Stock

Chris Edwards

The federal “tax gap” is the amount of taxes owed but not paid, essentially the amount of cheating on federal taxes. All tax systems have tax gaps, and there are pros and cons of using tougher enforcement to reduce the gap. The size of the federal tax gap is not a major problem, as it has been stable over time relative to the size of the economy and is smaller than the average gap in Europe.

The IRS released a new estimate of the tax gap yesterday, which it billed as a “significant jump from previous estimates.” But when compared to the size of the economy, the new estimate is not a significant jump. Despite much political rhetoric to the contrary, tax cheating is not a growing problem for the economy.

The gross tax gap in 2021 was $688 billion, according to the IRS. After late payments and enforcement actions, the net tax gap was $625 billion. Of the net total, $475 billion stemmed from individual income taxes, $37 billion from corporate income taxes, $112 billion from payroll taxes, and $1 billion from estate taxes.

The new report includes gross tax gap estimates for prior years. The dollar values of the tax gap have increased over time, but the gap is similar to previous estimates when compared to U.S. gross domestic product, as shown in the chart. I’ve used the GDP of the middle year for the multiyear gap estimates.

The flip side of the gross tax gap is the “voluntary compliance rate,” which is the tax paid on time divided by the estimated full amount owed. The IRS report shows that the voluntary compliance rate has hovered between 82 and 85 percent since 2001, and it was 84.9 percent in 2021.

No one likes tax cheating, especially when perpetrated by the rich and powerful. But there are civil liberties trade‐​offs when the government tries to close the gap by overly vigorous enforcement and heavy‐​handed regulations. The optimal tax gap is not zero because that would impose huge compliance costs on taxpayers and because the IRS makes frequent errors.

That said, there is a win‐​win approach to reducing the tax gap. Simplifying the tax code and cutting tax rates would reduce the ability and incentive for taxpayers to cheat. It would also cut compliance costs and boost civil liberties. Congress should put tax simplification back on the agenda.

I discuss IRS funding and the tax gap in recent congressional testimony here.

Colleen Hroncich

When I think about education, the Bob Dylan song “The Times They Are a‑Changin’” often comes to mind. In the past few years, things have changed dramatically on the education front. Parents are increasingly looking beyond their children’s assigned district school, and states are responding to that demand by adopting and expanding education choice programs that allow some taxpayer funding to follow kids to a variety of education options.

A few years ago, there wasn’t a single state with universal education choice, and now ten have universal or nearly universal programs.

As parents—armed with increased awareness and funding—search for new learning environments for their children, will the supply be there? In many areas, the answer is “yes,” thanks to a growing universe of education entrepreneurs. Parents, teachers, and others are stepping up to create microschools, hybrid schools, homeschool co‐​ops, online resources, and more. But a great idea may not make it to fruition if government regulations choke it. That’s why the yes. every kid. foundation. started the Eduprenuer Support Program.

“We saw growth in a new movement of parents and educators who were starting unconventional learning environments,” says Mike Donnelly, vice president at the Yes Foundation, who is heading up the support program. “This was exciting, but we also saw instances of government regulators aggressively enforcing regulations that threatened this new fledgling movement. We believed that these entrepreneurs could use some help to defend themselves, so we stepped in to try to serve that need.”

In many states, the regulatory environment hasn’t caught up with the changing education landscape. My colleague, Kerry McDonald, has catalogued the challenges education entrepreneurs face even in states that are generally business‐​friendly. In some cases, existing regulations make it impossible for edupreneurs to move forward. But in others, there are ways to structure a learning environment so it meets the regulatory requirements while retaining flexibility.

“Our Eduprenuer Support Program offers free legal support to help education entrepreneurs confidently navigate regulatory obstacles,” explains Mike. “Many entrepreneurs face questions about how regulatory frameworks like childcare, business formation, zoning, fire and safety codes, and compulsory attendance laws apply to them. We provide personalized support to educate and inform these courageous everyday entrepreneurs so they can move forward and offer more individualized educational opportunities to families in their community.”

