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Jai Kedia

A few months of hotter‐​than‐​expected inflation numbers have led to a renewed debate around how entrenched inflation has become. Most recently, the February Consumer Price Index increased 0.4% (4.8% annualized), driven primarily by shelter and gasoline which accounted for 60% of the overall increase in price level. Energy increased by a massive 2.3% in February alone. Despite these scary numbers, inflation is still trending in the right direction. This article will show that the elevated components of inflation—shelter and energy—do not accurately portray economic conditions.

In a free market‐​based economy such as the US, a central bank should do as little as possible since most economic fluctuations revert to trend through stronger and more informed market forces. When a (well‐​intentioned) central bank responds to incorrect price signals, it risks causing further damage by unnecessarily crushing credit markets and dampening real activity. The Fed rushing to respond to February’s elevated inflation would be an example of such a mistake.

Figure 1 shows two measures of CPI inflation—owners’ equivalent rent (OER) and the aggregate index less shelter since 2010. Both inflation metrics are computed by calculating the percent change of their respective quarterly price indices and then annualized (multiplied by 4). The aggregate metric was high post‐​pandemic but eventually started to fall in late 2022. Aggregate inflation less shelter maintained this downward trend and remained below 2% through most of 2023. The graph shows—especially since the pandemic—that shelter inflation as measured through the OER significantly trails the rest of the CPI. (In economist speak, it is a lagged measure.) OER inflation hit its peak 2 quarters after other price measures and similarly lagged in its recovery back towards trend.

Rather than indicating that inflation is entrenched, this increase in the OER is an indicator that shelter prices increased some time back. The problem is that those price increases are just now showing up in the CPI.

Figure 1 also shows median consumer one‐​year ahead inflation expectations as collected by the Michigan Survey of Consumers. Keeping expectations anchored is a vital component of managing inflation and this metric too is trending down since its post‐​pandemic high. It is important to note that median expectations are slow to adjust and typically do not fluctuate drastically, as the graph shows. The series trended gently upward during the worst of the inflationary episode, and it is likewise gently trending down. Again, this does not indicate that high inflation is entrenched. Instead, it offers further evidence that long‐​term inflation is headed in the right direction.

When can shelter prices be expected to catch up with the rest of the economy’s prices? Figure 2 shows the cross‐​correlations between the two CPI inflation metrics from Figure 1. Cross‐​correlations measure the similarity between any time series and a lagged version of another time series. Plotting the cross‐​correlation between these series at a variety of lags, as done in Figure 2, allows a researcher to determine the lag length at which the two series are most similar. The figure shows that CPI OER inflation is most similar to the aggregate of all other CPI components at a lag of 3 to 5 quarters. This suggests that consumers will likely have to wait 9 to 15 months to see rent prices follow the rest of the economy and revert to trend. (It is also important to note from Figure 1 that OER inflation trend is higher than the other metrics; it is reasonable to expect rent inflation to fall but not to the level of other price inflation metrics.)

Reporting on inflation has also expressed concern over its other elevated component—energy. Figure 3 compares CPI energy inflation and core (i.e., less food and energy) CPI inflation since 2010. Both metrics are computed like the inflation metrics from Figure 1.

As the chart shows, inflation volatility in the energy sector is significantly higher than the core CPI. Values for energy inflation range from ‑52% to +45% in this period. Core CPI inflation only fluctuates between ‑2% to +7%. Since 2010, the standard deviation of energy CPI inflation is 18.49% while core CPI is only 1.64%; as such, energy price inflation is over 11 times as volatile as the core CPI. Like rent inflation, energy inflation does not accurately reflect any truths about the current and future path of inflation—it is simply too volatile and acts in a very different manner to core CPI. It should not be used to express concern about elevated price levels.

To be clear, it is useful and informative to have reporting on a variety of inflation metrics. The concern is if policymakers base their decisions on improper price metrics. If the Fed were to intervene and discretionarily react to short‐​term price fluctuations that stem from rents or energy, it would only exacerbate current economic problems. For example, an improper rate increase could further tighten credit markets, increasing default rates on mortgages or credit card debt that are already very high. Sound policymaking accounts for such distinctions. Despite the hotter than expected inflation numbers, the conclusion to be drawn remains that aggregate inflation continues to trend down.

Colleen Hroncich

“We are doing this in collaboration with families, and it feels like fresh air and freedom.” These inspirational words from Jack Johnson Pannell really encapsulate his experiences in founding Trinity Arch Preparatory, an all‐​boys Christian school in Phoenix.

After a career in finance and politics, Jack decided to open an all‐​boys charter school in Baltimore in 2015. Despite—or maybe because of—the success of the school, he says he faced an “oppressive authorizer” who made everything a challenge. “It almost became a threat to the school district for us to be as good as we were,” he explains.

