure Investment and Jobs Act. Much like the original version of their bill from 2022, the Lummis‐​Gillibrand bill seeks to redefine the broker definition so that it doesn’t effectively capture everyone working in or around cryptocurrency. Separately, the bill would then repeal the arguably unconstitutional surveillance created by the Infrastructure Act in 26 U.S.C. Section 6050I. Although these portions of the Infrastructure Act are meant to go into effect at the end of 2023, the bill would delay the effective date to 2025 to give people (the IRS included) more time to figure out how even this limited version of the broker provision will work in practice.

Wash Sales and Unrealized Gains

The bill also addresses “wash sales”—an issue that some have speculated to be the “crypto tax loophole” that caught the attention of President Biden earlier this year. A wash sale is currently defined in the U.S. code as when someone sells a security at a loss to take a deduction on their taxes, but then immediately repurchase the same security. As it stands, wash sales with securities are not allowed, but it can be done with cryptocurrencies. Therefore, the bill would expand the current statutes covering securities to also cover cryptocurrencies.

Curiously, the bill then opens the door for a sort of “approved wash sale” on unrealized losses on the condition that it also apply to unrealized gains. The bill proposes a mark‐​to‐​market approach so that exchanges could reevaluate the fair market value of any cryptocurrency held as inventory and then pay or deduct taxes on any appreciation or loss without any sale taking place. Some argue that this process creates a more accurate picture of a balance sheet as markets ebb and flow. On the other hand, unrealized capital gains taxes are quite simply taxes on income that doesn’t yet exist. Perhaps that’s why the bill seems to take a nuanced stance by only amending the portion of existing law that pertains to exchanges electing to take on this practice. Either way, the bill bans traders from doing wash sales but then lets exchanges do them. Perhaps it’s time to rethink the capital gains approach entirely so that mitigating tax burdens no longer shapes investment strategies?

Mining and Staking

Carrying the theme of unrealized gains, the bill also addresses mining and staking. In short, the bill would make it so that any rewards from mining or staking are only considered taxable income when the holder actually sells the assets received for mining or staking. The question of taxing rewards has been a long standing issue, so the bill seeks to codify what people thought was decided in a 2021 court case: that mining and staking rewards are only taxable as income when they are sold.

Conclusion

The general theme seems to be that Senators Lummis and Gillibrand sought to compile everything from the debates over the last few years into a one‐​stop shop for cryptocurrency tax treatments. And they certainly managed to cover a wide range of issues. Given the complexity of the other sections of the bill, it may very well be the case that this section becomes a standalone bill in the future.

Are you curious about the other sections of the bill? See Jack Solowey and Jennifer Schulp’s commentary on the sections on market structure and exchanges and my own commentary on the section on illicit finance.

Colleen Hroncich

Just like one size doesn’t fit all students, one size doesn’t fit all teachers, either. Shiren Rattigan experienced this first‐​hand. A fourth generation educator, Shiren says she was destined to be a teacher. It just took her some time to find the right environment.

“As an educator for over 10 years, I taught at public schools, private elite international schools, and a Montessori school, but none of them quite reflected my vision of education,” she recalls. “I saw myself as Ms. Frizzle from The Magic School Bus—whisking the students away on some great unforgettable adventure. I wanted to ignite the love of learning in children with deep connections, hands‐​on activities, and soulful experiences.”

Then came COVID-19. Shiren’s three daughters were doing remote school while she was trying to teach her Montessori classes online. Some families asked her if she would tutor their children for the upcoming school year and she agreed. She created kits and dropped them off for the students every Sunday so they could have the Montessori environment right in their homes instead of trying to create it on a screen. She would then direct them to get the appropriate box for each lesson.

“This was working pretty well,” she says. “We decided to meet once a week, then twice a week, and then three times a week. I wanted to offer this opportunity to more children and be accessible to a diverse socioeconomic background. I decided the best way to do that was to become a licensed private school and participate in Florida’s school choice scholarship program.”