Mike says the most worrisome situations are when an edupreneur faces the threat of being shut down by a government regulator. “While this does not happen frequently, it is happening—and as the movement grows it will not surprise me if these incidents become more frequent,” he adds.

His team has offered support in dozens of states, including a microschool in Washington that was told it had to comply with health codes that would have cost tens of thousands of dollars to comply with. In Hawaii, they talked with an edupreneur who was threatened with tens of thousands of dollars in fines by childcare regulators. And they counseled a Maryland edupreneur who was told they needed a childcare license. The Yes Foundation’s legal support team helped these education entrepreneurs understand how to face or respond to these challenges.

“As a new service of Yes Foundation started this year, we have been able to help close to 100 entrepreneurs,” notes Mike. “We expect to see this number increase significantly in 2024 as new edupreneurs start up and existing edupreneurs grow. Part of what makes us different is that we are philosophically aligned with and are totally focused on the unique problems that these education entrepreneurs are trying to solve.”

While no state makes it very easy, Mike says there are some that are a bit more friendly when it comes to starting unconventional learning environments. I was excited to learn that we’ll soon have more solid information about each state—EdChoice and Yes Foundation are planning to release a report in the coming weeks that analyzes and ranks all fifty states on the ease of doing business for education entrepreneurs.

As Mike describes the report, “We examined about ten key indicators across the states to assess the comparative ease of opening and operating unconventional educational settings for school‐​aged children. We looked at barriers like compulsory education laws, homeschooling regulations, private schooling regulations and childcare regulations as well as generally applicable regulations such as fire and safety codes. Based on our straightforward ranking system, Idaho, Montana, New Jersey, Oklahoma, and Texas rose to the top. At the bottom were Alabama, Hawaii, Tennessee, and Washington. These four states had barriers that made it more difficult for edupreneurs to open and operate, leaving children and families with fewer options for educational choice.”

Just like education entrepreneurs are stepping up to create new learning environments for children, the Yes Foundation has stepped up to ensure these edupreneurs have legal support to help them navigate regulatory roadblocks. To get help, an education entrepreneur from any state can ask a question at www​.yesle​gal​.org, and they’ll get a response from an attorney that will help them think through the challenges that they are facing.

“Our legal team (and all of us at the Yes family) believe that an environment that empowers families is the way forward,” Mike explains. “By helping education entrepreneurs, designing, advocating, implementing and defending people and policy that puts kids first, we are working towards a brighter future for education.”

Walter Olson

Voters will go to the polls soon in states and municipalities to decide ballot issues of significance for individual liberty, limited government, and sound public administration. Some highlights (via Ballotpedia and Bolts):

If Ohio voters approve Issue 2 to legalize and regulate pot sales, more than half the U.S. population will live in states that have legalized recreational marijuana. Issue 1 in the same state would establish a state constitutional right to “make and carry out one’s own reproductive decisions,” including decisions about abortion, contraception, fertility treatment, miscarriage care, and continuing pregnancy, while allowing the state to restrict abortion after fetal viability, except when “necessary to protect the pregnant patient’s life or health.”
Maine Question 3 would create a state utility authorized to take over Maine’s privately owned electric utilities and transmission operations. Sen. Bernie Sanders (I‑VT) and the Sierra Club are among its backers on the left, but even some progressives have doubts and the utility workers’ union outright opposes the takeover. Ironically, one of the state’s two investor‐​owned utilities, serving areas in the north and east of the state, is itself owned by Calgary, Alberta’s municipal electric utility.
On public finance, Colorado Proposition HH is being promoted as a reduction in property tax rates but is so drafted as to enable an end run around key provisions of the Colorado Taxpayer Bill of Rights (TABOR), enacted by voters in 1992, which has worked to limit the growth of government. Texas Proposition 3, a constitutional amendment, would prohibit the legislature from enacting a tax on wealth or on net worth in the future. It is one of more than a dozen constitutional amendments on the Texas ballot with fiscal or tax implications. Maine Question 1 would require voter approval of many bond issuances above $1 billion, and was advanced by opponents of Maine Question 3, the above‐​mentioned measure authorizing a state takeover of electric utilities, which would presumably be funded by such bond issuances.
Ranked choice voting in municipal elections, an idea I’ve written about favorably, will be on the ballot in three mid‐​sized Michigan communities, Kalamazoo, East Lansing, and Royal Oak; the state would still have to give its approval. In Minnetonka, Minn., where voters approved RCV in 2020, opponents of the voting method have placed on the ballot a measure that would reverse that decision. Earlier this year voters in Redondo Beach, Calif., and Burlington, Vt., approved RCV, the latest in a streak of local wins for the method, which is also employed statewide in Maine and Alaska.
In Louisiana, which follows its own election schedule, voters will decide tomorrow whether to ban foundations and nonprofits from making private grants to election administrators, as about half the states have lately done. I’ve argued that there are legitimate reasons states might want to scrutinize and in some cases restrict such grants. A new paper by Apoorva Lal and Daniel M. Thompson estimates that the receipt of a 2020 grant had a probable low‐​but‐​positive effect on turnout and on Democratic vote share, which works to confirm Republican political misgivings; at the same time they find (as has every other piece of serious research I know) that the effects were likely too small to have changed the outcome of that year’s presidential election.