Around two years ago, a friend asked Jack if he’d ever thought about opening an microschool. Jack had never heard of a microschool and wanted to know more. His friend sent him information on microschools in Colorado and Florida, so he contacted the school leaders and learned more. Then he made plans to go to Florida and Arizona to learn about education savings accounts (ESAs) and how they work.

Apparently Jack liked what he heard—he packed his bags and moved to Arizona to open a microschool. He participated in the KaiPod Catalyst program to help get Trinity Arch Prep off the ground. He says his first task was finding a location. “I’ve been on the real estate hunt for years for a charter school for 3–400 people. Here I was just looking for space for ten. We found a great landlord in an athletic facility for youth basketball, and that helps us be a sports‐​focused school.”

“Every day is an experiment,” he continues. “This is our pilot year, and we’re experimenting with alternatives to traditional education. To not have a teacher standing in front of the room with a chalkboard and 30 kids. To not spend all that time getting kids quiet and moving from one room to another. We’re all in an 800 square foot space. We just bought a new beanie bag for the boys who want to be on the floor more than they want to be at a desk.”

To achieve the goal of self‐​paced learning, they use a variety of computer‐​assisted programs. “The quality of educational training online has approved tremendously,” Jack explains. “We find out whatever works well in terms of assisting us with side‐​by‐​side tutoring. Like I said, we don’t have a teacher standing at a board educating our kids. We’re self‐​paced, moving the boys along their own learning plan.”

Jack purposely designed the academic curriculum to reach boys aged 10–14 in a way that encourages them to take ownership of their education. The goal is to graduate well‐​rounded scholars, lifelong learners, and individuals of character. According to the website, “A well‐​prepared Trinity Arch graduate should be able to think critically, reason analytically, communicate effectively, solve problems creatively, and exhibit values‐​based self‐​leadership.”

The school offers flexible scheduling for homeschooling families who want a part‐​time option and for families who want a full‐​time school experience. Jack says the student body is about half and half. In the full‐​time option, Fridays have students alternating between learning from home and participating in learning expeditions. The part‐​time students can participate in the learning expeditions for an additional fee.

While his Baltimore charter school’s student body was predominantly from lower income families, Jack wants a diverse socioeconomic background at Trinity Arch so children from all backgrounds can learn together. “And we have that,” he says. “We have a third high income, a third middle income, and a third low‐​income families.” He credits Arizona’s ESA program, which allows a portion of state funding to follow children to a variety of educational options, for making that possible.

Jack is bullish on the prospects for the future of innovative education. “My overarching goal is to prove ‘Can we do K‑12 education in 10 years or 9 years?’ Because we waste so much time in traditional schools,” he says. “Every boy in our school is doing work one or two grade levels ahead. So we’re able to accelerate learning in a way that traditional schools can’t because we have a self‐​paced curriculum and process of learning.”

Jack recently joined four other school founders for a Cato Institute panel, Showcasing Education Entrepreneurs. To learn more about Trinity Arch Prep and the other microschools and hybrid schools that participated in our event, you can watch the recording online. And be sure to browse the full library of Friday Feature blogs to learn about a wide variety of exciting educational options.

Marc Joffe

“You can’t manage what you can’t measure” is an aphorism frequently applied to managing companies, but it applies equally to complex government programs like Medicaid. The federal/​state initiative reimburses medical services provided to over 80 million beneficiaries in multiple categories using a variety of service delivery mechanisms. Assessing federal and state Medicaid policies is complicated by the unavailability of comprehensive, public data.

The Centers for Medicare and Medicaid Services (CMS), a unit of the federal Department of Health and Human Services, has a large trove of Medicaid payment data that could be quite helpful for policy analysis. This data resides in CMS’s Transformed Medicaid Statistical Information System (T‑MSIS).

Unfortunately, this data set is not made available to the public. Instead, interested users must purchase it at costs ranging into the tens of thousands of dollars and obtain approval from an Institutional Review Board (IRB). An IRB is a body (typically at an academic institution) that reviews research protocols to ensure that human subjects are not mistreated.

These barriers effectively limited access to detailed Medicaid data to government researchers, a few academics, and large non‐​governmental research organizations like the Urban Institute and the Kaiser Family Foundation. Taxpayer advocates and good‐​government watchdog organizations are effectively barred from obtaining this data, even though analyzing the files could well yield findings of waste and ideas for greater efficiency.

While researching our Cato Policy Analysis, Containing Medicaid Costs at the State Level, my colleague Krit Chanwong and I came across a report by the HHS Office of Inspector General (OIG) that relied on T‑MSIS data. Cato filed a Freedom of Information Act (FOIA) request with HHS asking for the T‑MSIS data that OIG analyzed.

Unfortunately, HHS allowed seven months to pass without responding to Cato’s FOIA request despite the fact that federal law mandates a response within twenty business days consequently. Cato has decided to file suit in the Federal District Court of the District of Columbia.