Colossal Academy focuses on what Shiren calls 21st century foundational skills—literacy, numeracy, scientific literacy, cultural and civic literacy, and financial literacy. The more traditional academic classes are in the morning, and the students all have their own individual learning plans. They have an hour of unstructured time for lunch where they’re able to just be together as a group. After lunch, they have specials, which can include farming, cooking, and textiles. While Colossal Academy is an official private school, Shiren welcomes homeschoolers as well with her three‐​day a week hybrid option.

The initial focus of Colossal Academy was middle school, but Shiren is adding a high school starting with ninth grade this year. “We are working towards relevancy‐​based education,” she notes. “As we bridge into high school, all students will graduate as the CEO of their company. By junior year they will have decided formally what their business will be, created business plans, launched a website, and gone to pitch and raise money for their ventures or non‐​profits.”

Shiren has also gotten external validation—Colossal received a Next Step Grant from VELA Education Fund and was a Yass Prize quarterfinalist. No wonder she’s looking to help others start their own microschools. The Colossal Architect Accelerator assists with securing a space, designing a project‐​based curriculum, marketing, enrollment, and more. This will help teachers as well as other students.

“One exciting aspect that I’ve grown to understand is that I’m also creating a fertile ground for educators. A place where they can be creative, have deep connections, and thrive,” Shiren explains. “I want to fortify teachers to be the professionals that they aim to be—that they thought they were signing up for when they went into education. So it’s kind of two‐​fold: serving learners, but also creating a better environment for teachers.”

The excitement and passion Shiren has for Colossal Academy is impossible to miss. She sees it as the learning sanctuary she wishes she’d had, the vision she had in becoming a teacher, and the educational environment she wants for her own children.

“In many ways, Colossal Academy is completing a circle,” Shiren says. “My great‐​grandmother taught in a one‐​room schoolhouse on a farm. My grandma and mom taught in public schools like we see today. And now I’ve created a modern version of the one‐​room schoolhouse that lets me individualize education for my students. I guess it’s true that everything old is new again.”

Daniel Raisbeck and Gabriela Calderon de Burgos

For the first time since 1991, Argentina suffers from annual inflation rates above 100 percent. As voters prepare to head to the polls on August 13, the date of the presidential primaries for all parties, a majority thinks—regardless of ideology— that inflation is the country’s most pressing problem. Meanwhile, a significant minority—29 percent according to one poll— now considers that the best way to tackle inflation is to get rid of the Argentine peso altogether and adopt the U.S. dollar as the official currency. They are absolutely right.

As we explain in a new briefing paper out today, dollarization works because it deprives the local ruling class of all control over the national currency. This protects ordinary people’s purchasing power from the excesses of chronically profligate politicians and often subservient—or simply incompetent—central bankers. Along with Peru, a semi‐​dollarized economy, Latin America’s three fully dollarized countries—Panama, Ecuador, and El Salvador—have had the region’s lowest inflation levels during the past 20 years (and much longer in the case of Panama). Unlike many countries in the region, the dollarized trio did not see double‐​digit inflation in the aftermath of the Covid‐​19 pandemic. Steve Hanke, a Johns Hopkins University economist, puts it well: dollarization is equivalent to instituting the rule of law in the monetary sphere.

Dollarization is often compared to the convertibility system that Argentina implemented in the 1990s, a monetary regime consisting of the Central Bank maintaining unlimited convertibility between its currency and that which it is pegged to at a fixed exchange rate. That system ultimately fell apart because it deviated from following orthodox rules. But because dollarization simply replaces a local currency with a foreign one, it does not depend on a promise from the political class to abide by a certain set of rules and it has proven much harder to undo. As we explain in our policy brief, this does not imply a country’s surrender of its monetary policy to the United States:

“As economist Juan Luis Moreno‐​Villalaz argued in the Cato Journal in 1999, Panama’s banks, which have been integrated to the global financial system after a series of liberalization measures in the 1970s, allocate their resources inside or outside the country without major restrictions, adjusting their liquidity according to the local demand for credit or money. Hence, changes in the money supply—which arise from the interplay between local factors and the specific conditions of global credit markets— and not the Federal Reserve, determine Panama’s monetary policy. Fed policy affects Panama only to the same extent that it does the rest of the world”.