Marc Joffe

While the recent rise in interest rates creates headaches for governments issuing bonds (and for the taxpayers who are obliged to pay debt service on these bonds), it provides an option for public pension funds managing large pools of assets. Rather than investing in riskier assets, pension fund managers can now earn 5% or more annually on bonds.

De‐​risking public pension portfolios is a win for future taxpayers who would no longer be on the hook for retiree benefits if pension investments go sour.

According to a Hoover Institution analysis, state and local pension systems have racked up over $5 trillion in unfunded pension liabilities. These liabilities could be radically reduced by shrinking the number of state and local government employees and switching those that remain from defined‐​benefit pension plans to defined‐​contribution plans, like those common in the private sector.

But until support can be found for these more comprehensive solutions, reformers can limit the growth of unfunded pension liabilities by advocating more prudent approaches to managing pension fund assets.

Before the 1950s, public pension systems invested their funds almost exclusively in bonds. But as officials sweetened benefits and member lifespans increased, the relatively paltry returns on bonds were insufficient to pay future benefits. Rather than increase employee and employer contributions, pension systems began “stretching for yield” by investing in higher return, but higher risk investment vehicles.

When interest rates bottomed out during the pandemic, long‐​term Treasury bonds were yielding around 1%, making them an especially poor fit for pension systems with “assumed rates of return” that averaged around 7%.

But now the margin between Treasury bond yields and pension plan return targets has narrowed considerably. And, for some pension plans with more conservative assumptions, corporate bonds may already provide sufficient yield.

For example, the Kentucky State Police Retirement System and the Kentucky Employee Retirement System Non‐​Hazardous Plan have return assumptions of 5.25%. A portfolio of long‐​term corporate bonds could meet this threshold.

Systems with higher return assumptions could migrate to low‐​risk, fixed‐​income portfolios by lowering their assumed rates of return. If a system reduces its return assumption from 7% to 5.25%, like the Kentucky plans, its reported liabilities would increase, and system actuaries would recommend higher pension contributions over the near term. While this is initially a bad outcome for taxpayers, they may be better off in the long run.

If pension systems hold portfolios of less volatile assets — Treasury or corporate bonds –there is less risk of investment losses that trigger sudden spikes in unfunded pension liabilities, and the sharp increases in pension contributions required to eliminate them.

Chris Edwards and Krit Chanwong

Federal spending and deficits are at dangerously high levels, and interest costs on government borrowing are soaring. If spending is not restrained, we may face an economic crisis. Congress should cut spending, and one good reform target is the huge and fast‐​growing Medicaid program.

Medicaid provides health coverage for lower‐​income individuals. It is administered by the states but the federal government provides about two‐​thirds of the funding. Federal Medicaid costs have more than doubled over the past decade from $265 billion in 2013 to $616 billion in 2023.