The suit, which can be tracked on CourtListener, is entitled Cato Institute v. Department of Health and Human Services, case number 1:24-cv-00719. Cato is asking the court to declare HHS in violation of federal FOIA Law, order HHS to search for the data and release it (unless it is covered by a FOIA exemption), and to pay court costs.

Hopefully, the act of defending the case will compel HHS to revisit its stance on T‑MSIS data. It should be freely available to any organization that has the capacity to process and analyze very large datasets.

Scott Lincicome and Alfredo Carrillo Obregon

In a “highly unusual” move, President Biden yesterday voiced his opposition to Japan‐​based Nippon Steel’s bid to acquire US Steel, saying that it’s “vital” for US Steel “to remain an American steel company that is domestically owned and operated.”

Vital for whom?

If the president were concerned about the vitality of the company, as well as the US steel industry and the US economy more broadly, he’d quietly let the deal proceed. As Scott Lincicome explained in a recent column, this isn’t your grandfather’s US Steel: after decades of poor management and stagnation, the company is today only the third largest steel producer in the United States (27th in the world) and employs just 20,000 people—less than the number of manufacturing jobs the US economy gained in November 2023 alone.

Nippon Steel, meanwhile, is not paying a large premium—over $5 billion above US Steel’s market capitalization—to shutter the company. It’s doing so because it sees an opportunity for growth and expansion in an American steel market that—thanks to US protectionism—has long been difficult to access. Nippon Steel management has accordingly stated their intention to invest in and enhance the technology of US Steel’s production facilities—investment that most steel industry experts and US steel‐​consuming manufacturers believe will benefit US Steel, its American workforce, and the broader manufacturing sector.

Such a result would hardly be uncommon. Foreign investments—including by Japanese companies, which had invested $712 billion in the United States by end‐​2022 and employ 963,000 Americans—have often benefited the US companies being acquired and their surrounding communities. The investments can result in increased spending in R&D and capital equipment and internal changes in management or business practices—precisely what both Nippon Steel and US Steel have told their shareholders about the current acquisition.

The president’s opposition also can’t be said to be about the “vitality” of US national security. As Lincicome also explained, Japan has been one of the United States’ closest allies for 60 years, hosts US military personnel and Department of Defense (DOD) civilians and their families and acquires more than 90 percent of its defense imports from the US. Similarly, Japanese investors haven’t been a concern for the Committee on Foreign Investment in the United States (CFIUS), which is reviewing the Nippon deal, since the 1980s. The House Select Committee on the Chinese Communist Party has even gone so far as to recently recommend that Congress put Japan on the CFIUS “whitelist” of close allies. Nippon Steel is also far removed from the days in which it was closely connected to the Japanese government, and almost a quarter of it is owned by foreign (i.e., non‐​Japanese) entities. And if a war or other national emergency arose that did necessitate the federal government nationalizing some of company’s US output, Nippon’s ownership would be immaterial.

This, of course, is extremely unlikely, and more realistic scenarios present even lower risks—or even argue for supporting the deal outright. The Defense Department doesn’t currently buy from US Steel, and DOD needs just 3 percent of domestic steel production to meet its procurement obligations. As former deputy undersecretary of defense for industrial policy William C. Greenwalt recently explained, in fact, the current steel industry—save a couple mills (not owned by US Steel) that produce defense‐​grade metals—“has not only been mostly worthless to national security—it has arguably become detrimental to it” because of its support for protectionism. In particular, the “adoption of domestic source restrictions that torture DOD’s supply chain to buy de minimis levels of steel found in products such as casings, fasteners and spare parts, often at higher prices than it could buy from abroad.” Thus, when DOD urgently needed more steel for its Mine‐​Resistant Ambush Protected (MRAP) program during the 2000s, most of the US steel industry declined to help, while one US company was blocked by “Buy America” restrictions because it sourced crude steel from Mexico. Thus, DOD instead turned to our allies for help, buying steel from Sweden, Germany, Israel, and Australia.

Given these realities, most independent observers understand President Biden’s decision as motivated by politics, not economics or national security. In particular, the president believes he needs the support of unions that oppose the Nippon Steel deal, and his opponent, Donald Trump, has publicly pledged that he would block it if elected. Thus, there’s really only one thing for which the president’s opposition can arguably be said to be “vital”: his reelection prospects.

Krit Chanwong and Marc Joffe

On February 28, 2024, Mississippi’s House of Representatives voted overwhelmingly to approve the expansion of the Medicaid program to all adults earning less than 138 percent of the federal poverty line. 

Some of Mississippi’s lawmakers approved of Medicaid expansion because they believed the policy would increase labor force participation because healthy people are likelier to participate in the labor market. Thus, putting more people on Medicaid would increase the number of healthy people and lead to increases in the labor force. To ensure that this sequence of events occurs, Mississippi has imposed a community engagement requirement, conditioning Medicaid expansion coverage on working, getting an education, or participating in work‐​related training.