In Argentina, opposition to dollarization comes from critics on both the left and the right. The former usually claim that adopting the dollar is a costly affront to national sovereignty (the cost pertaining to the loss of seigniorage). The latter tend to argue that local technocrats will be left without monetary tools with which to steer the national economy. Neither side has come to terms with the reasons why an overwhelming majority of Panamanians, Ecuadoreans, or Salvadoreans wouldn’t dream of ditching the dollar in favor of weak national currencies. In fact, minimal inflation rates are but one benefit of dollarization. The others include far lower interest rates, longer loan periods, and an intrinsic hard budget constraint on governments and parliaments alike.

Despite such advantages, dollarization is certainly no guarantee of fiscal discipline or sustained economic growth, as the recent experience of both Ecuador and El Salvador can attest. Nonetheless, dollarization is worth it simply because it leaves politicians and bureaucrats unable to devalue a local currency or monetize the debt, thereby limiting the magnitude of the potential harm. During the 2010s, radical left‐​wing governments in both El Salvador and Ecuador were unable to get rid of the dollar despite their anti‐​dollarization rhetoric. The pros of dollarization may be difficult to grasp ex‐​ante; once it is instituted, however, dollarization’s benefits in daily life are so palpable to a large majority that the greenback has become demagogue‐​proof in a region ripe with demagoguery.

The loss of seigniorage, it turns out, is an infinitesimal price to pay for the advantages of dollarization. Manuel Hinds, a former finance minister in El Salvador, likens giving up seigniorage to paying a small insurance premium for protection against the very high risks of maintaining a local currency. Nor is a lack of large dollar reserves an excuse not to dollarize.

In Ecuador, the mere announcement of dollarization in January of 2000 led to a massive increase in deposits in dollars previously held abroad or under mattresses. This was the case even though the beleaguered banks were offering negative interest rates.

As we discuss in our briefing paper, adopting the dollar can also help solve Argentina’s serious problem with short‐​term liquidity notes, the debt of which is more than twice as large as the monetary base. This is yet another reason why Argentina’s next government should dollarize, albeit taking seriously the technical challenges that dollarization presents.

The Argentinean peso no longer provides the basic functions of money. Argentineans already use the dollar as a unit of account and—if they can overcome multiple legal obstacles and afford significant transaction costs—as a store of value and a medium of exchange for important transactions. Dollarization would democratize the latter two essential functions of a sound currency.

Adam N. Michel

In addition to raising revenue, the tax code is used by politicians to subsidize myriad private activities, including politically popular energy sources, charitable giving, children, research, and housing. Congress and the Administration measure these programs through tax expenditure reports or lists of items that deviate from a “normal” income tax base.

A new report by Cato’s Chris Edwards explains why the way government scorekeepers tabulate tax expenditures biases the tax code against investment and growth and toward progressive forms of redistribution. Congress can fix this bias by reforming the definition of tax expenditure in the Congressional Budget and Impoundment Control Act of 1974 (1974 Act).

Current tax expenditure lists are misleading because they lump together two separate phenomena. Some tax expenditures move the tax code toward a consumption tax base by decreasing harmful economic distortions of double taxation built into the normal income tax system. Many other tax expenditures are true special interest carve‐​outs and loopholes that grant privileges to some at the expense of others. Edwards estimates that about 48 percent of tax expenditure dollars are this type of special interest spending in the tax code.

As Congress considers additional reforms to the tax code, ways to lower tax rates, or increase revenues, it is critical to start with a definition of tax expenditures that does not confuse true loopholes with pro‐​growth improvements. Edwards explains:

To guide reforms, policymakers need an accurate tabulation of loopholes in the tax code. The current Treasury and JCT tax expenditure lists fall far short. They depend on the faulty Haig‐​Simons definition of income, which endorses the double taxation of saving and investment, and they depend on ad hoc rules reflecting a redistributionist bias. Claims that high earners gain the most from tax loopholes are off base. The claims stem from arbitrary choices made in producing the official tax expenditure lists.

Defining the tax base from which to measure expenditures is critical. The Haig‐​Simons income tax base includes earned income plus other changes in net worth. This system taxes saved income at a higher effective rate than income that is spent immediately. A consumption tax base fixes this problem by taxing all income that is consumed only once.