The federal government funds Medicaid with open‐​ended matching payments to the states. For administrative costs, the federal match averages 62 percent, and for medical costs the match is based on the Federal Medical Assistance Percentage. The FMAP is determined by each state’s per capita income—states with lower incomes receive higher matches and states with higher incomes receive lower matches. State FMAPs range from 50 to 83 percent.

The national average FMAP in coming years is expected to be 60 percent. That means for every $10 million that states expand their Medicaid programs, they pay $4 million and they send a bill to Washington for $6 million.

However, the federal match is even higher on Medicaid enrollees under the 2010 Affordable Care Act. The Act provides a 90 percent match to states that expand coverage to all adults under age 65 up to 138 percent of the poverty level. That creates a large incentive for states to join the ACA expansion and 40 states have done so.

The cost of the ACA expansion exceeded projections. A 2016 study found that enrollment in 24 early adopting states was double than originally projected. New York projected 76,000 ACA enrollees by 2015 but actual enrollment was 285,000. California projected 910,000 enrollees by 2016 but actual enrollment was 3.8 million.

Federal subsidies for the states create many distortions, which high federal matching rates exacerbate. A modest first step to reform Medicaid would be to reduce the ACA matching rate. The ACA expansion is now costing federal taxpayers about $120 billion a year.

Bad Incentives of Federal Funding

If a state with an FMAP of 60 percent expands its Medicaid by $10 million, it would cover $4 million and the federal government would cover $6 million. This creates an incentive for states to expand benefits beyond what they would provide if state taxpayers paid the full cost. Medicaid expansion allows state policymakers to spend on their constituents while only being accountable to their constituents for a fraction of the costs.

Also, as Michael Cannon noted, if a state spends, say, $4 million on an activity such as policing that does not receive matching federal aid, it buys $4 million of police protection. But if a state spends $4 million on Medicaid, it buys $10 million in health care spending. So federal aid distorts the legislative priorities of state policymakers, and public funds are misallocated.

Furthermore, Medicaid’s high federal match combined with the program’s size and complexity undermines state‐​level monitoring for waste and fraud. For every $10 million that state auditors may save from reducing waste or fraud in a state with a 60 percent match, the state government would gain just $4 million. As a result, states likely underinvest in program integrity activities such as examining billing claims and recipient eligibility.

Medicaid has long been on the Government Accountability Office’s high‐​risk list. The program’s improper payment rate was 16 percent in 2022, which amounted to $81 billion of erroneous or fraudulent payments. Some legislators think the rate is substantially higher.

State governments themselves abuse Medicaid with schemes to inflate matching dollars. To boost their federal match, they classify non‐​Medicaid spending as Medicaid spending, and they create accounting schemes such as overpaying health care facilities run by local governments and imposing taxes on health providers.

Medicaid’s financial structure creates irresponsibility all around. Budget expert James Capretta noted, “Medicaid’s current federal‐​state design also undermines political accountability. Neither the federal government nor the states are fully in charge. As a result, each side has tended to blame the other for the program’s shortcomings, and neither believes it has sufficient power to unilaterally impose effective reforms.”

Reduce ACA Matching Rate to FMAP

To generate federal budget savings and improve state incentives, Congress should cut the 90 percent ACA match to the state FMAP rates. The Congressional Budget Office estimates that such a reform would reduce federal deficits by $604 billion over 10 years.

A more thorough reform would be to convert federal Medicaid payments to per‐​capita block grants, while loosening regulations on the states to foster innovation. With block grants, the states would be encouraged to find more efficient benefit structures and to reduce fraud and waste. That was the successful approach of federal welfare reform in 1996. A further advantage of block grants is that they could help equalize current disparities between the states in federal Medicaid payments.

Michael Cannon has proposed Medicaid reforms in his new book Recovery, and further reform ideas are here and here.

Jeffrey Miron

This article appeared on Substack on October 13, 2023.