Mississippi’s labor force participation rate is indeed very low, both by historical standards and compared to other states. However, from 2018 to 2019, Arkansas enacted an almost identical policy to Mississippi’s proposed legislation. Arkansas’s work requirements did not meaningfully improve labor force participation and should serve as a lesson for Mississippi’s legislators.

Medicaid Work Requirements and Labor Force Participation: Arkansas’s Experience

In 2018, the Department of Health and Human Services (HHS) encouraged states to make work requirements part of their Medicaid programs. Arkansas was one of the 13 states that did.

Arkansas’s Medicaid work requirements program was called Arkansas Works. The program required all Medicaid expansion beneficiaries aged 19 to 49 to “work or engage in specified educational, job training, or job search activities for at least 80 hours per month.” Those who failed to comply and did not receive an exemption would be disenrolled from Medicaid. The HHS secretary approved Arkansas Works on March 5, 2018, allowing the program to go on until the end of 2021. In April 2019, a federal judge ended the program.

Arkansas Works was filled with bureaucratic confusion. A December 2018 focus group run by the Kaiser Family Foundation found that beneficiaries “were not receiving notices at their correct address, despite having reported an address change to the state.” Moreover, a February 2019 Kaiser Family Foundation brief found that 5 percent of all Arkansas Works enrollees had their cases dropped due to problems with communication—not with failures to meet work and reporting requirements.

Moreover, Arkansas Works also did not meaningfully increase the state’s labor force participation rate. Figure 1 shows various measures of Arkansas’s labor force participation rate from 2017 to 2020. The periods for which Arkansas Works was active are shown in between the dashed vertical lines.

Arkansas’s total labor force participation did not increase. Moreover, prime‐​age (25–54) workforce participation rate during this period also did not increase meaningfully, hovering around 78 percent in 2018 to 80 percent in 2020.

What is most striking, however, is that labor force participation rates for Medicaid beneficiaries aged 19 to 49 did not meaningfully increase. From 2018 to 2019, this demographic’s labor force participation increased from 54 percent to 55 percent. This increase, however, was much slower than the 14 percent increase in labor force participation that occurred from 2017 to 2018. Moreover, this increase continued even after Arkansas Works was put on hold. So, the effects of Arkansas Works on the labor force participation rate seem to be minimal at best.

The above analysis is confirmed by a more sophisticated observational study of 2,706 individuals conducted by Harvard University researchers. This study found “no significant changes in employment, number of hours worked, or community engagement status between 2018 (during work requirements) and 2019 (after work requirements were put on hold).”

What accounts for the failure of Arkansas Works to increase labor force participation? In Arkansas’s case, it is because “95% of beneficiaries [surveyed by the Harvard University researchers] already met the state’s Medicaid work requirements or should have been eligible for an exemption.” And this failure was expensive: the Government Accountability Office estimates that it cost $26.1 million to administer Arkansas’s Medicaid work requirements program.

Arkansas’s experience with work requirements should inform Mississippi for two reasons. First, Mississippi’s work requirements program is almost identical to Arkansas’s program, with only slight differences in age limits. Second, Mississippi and Arkansas are two states with similar demographic profiles. As such, it is likely that Mississippi’s Medicaid work requirements will simply result in millions of dollars in additional spending without any appreciable improvements in outcomes.

How to Increase Mississippi’s Labor Force Participation?

Figure 2 and Figure 3 show long‐​term trends in Mississippi’s labor force participation rate, with the horizontal dashed red line showing the 40‐​year average.

Although Mississippi’s total labor force participation rate is at an all‐​time low, Mississippi’s prime‐​age labor force participation rate (those aged 25–54) is close to the long‐​term average. This implies that population aging has been driving much of Mississippi’s labor force decline. Figure 4 verifies this.

Medicaid expansion does not provide any tools for remedying an aging population. In fact, it is unclear whether anything can be done. But if Mississippi’s legislators genuinely want to increase the Magnolia State’s labor force participation, they should consider occupational licensing reform. Reforming over‐​stringent occupational restrictions allows more people to be qualified for jobs. This would directly increase the labor force participation rate. It would also increase the number of services available, thus reducing the costs of services to consumers.

Figure 5 plots the relationship between the 2022 occupational licensing score from Cato’s Freedom in the 50 States (higher is freer) and the December 2022 labor force participation rate. Although the relationship is not perfectly linear, Figure 5 suggests that there is a moderately positive relationship between more liberal occupational licensing regulations and higher labor force participation.

Mississippi’s occupational licensing score has decreased significantly, falling from a rank of 14th in 2000 to 26th in 2022. Reducing barriers to work is more likely to reinvigorate Mississippi’s labor market than the expansion of the welfare state.