I encourage you to read the entire report, which includes the history of how the long‐​running academic debate over how to define the tax base still dictates current budget scoring. The report applies the discussion of the appropriate tax base to a series of proposed tax reforms, including the tax treatment of business investment, personal savings, health care, housing, and state and local finances.

I will highlight one point Edwards makes in passing: Treasury and the Joint Committee on Taxation (JCT) should change how they present tax expenditures. To facilitate this shift, Congress should amend the 1974 Act to specify that tax expenditures are to be measured from a comprehensive consumption tax base rather than from “gross income,” which currently guides the inconsistently defined normal income tax base used by JCT.

Section 3(3) of the 1974 Act (2 U.S.C. 622(3)) states:

The term “tax expenditures” means those revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability; and the term “tax expenditures budget” means an enumeration of such tax expenditures.

By replacing “gross income” with “consumed income,” Congress could ensure that future tax expenditure reports only include those provisions which are truly loopholes in the tax code.

Alternatively, Congress could add a sub‐​section requiring any agency that produces a tax expenditure report also produce a companion report measuring tax expenditures from a comparable consumption tax baseline. A second expenditure report could also be done at the request of the committees of jurisdiction or rule changes. As Edwards notes, the current federal tax code is a hybrid of the consumption and income tax systems. At a minimum, tax expenditures should be measured from the two tax bases and presented on an equal footing.

A better understanding of tax expenditures—the good and the bad—is critical in any discussion of future tax reform. Congress can ensure that future tax policy debates are better informed by clarifying how scorekeepers define deviations from the normal tax base.

Romina Boccia and Dominik Lett

Congress is in the midst of debating the annual defense spending bill and chances for completion before the August recess look bleak. The multitrillion‐​dollar increase in the debt limit, which Congress passed in early June following months of negotiations, established budget levels for defense and nondefense appropriations for the next two years. The parties remain divided on the details.

Spending debates that are contentious now will likely get worse in future years, as the current fiscal trajectory will place inevitable constraints on America’s military. Without reforms to health care and retirement benefits, other domestic and defense priorities will be increasingly squeezed. As debt levels and associated interest costs rise, economic growth will suffer. And as the share of the budget dedicated to autopilot entitlement spending expands, reduced fiscal capacity will further increase budgetary conflict over the shrinking portion of discretionary spending that Congress allocates each year.

Congress only debates 28 cents of every dollar it spends; the vast majority of federal spending goes out without congressional deliberation, primarily funding programs like Medicare, Medicaid, and Social Security, among other entitlements. A new mechanism is needed to reform entitlement spending and avoid a future fiscal crisis before it’s too late.

Erosion of economic power

According to the Congressional Budget Office’s (CBO’s) latest long‐​term budget outlook, publicly held debt will grow from 98 percent of gross domestic product (GDP) to 181 percent of GDP by 2053. Most economic research finds that excessive public debt reduces economic growth, with dampening effects kicking in around debt reaching 78 percent of GDP.

There are many benefits of a robust economy including a higher standard of living. A strong domestic economy is also critical for supporting national security. Prominent national security leaders, including former Secretaries of State, Defense, Treasury, and Homeland Security across eight Republican and Democratic administrations, were recently gathered by the Peterson Foundation’s Coalition for Fiscal and National Security. They argue that:

“[L]ong-term debt is the single greatest threat to our national security…This debt burden would slow economic growth, reduce income levels, and harm our national security posture. It would inevitably constrain funding for a strong military and effective diplomacy, and draw resources away from the investments that are essential for our economic strength and leading role among nations.”

Delaying responsible fiscal reforms in the face of growing federal debt invites economic and national decline. High and rising U.S. federal debt leads to suppressed private investment, reduced incomes, and increased risk of a sudden fiscal crisis. A weaker economy and growing concerns by international bondholders of U.S. treasuries about the government’s ability and willingness to service its debt—without resorting to high inflation—will drive up interest costs and eventually impact America’s international standing negatively.