The Wall Street Journal recently praised Nikki Haley for advocating healthcare tort reform during the Republican debate. Haley and the WSJ believe that excessive malpractice lawsuits increase healthcare costs by forcing doctors to pay for expensive insurance and by incentivizing unnecessary defensive procedures.

Healthcare costs are undoubtedly out of control. Yet the percentage of healthcare costs due to malpractice suits is modest and has been relatively stable over time.

Even if lawsuits were a major source of health cost inflation, tort law reform invites unintended consequences. Doctors may increase risky surgeries, for example, if they have less fear of being sued. Studies suggest that reforms have contributed to worse patient outcomes or increased use of certain procedures, implying higher costs.

The policies that cause high and rising health care costs are subsidies for health insurance (Medicare, Medicaid, Obamacare, and the tax exclusion for employer‐​paid health insurance premiums). Politicians looking to constrain health costs should trim these subsidies.

Clark Packard

Since the late 1970s, when Chinese president Deng Xiaoping initiated some market‐​oriented liberalization, the country has been on an upward economic trajectory. As documented by my colleague Jim Dorn in a recent essay for Cato’s Defending Globalization project, these reforms yielded substantial dividends. It is estimated that nearly 800 million Chinese were lifted out of extreme poverty since 1980, coinciding with the onset of these reforms.

In recent years, particularly under the leadership of Xi Jinping, China has pivoted away from the market‐​oriented policies that catapulted it to prosperity and global influence.

Today, the prevailing consensus within Washington policy circles is that China is an economic juggernaut poised to surpass the United States as the world’s leading economy in the near future. Proponents contend that Beijing’s reembrace of heavy industrial policy, coupled with the abandonment of market liberalization, has energized the Chinese economy.

However, the actual reality departs from the proponents’ simplistic narrative, as I argue in my new essay for Cato’s Defending Globalization project.

Indeed, China confronts an array of short‐ and long‐​term economic challenges.

Short‐​Term Headwinds

Today China grapples with several immediate challenges that are almost certain to exert downward pressure on its economy in the coming years. Xi Jinping has rapidly moved the country in an illiberal direction. The once‐​dynamic and thriving tech sector has been stymied by Xi Jinping’s embrace of Maoist socialism. China has cracked down on educational platforms, and its general aversion to private sector enterprises continues to exacerbate youth unemployment, which is estimated to have exceeded 20 percent.

China’s real estate sector is overinflated, and property developers are failing to deliver promised residential units, leading to a widespread middle‐​class boycott of mortgage payments in 2022. Major Chinese property developer Evergrande defaulted on its debt in late 2021 and then filed for bankruptcy in August.

Earlier this week, the largest Chinese property developer, Country Garden, warned that “it doesn’t expect to be able to repay all of its U.S. dollar bonds and other offshore debts,” according to the Wall Street Journal. This is a worrying sign about Beijing’s ability to stabilize the country’s beleaguered housing market. Meanwhile, local governments, reliant on land sales to fund public services, are increasingly grappling with constrained budgets.

China’s handling of the COVID-19 pandemic has been fraught with difficulties, and the nation’s increasing dependence on forced labor and repression in the Xinjiang region has drawn international condemnation. Additionally, Beijing has reneged on its “One Country, Two Systems” commitment to Hong Kong, effectively annexing it in 2020 with the passage of the national security law. Today Beijing’s galloping illiberalism has rendered the country less attractive for foreign investment.

Long‐​Term Headwinds

While the short‐​term challenges may be surmountable with different policies, the long‐​term headwinds pose more formidable and enduring obstacles.

First, China is facing a rapidly aging population and a diminishing workforce, which will dampen economic output, stifle innovation, and strain government services. The United Nations recently projected that India will overtake China as the world’s most populous country in 2023. Notably, China’s aging population is an accelerating phenomenon, as highlighted by a Foreign Affairs article that observed, “In 1978, the average median age of a Chinese citizen was 21.5 years. By 2021, it had risen to 38.4, surpassing the United States.” China’s fertility rate has plummeted to 1.15 births per woman, well below the replacement rate of 2.1 births per woman.