Jeffrey A. Singer

Last year, Tennessee became the first state to make it easier for competent and experienced doctors in other countries who migrate to the United States to provide care to its residents. Unlike Canada, Australia, the European Union countries, and many other developed countries, states require such doctors to repeat their entire residency training in an accredited residency program in the US—even if they have been practicing for years in their home countries—and pass the standardized US Medical Licensing Exam (USMLE).

Such demanding requirements cause many experienced physicians who can’t get a spot in a residency program—or can’t afford to repeat the education and training they already received—to find work in other fields. As it gets increasingly difficult to get prompt appointments with health care providers and with average wait times exceeding three weeks, these experienced foreign doctors could be helping reduce the bottleneck. But state licensing requirements won’t let them.

Beginning in 2025, Tennessee will grant provisional licenses to international medical graduates who have full licenses in good standing in other countries and who pass the same standardized medical exams that US medical graduates must pass. After two years of supervision by a Tennessee‐​licensed physician, they can receive unrestricted licenses.

This year, lawmakers in several states are following Tennessee’s lead and reforming licensing laws that block patients from accessing care from experienced international medical graduates.

Earlier this month, Florida Governor DeSantis signed S 7016 into law. The law grants provisional licenses to international medical graduates who have practiced for at least four years in another country and received education and training outside the United States that is “substantially similar” to the education and training physicians obtain in this country without repeating a residency program. After two years of working under supervision, their license becomes unrestricted.

Last week, Virginia lawmakers passed and sent to Governor Glenn Youngkin’s desk H 995. The new law grants provisional licenses to international medical graduates who have “received a degree of doctor of medicine or its equivalent from a legally chartered medical school outside of the United States recognized by the World Health Organization, has been licensed or otherwise authorized to practice medicine in a country other than the United States, and has practiced medicine for at least five years.” Like Florida and Tennessee, international medical graduates may receive unrestricted licenses after having worked under supervision for two years.

The Wisconsin Assembly passed and sent to the Senate AB 954. Like Tennessee, Florida, and Virginia, the law would grant provisional licenses to international medical graduates who completed a foreign residency program or a postgraduate medical training program that is “substantially similar to a residency program” in the United States. The Wisconsin reform provisional license would be available for graduates who have practiced in another country for at least five years. It would be convertible to an unrestricted license after three years of supervised practice.

Idaho lawmakers are considering H 542, which would grant provisional licenses to international medical graduates with substantially similar training to US training programs who have been licensed to practice in a foreign country for at least three years. The provisional license would become unrestricted after three years of supervised practice in Idaho. The bill passed the House and awaits a final vote in the Senate.

In all the above examples, international medical graduates are expected to pass all three steps of the USMLE that domestic physicians must pass.

Arizona lawmakers set out to pass similar international medical graduate reform this session, but after several meetings with “stakeholders,” the bill became so watered down that it is unlikely the bill will attract enough candidates to significantly improve access to health care, especially in rural and remote areas of the state. The bill, SB 1406, would grant provisional licenses to international medical graduates who are currently licensed and have been practicing for at least five years in one of the following countries: the UK, Ireland, Australia, Switzerland, Hong Kong, Singapore, New Zealand, South Africa, Israel, and Canada. It’s curious to include Canada on the list since licensed Canadian doctors who pass the USMLE are already eligible for unrestricted licenses in all 50 states and the District of Columbia.

The Arizona bill only grants provisional licenses to these first‐​world doctors if they practice for four years under supervision in areas in the state that the Department of Health and Human Services designates as “medically underserved.” After four years, these international medical graduates can seek an unrestricted license.

It isn’t easy to imagine a scenario in which a doctor gives up a practice in London, Sydney, Dublin, or Geneva to become an employed physician for four years in a remote part of Arizona. International medical graduates who want to leave Hong Kong will find more opportunities in states like Tennessee, Florida, Virginia, Wisconsin, and Idaho.

An Arizona Senate vote on SB 1406 is imminent. If the Senate passes the bill, it will go to Governor Katie Hobbs’s desk for her signature.

An important takeaway is that more state lawmakers are recognizing that state licensing laws make it more difficult for patients to access competent, experienced health care practitioners from other countries who are eager to serve them. Hopefully, the trend that Tennessee lawmakers started last year will continue.

Adam N. Michel

Last week, the Ways and Means Committee held a hearing on Pillar One of the Organisation for Economic Co‐​operation and Development’s (OECD) plan to remake the global business tax system and raise taxes on American businesses in the process.

Pillar One consists of two parts, Amount A and Amount B. Amount A is a multilateral convention to redistribute about $200 billion of large multinational corporate profits to countries based on customer location, regardless of a company’s physical location. An accompanying Joint Committee on Taxation report estimates that US multinationals account for 70 percent of Amount A’s redistributed profits, resulting in annual US revenue losses between $100 million and $4.4 billion (using 2021 data). The multilateral convention is designed so that it will not take effect without US Senate ratification (requiring a two‐​thirds vote).