While investors continue to gobble up U.S. debt, which now exceeds $25 trillion, the $114 trillion in additional deficits CBO projects over the next 30 years pose serious questions about whether there will be enough appetite for markets to absorb such high levels of government debt. Troubling too is how much productivity‐​enhancing private investments will suffer because of crowding out. The prudent choice is to restore fiscal sustainability during times of peace and economic strength, reversing America’s unsustainable debt crisis while it’s still possible.

National defense is a core responsibility of the federal government. To maximize Americans’ safety and prosperity, prudence should guide both strategy and the budget. A dire fiscal crisis would erode the economic foundation of America’s strength, limiting U.S. capacity to defend its vital interests at home and abroad.

Crowding out of defense spending as a budget priority

Entitlements are increasingly dominating the federal budget. Since 1962, Social Security, Medicare, Medicaid, and other income security programs such as food stamps have grown four times larger as a share of GDP and consume more than half of the federal budget. By comparison, defense spending declined by a factor of three as a share of GDP, from 9 percent of GDP in 1962 to 3 percent of GDP by 2022. Defense spending makes up less than one‐​fifth of the budget, despite growing in real, inflation‐​adjusted terms as entitlement spending has claimed an increasing share of the taxpayer burden. In real terms, annual defense spending has increased by nearly $200 billion between 1962 and 2022. Meanwhile, annual entitlement spending has grown by $3.3 trillion over the same timeframe. The graphic below shows how entitlements have grown to consume a greater share of total non‐​interest spending over time.

As entitlements consume a larger share of the budget, this exerts downward pressure on other budget priorities. Former Principal Research Scientist for Massachusetts Institute of Technology’s Security Studies Program Cindy Williams explains,

“Absent significant reform or a major expansion of the total federal budget, the rising costs of Social Security, Medicare, and Medicaid will continue to crowd out defense spending. In the extreme, if federal budgets are held near today’s levels as a share of GDP, nondefense discretionary spending is not reduced significantly, and mandatory spending is not brought under control, there will soon be no money left for defense.”

Defense has also been a prime target for cuts across several congressional efforts to reduce government spending. The Manhattan Institute’s Brian Riedl examined 14 major deficit‐​reduction negotiations since 1980. More than any other category, legislators tend to reduce defense spending during fiscal consolidation periods. Cuts to defense discretionary spending produced the largest savings in four of six deficit‐​reduction deals. Despite entitlements primarily driving rising deficits, mandatory spending reforms in these deals were modest at best. It seems politically easier to keep targeting discretionary spending for cuts than to tackle the key driver of rising spending: entitlements.

For those in favor of restraining the scope of U.S. military engagement, a fiscally restrained government may have some upside. Cato’s Justin Logan and former Cato research fellow Ben Friedman argue that depressed economic growth and rising interest rates driven by high debt could make the defense budget an increasingly likely target for cuts. Logan and Friedman write,

“The U.S. military of the 2010s and 2020s will likely have a moderately less ambitious strategy and smaller budget than that of last decade. But the ambitions will still be hegemonic and the budget massive, hardly those of a normal country concerned chiefly with its own affairs. Unfortunately, the old Bolshevik saying, ‘‘the worse, the better’’ may apply for those seeking to rein in American military ambition. Ironically, we are left to push for military restraint while rooting against the conditions liable to produce it.”

In this way, a smaller U.S. defense budget would put real limits on unnecessary and self‐​defeating American military activities overseas by, constraining American legislators. Paradoxically, some level of defense budget constraints could improve U.S. national security by reducing our involvement in military conflicts that are not in America’s national interest.

Apply a defense savings mechanism to the broader budget

The United States’ unsustainable fiscal trajectory is almost entirely driven by rising interest expenses and entitlement spending. Legislators must work together to reform the major entitlement programs to avoid a potential debt crisis, massive tax increases, and lagging economic growth. One idea gaining traction is a debt commission to assist legislators with adopting budget reforms to stabilize the growth in the debt.

The 1988 Base Realignment and Closure Act (BRAC) successfully addressed the politically thorny issue of closing military bases and can serve as a model for Congress’s debt commission. BRAC established an independent commission to select military bases for closures, with recommendations that were approved by the President being adopted by default in Congress unless legislators successfully passed a resolution of disapproval. BRAC successfully bypassed special interest politics and congressional gridlock to free up funding for more essential defense priorities. Congress should consider establishing a BRAC‐​like, independent fiscal commission to recommend changes to stabilize the debt at no more than 100 percent of GDP over the next 10 years.