Furthermore, China is witnessing an exodus of talent as young, highly educated individuals seek opportunities abroad. Take artificial intelligence (AI), where a significant proportion of top‐​tier AI researchers globally obtained their undergraduate degrees in China. However, the majority do not remain in China, with 56 percent choosing the United States as their preferred destination.

Reasons for this exodus, as explained by a report from the Paulson Institute at the University of Chicago, include the “relatively relaxed and innovative scientific research environment” in the United States compared to China, China’s “authoritarian political system and restricted freedom,” and various impediments such as “language barriers, pervasive internet censorship, and environmental quality.”

Additionally, China’s workforce productivity is not expanding at the same robust pace as it has in the past. The period following Deng’s reforms witnessed a rapid surge in productivity growth, largely attributable to catch‐​up growth due to China’s low starting point. Today, mounting evidence suggests that productivity growth is slowing, or perhaps even reversing, representing a more pronounced decline compared to global productivity trends.

Demographic shifts and brain drain certainly play a role in this phenomenon, but China’s growing reliance on top‐​down central planning and industrial policy also contribute. According to a 2022 paper from the International Monetary Fund, state‐​owned enterprises (SOEs) are estimated to be 20 percent less productive than their private sector counterparts in the same industry. This contrasts with the period of reform between 1998 and 2005, which fostered significant private sector entrepreneurship, as detailed in a recent blog post.

Collectively, the economic reforms that China undertook from the late 1970s to 2012 propelled the nation to increasing wealth and improved living standards for the average citizen. In recent years, however, the country has veered toward illiberalism, characterized by heavy‐​handed state intervention and repressive human rights practices. These policies are beginning to manifest in economic data; for instance, foreign direct investment (FDI) in China has dwindled from around 4 percent of China’s GDP in 2011 to approximately 1 percent today. As economist Noah Smith has noted, FDI from G7 countries declined from $35.4 billion in 2014 to $16.3 billion in 2020.

For policymakers in Beijing seeking to rejuvenate the economy, a return to the market‐​oriented reforms of the past is the key to future growth.

Adam N. Michel

The Employee Retention Tax Credit (ERTC) is a refundable payroll tax credit—equivalent to a cash payment of up to $26,000 per employee—for businesses and nonprofits with significant pandemic‐​related revenue declines or shuttered by government orders. The payments were intended to reward companies for keeping employees during the COVID-19 pandemic.

Since passage, the fiscal cost of the credit has ballooned to more than $230 billion, three times the original estimate. Over three‐​quarters of that cost is likely a windfall to business owners and tax preparers.

The ERTC was created in the CARES Act and subsequently expanded as part of the 2021 appropriations, expanded again in the American Rescue Plan Act of 2021, and partially clawed back in the Infrastructure Investment and Jobs Act.

Since then, there has been in‐​depth reporting, a congressional hearing, and successive IRS guidance highlighting the many problems with the program. In September, the IRS announced it would stop processing new ERTC claims and increase audits following more than a year of repeated warnings to taxpayers against claiming inflated credits. The ERTC was the first entry in the IRS’s annual Dirty Dozen list of tax scams.

In a recent story following the IRS’s crackdown, the Wall Street Journal detailed the rise and fall of third‐​party ERTC processing firms that have engaged in extensive marketing campaigns, aggressive (possibly fraudulent) credit claiming, and exploitative contingency arrangements in which some third‐​party processors receive up to 25 percent of the credit.

It’s easy to find stories of businesses needing ERTC funds to stay open. These are the stories Congress reacted to when struggling businesses in their districts were waiting on delayed tax refunds.

However, the majority of the ERTC spending looks to have been a windfall to businesses that did not need the funds to retain employees through the pandemic. What doesn’t make the headlines are the thousands of businesses for which the payments are “icing on the cake,” as one accountant put it, “cash they can claim because they qualify,” as opposed to because they needed the cash to retain employees.