Amount B of Pillar One is a new formulaic system for apportioning income between countries for routine marketing and wholesale distribution arrangements. The more simplified system is intended to limit aggressive and expensive transfer pricing audits by countries seeking to expand their tax base.

I review the major features of the international tax system, give background on the OECD inclusive framework process that resulted in Pillar One, and discuss reforms in my recent Cato policy analysis “Bold International Tax Reforms to Counteract the OECD Global Tax.”

Each of the witnesses and most of the committee members highlighted numerous ways that both components of Pillar One (and Pillar Two, for that matter) are fundamentally flawed. However, none of the witnesses were willing to tell the committee what they needed to hear: the Pillar One cure is worse than the digital tax disease. It’s time for the United States to abandon the OECD inclusive framework and pursue reforms prioritizing lower taxes and true international tax stability.

Are Digital Taxes Worse than Amount A?

Pillar One is intended to replace a patchwork of digital services taxes and other novel tools that many countries use to tax large US technology firms on the revenues from users in their countries. By replacing digital services taxes, Pillar One’s value is to reduce the economic costs of discriminatory unilateral taxes on digital products and return stability to the international tax system.

After more than five years of work, it is eminently clear that predictability and certainty are, at best, secondary goals in the OECD negotiations. Instead of prizing stability, Pillar One primarily aims to extract additional revenues from US businesses. France and a handful of other mostly European countries originally enacted or proposed digital services taxes as a mechanism to force action at the OECD. Their goal has always been to increase taxes on domestic US corporate profits through digital services tax or the OECD. The incentives in the Pillar One negotiations have been flawed from the start.

By capitulating to the demands of the most aggressive countries, the OECD Pillar One process encourages future agitation with unilateral taxes by countries seeking additional revenues or new forms of taxation. The inclusive framework institutionalizes destabilizing unilateral actions. Thus, Pillar One worsens international tax uncertainty by opening the door to redistributing taxing rights based on novel principles in response to bad actors.

Discriminatory taxes on digital products and services are economically costly, but US policymakers should remember that, like tariffs, the costs of digital services taxes fall primarily on consumers in other countries. If France, Canada, or any other country wants to impose new taxes on its citizens, that is its choice. Similar to the trade context, retaliatory measures—or new global tax systems—are also not a sensible solution. Poor domestic policy of other countries is not a good reason to force a novel international tax increase on a larger share of businesses, creating even more uncertainty and raising costs. Without the promise of a globally coordinated replacement, these economically costly domestic taxes are also less likely to proliferate.

Failure of Stability Agenda

The testimonies of the four witnesses made it clear that the current OECD Pillar One work product has failed at its primary goal of ensuring tax certainty in a number of fundamental ways. I’ve explained before how various arbitrary formulas and thresholds in Amount A will create instability in the final multilateral convention. The witnesses made three additional points that deserve emphasis.

Digital services taxes, not prohibited. The multilateral convention lists eight digital services taxes meant to be replaced by Pillar One and outlines other prohibited activities that resemble these taxes. However, the Amount A rules allow some countries to keep their existing digital services taxes if they decide to opt out of the multilateral convention, and according to witness Rick Minor, the multilateral convention includes “vague exceptions” that could lead to new discriminatory digital taxes in the future, a point echoed by fellow witness Daniel Bunn.

Expands double taxation. Redistribution of taxing rights based on new principles requires an offsetting reduction in the losing jurisdictions to ensure the same profits are not taxed twice. The multilateral convention does not fully make these necessary adjustments, opening American firms to new forms of double taxation. Amount A allows tax credit systems (which can be inadequate for fully adjusting tax liabilities) instead of requiring the better exemption method. These adjustments also rely on uncertain changes to domestic tax laws across almost 140 signatory countries. There are additional concerns around the treatment of withholding taxes and gaps in how the marketing and distribution safe harbor account for certain taxes paid.

Amount B falls short. If Amount B protected firms from the uncertainty of aggressive transfer pricing audits and simplified a highly complex system, it could be worthwhile. Unfortunately, Amount B will likely add uncertainty and future instability rather than fix it. The benefits of predictability are directly undermined by the new rules being entirely optional, their narrow application to marketing and distribution of tangible products, and the continued possibility of new nonquantitative, subjective methods for applying Amount B.

While each of these problems is fixable, they are the product of an OECD process held captive by countries more concerned with increasing global business taxes than ensuring international tax certainty. 

Multilateralism Works When It Is a Limiting Institution

Multilateral policy coordination is worth pursuing when it is used to restrain the expansion of harmful unilateral domestic policy. This is the chief selling point of the OECD’s tax work: multilateral disarmament of aggressive, duplicative, and discriminatory tax mechanisms. Instead of pursuing this type of mutually beneficial coordination, the OECD has designed a system to replace unilateral taxes with a similar global tax system that expands state power, limits market competition, and increases the costs of cross‐​border investment. By abandoning its historical framework of mutual agreement to limit costly tax and trade barriers, the OECD project to expand taxing rights and reallocate sovereign tax bases will be unable to deliver the promised stability.