A well‐​designed commission will be composed of a diverse group of experts, guided by clear goals established by Congress, and whose recommendations will be self‐​executing after Presidential approval; benefitting from so‐​called fast‐​track authority. Asking members of Congress to affirmatively vote for entitlement reforms recommended by such a commission will most likely undermine the debt commission’s recommendations from becoming law. Few legislators are willing to stick their necks out in support of necessary and yet unpopular changes to Medicare and Social Security.

Unsustainable fiscal policy imperils American economic and military strength. By reforming entitlement programs and reducing spending, legislators can prevent high debt from undermining America’s prosperity and security. A well‐​designed debt commission can help Congress to see this through.

Gabriella Beaumont-Smith

A bipartisan group of Senators, led by Senator Tammy Baldwin (D‑WI), introduced the Country‐​of‐​Origin Labeling (COOL) Online Act on May 3, 2023. Built on the pretext that American consumers want to purchase more “Made in America” goods, the proposed bill mandates imported products “to be introduced, sold, advertised, or offered for sale in commerce on an internet website” are clearly and conspicuously marked with the country‐​of‐​origin. While this proposal may seem benign, this legislation will burden U.S. businesses, and ultimately consumers.

COOL laws are not new. Retailers are required to notify customers with country‐​of‐​origin labeling for certain foods. Supporters of this type of labeling argue that it helps inform consumers and falsely asserts that people are willing to pay more for this information. In reality, these laws are burdensome for producers and consumers. For example, the United States Department of Agriculture estimated that mandatory country‐​of‐​origin labeling for beef and pork products would cost over $9 billion over 10 years, and U.S. consumers’ purchasing power in the 10th year would fall by $212 million. The COOL Online Act applies to a much broader range of goods than beef and pork products, therefore, the imposed costs of this law would be much greater.

Further, COOL is a well understood non‐​tariff barrier and protectionist scheme. This bill likely would violate World Trade Organization (WTO) rules on non‐​tariff barriers as it is not simple, transparent, or predictable, and would likely have restricting, distorting, or disruptive effects on trade. In 2015, the WTO affirmed Canada’s claims that U.S. COOL requirements violated WTO rules, resulting in $1 billion in retaliatory tariffs.

Ecommerce platforms host millions of small businesses and independent sellers whose products are sourced from all over the world, making it more difficult to ascertain origin. Requiring these platforms to track and comply with country‐​of‐​origin labeling for millions of products threatens to raise the cost experienced by both businesses and consumers. Information about origin can more easily be included by retailers or sellers in their product descriptions and advertisements on the platform. In fact, since 2021, Amazon has required sellers to provide country‐​of‐​origin information.

Determining the country of origin is an extremely complex issue and is reliant on clear definitions traditionally established in trade laws enforced by the United States Customs and Border Protection (CBP). However, enforcement of the proposed COOL Online Act would be a far more complicated process, particularly as the bill proposes providing broad discretion to the Federal Trade Commission (FTC). While the bill includes a memorandum of understanding provision between CBP and the FTC, inserting the FTC at all seems unnecessary and likely to cause confusion in the implementation and enforcement of the law, if passed.

COOL Online risks shrinking the impact that ecommerce platforms can have in supporting the growth of businesses that use their services, ultimately harming U.S. workers, business owners, and consumers. This policy not only threatens to significantly raise the costs for businesses utilizing ecommerce platforms, just as it raised costs for producers, packers, and retailers for certain food products subject to mandatory COOL, but also potentially leaves U.S. businesses vulnerable to retaliatory tariffs imposed by trading partners.

As this bill is considered, it begs the question whether such labeling actually promotes the best interest of American businesses and consumers. While some Americans may prefer buying American‐​made products and some say they are willing to pay a premium of approximately 11 cents for “Made in America” products, origin is not important to everyone. If consumers truly demand origin labeling, businesses will be incentivized to provide it in a bid to increase sales. There is no good reason for Congress to intervene and impose costs on businesses for information that can be provided as consumers, not policymakers, demand.