Instead, the United States has the opportunity to opt out of the OECD system and redefine itself as the world’s premier business destination by focusing exclusively on increasing the attractiveness of the United States as an investment destination. Congress could lead pro‐​growth global tax reform by example. It could reduce the corporate tax rate, permanently expand full expensing to attract new domestic investment, and complete the transition to a fully territorial tax system. These reforms would directly support American workers and create strong incentives for good policy in other countries.

Michael F. Cannon

Any day now, the Biden administration could issue a regulation that, if it mirrors what the administration proposed in July, would take comprehensive health insurance away from some 500,000 consumers. Worse, exposing consumers to those risks appears to be the purpose.

Some three million consumers are opting to purchase “short‐​term” health insurance plans instead of ObamaCare plans. The Congressional Budget Office says short‐​term plans offer “comprehensive major medical” insurance with “lower deductibles or wider provider networks” at a cost “as much as 60 percent lower than premiums for the lowest‐​cost [ObamaCare] plan.” All this is possible because Congress exempts short‐​term plans from all federal health insurance regulations, including ObamaCare.

Under current rules, short‐​term plans can cover enrollees for 12 months, which is enough to get them to the next ObamaCare enrollment period. The Biden administration proposes requiring insurers to terminate all short‐​term plans after just four months. Enrollees who fall ill would lose their coverage and face up to 12 months without health insurance. The administration acknowledges this would expose consumers to “higher out‐​of‐​pocket expenses and medical debt, reduced access to health care, and potentially worse health outcomes.”

Next, the administration proposes to require short‐​term plans to warn consumers about the risks that the administration would prohibit those plans from covering. The idea appears to be that exposing consumers to completely avoidable risks would spur them to enroll in ObamaCare instead.

Today, the Cato Institute released my study, “Biden Short‐​Term Health Plans Rule Creates Gaps in Coverage,” which argues that the administration should abandon its proposal and that Congress should codify current rules for short‐​term plans. I hope you’ll give it a read.

Whatever one’s political leanings, we should all be able to agree that regulators should not make the products they regulate worse.

Romina Boccia

Below are abbreviated remarks I delivered before the US Joint Economic Committee on March 12, 2024. Read my full testimony “The Fiscal Situation of the United States.” Watch my testimony at 1:12:19–1:17:25 with responses to member questions at 1:31:45–1:32:54, 2:11:25–2:12:20, and 2:32:23–2:33:31.

Chair Martin Heinrich, Vice Chair David Schweikert, and members of the committee:

Thank you for inviting me to testify today. My name is Romina Boccia, and I am the director of budget and entitlement policy at the Cato Institute. The views I express in this testimony are my own and should not be construed as representing any official position of my employer.

I will make three main points:

First, higher spending is driving the growth in the public debt.

Second, the growth in Medicare and Social Security spending is the primary driver of the growth in the public debt.

Third, slowing the growth in spending must be coupled with pro‐​growth policies to secure America’s fiscal future and economic prosperity.

Our nation’s debt is growing at an alarming rate, with the Congressional Budget Office (CBO) projecting that debt borrowed in credit markets will exceed 170 percent of gross domestic product (GDP) in the next 30 years.

Current fiscal projections threaten Americans with higher taxes, reduced economic growth, higher interest rates, stifling inflation, and the tail risk of a severe fiscal crisis that exacerbates all these issues.

Even under fantastic revenue projections, spending‐​driven debt growth threatens US fiscal stability and Americans’ economic security. Despite CBO’s highly unrealistic projections about tax revenues rising by 50 percent over the next 10 years, spending will continue to outpace revenue. Baked into CBO’s baseline is the assumption that the Tax Cuts and Jobs Act will expire as scheduled under current law when neither political party has demonstrated an appetite for allowing that to happen.

Even taking CBO’s 10‐​year projections at face value, comparing them with historical spending and revenue averages highlights the unsustainability of current spending growth. Spending is projected to exceed 24 percent of GDP by 2034, compared to a 50‐​year average of 21 percent of GDP. Meanwhile revenues would also exceed their historical average of 17.3 percent of GDP, but by much less, just shy of 18 percent of GDP. Peacetime deficits of 6 percent of GDP are too high and not sustainable for long.

What’s driving this growth in federal spending?

Federal health care programs and Social Security are the biggest spending growth drivers, alongside increasing debt service costs. Health care and Social Security are responsible for nearly two‐​thirds of the growth in spending over the next 10 years, followed by interest costs.

Over the longer‐​term 30‐​year spending window, Social Security, health care programs, and interest costs continue to pose the biggest spending pressures, threatening to drive federal spending to 30 percent of GDP, from a 50‐​year historical average of 21 percent of GDP.

That would be a massive expansion in the size of government that could only be financed by higher taxes on all Americans—not just the wealthy. There isn’t enough money at the very top of the income distribution to make that math work.

As health care and Social Security spending balloon as a percentage of the economy, every other major budget category declines or stabilizes over the same 30‐​year period. Looking out yet further, the financial report of the US government details how Medicare and Social Security’s funding shortfalls are responsible for the entire long‐​term unfunded obligation. You read that correctly. The 75‐​year gap between noninterest spending and revenue collection of close to $74 trillion can be attributed to Medicare and Social Security—alone.

The key drivers of rising US deficits and debt are obvious.

Congress cannot effectively address the short‐​term or long‐​term growth in the federal debt without slowing the growth in old‐​age benefit programs and health care spending, or massively raising taxes on all Americans, bringing the US closer to European‐​style tax levels.

As Congress seeks to address the debt problem, legislators must not lose sight of preserving the economy’s capacity to grow. Shortsighted policies that raise taxes on investment and work can undermine debt stabilization if such policies dampen growth.

Spending‐​based deficit reduction, especially targeted at social and entitlement programs, is most effective at sustainably reducing deficits and the growth in the debt as a percentage of GDP. While revenues are likely to be part of any politically realistic debt‐​reduction proposal, legislators should focus on increasing revenues from economic growth and closing special interest loopholes that distort markets by picking political winners and losers.

As bleak as the US fiscal outlook is, there is light at the end of the tunnel. The House Budget Committee recently passed the Fiscal Commission Act, which seeks to stabilize the debt over 15 years, educate the public on the nation’s deteriorating fiscal state, and improve the Medicare and Social Security trust funds’ solvency over a 75‐​year window. This is a positive step.

It would be even more promising if Congress designed a fiscal commission based on the successful Base Realignment and Closure Commission, or BRAC, with independent experts, executive involvement, and fast‐​track authority to allow for default adoption of a commission plan.

The fiscal state of our nation is weak and worsening. Congress must act to reduce the growth in spending on health care and old‐​age benefits to secure a free, prosperous, and secure United States.

I look forward to your questions.

Read more about the Fiscal Commission Act of 2024 in “House Budget Committee Advances Fiscal Commission to Address Government Spending and Debt.”

Chris Edwards

President Biden’s new federal budget proposes high spending and huge deficits for years to come. The deficits are expected to boost government debt held by the public from $28 trillion this year to $45 trillion by 2034.

The budget baseline—which excludes Biden’s proposed policies—shows slightly higher debt growth over the coming decade. The Wall Street Journal reported, “The fiscal 2025 budget would cut the deficit by $3 trillion over the next decade,” and the Committee for a Responsible Federal Budget said, “President Biden does deserve praise for putting forward a comprehensive budget proposal that not only offsets new spending and tax breaks but would also reduce budget deficits by $3.3 trillion through 2034.”

But the Biden budget uses common accounting tricks to make the federal debt disaster look slightly less disastrous. One trick is pretending that nondefense discretionary spending drops sharply in the later years of the 10‐​year budget horizon. It would be great if Biden’s policies were laying the groundwork for such discretionary spending cuts, but they are not.

The chart shows the nondefense discretionary baseline and Biden’s proposed spending relative to gross domestic product (GDP). Proposed spending is above the baseline in the early years because that’s the spending Biden actually wants right now. Then in later years, proposed spending falls below the baseline to generate supposed savings. Those fake savings reduce the 10‐​year deficit totals, which the White House knows that reporters and think tanks focus on.

If nondefense discretionary spending remained at this year’s level of 3.5 percent of GDP, it would add about $2.5 trillion to deficits by 2034, including higher interest costs. That would be roughly a normal level for this category of spending, which has averaged 3.7 percent of GDP over the past five decades. I favor far lower spending, but 3.5 percent of GDP seems like a more realistic projection for Biden given his demonstrated big‐​spending approach. In other words, Biden has shown that he actually favors 3.5 percent of GDP, yet his budget pencils in out‐​year figures that pretend to be much more frugal.

Another accounting trick in the Biden budget is assuming that the proposed expansion of the child tax credit lasts just one year. If the budget had accounted for permanent extension, it would have added about $2 trillion to 10‐​year deficits.

Just these two accounting tricks total more in added spending than the $3 trillion that Biden gets praise for supposedly saving. The upshot is that 10‐​year presidential budget projections seem useless as indicators of fiscal discipline.

For further comments on Biden’s budget and federal spending, see the following: “President Biden’s Proposed Budget,” “The Fiscal Situation of the United States,” “How the Federal Government Spends $6.7 Trillion,” and “Reviving Federalism to Tackle the Government Debt Crisis.”