The Joint Committee on Taxation initially estimated that the ERTC would cost about $77 billion after the successive legislative changes. Using early filing statistics through the 2021 tax season, a U.S. Treasury economist estimated the credit cost $99 billion (a highly uncertain figure given processing delays). Of that figure, about half of the total credit (about $50 billion) was estimated to come from amended returns—whereby taxpayers claim the credit retroactively after they filed their original return.

As of September 2023, the IRS had paid out more than $230 billion in credits, the steep increase largely due to a flood of amended returns. The Congressional Budget Office pointed to the unexpected surge in credits as one factor for this year’s lower‐​than‐​expected tax revenues.

The large number of third‐​party ERTC processors submitting amended returns is economically damning. For the subsidy to have the intended effect of keeping employees on the payroll who would have otherwise been laid off, the taxpayer must know about the credit and change their behavior during the pandemic closures. There is no employment incentive for taxpayers who submit claims on amended returns upon advice from third‐​party consultants years after the pandemic ended.

If the credit did not change behavior, it is simply a windfall.

If we generously assume that all of the JCT’s initially estimated $77 billion went to keep employees on the payroll during the pandemic, we can conclude that the remaining $153 billion of ERTC spending was likely a windfall to business owners and third‐​party processors who saw an opportunity to exploit the program’s complexity and lenient rules.

Extrapolating from the other estimate’s $50 billion in claims not submitted on amended returns through the end of the 2021 filling season (and assuming subsequent payments were made to amended returns), as much as $181 billion or 78 percent of the $230 billion in ERTC spending to date has been a windfall to businesses. By one estimate, nearly half of any windfall to business owners is captured by individuals with incomes above $250,000.

Some may argue that the ERTC funds were, in some cases, used for productive ends, such as to pay out employee bonuses or expand businesses to meet post‐​pandemic demand. While this is invariably true, it is an argument for lower taxes for all businesses and not just for those who could exploit the arcana of a poorly designed and haphazardly administered tax credit.

Since it created the ERTC, Congress has added dozens of new tax credit schemes worth trillions of dollars to incentivize everything from computer chip manufacturing to hydrogen fuels. We cannot predict how each new credit will unravel, but Congress should expect similar types of grift, fraud, ballooning costs, and other unintended consequences.

The core lesson policymakers should learn from the mistakes of the ERTC is that the tax code and the IRS are not well‐​equipped to distribute targeted subsidies. As a matter of economic planning, industrial policy by tax credit is just as economically flawed as industrial policy by any other means. Tax credits for every social and economic ill is a recipe for fiscal ruin and economic malaise.

Romina Boccia and Dominik Lett

On April 10, 2023, Congress terminated the three‐​year‐​long COVID-19 national emergency—one of the most expensive emergency declarations ever at more than $7 trillion in spending, as reported by the Committee for a Responsible Federal Budget and the Heritage Foundation. Whenever such emergency declarations occur, the president is required by law to submit spending reports to Congress. With respect to the COVID-19 spending, President Biden apparently has not done so.

Based on press releases, letters to the administration, and congressional floor speeches, the administration has reportedly failed to follow the law. Failure to report emergency expenditures undermines transparency and accountability. This needs to change.

The National Emergencies Act (NEA), enacted in 1976, exists to limit the executive’s emergency powers. It requires the president to submit a spending summary for each ongoing national emergency to Congress every six months. The president must also send a final total ninety days after an emergency declaration ends. NEA expenditure reports are supposed to encompass any spending that is “directly attributable” to a national emergency declaration.

A major impediment to holding the executive accountable for ignoring emergency spending reporting requirements is that these reports are not easy to trace. NEA spending reports are not typically published online and the few that are lack detail as shown by this compilation of Treasury Department emergency expenditure reports. Greater transparency is essential in policing executive emergency spending abuses. Congress should revise NEA expenditure reporting rules to ensure they are as comprehensive as practicable and easily accessible to both legislators and the public.

Follow the Money

Emergency spending reporting requirements are intended to shed light on how taxpayer dollars are used during emergencies. Yet, the current system is convoluted. No centralized repository exists for NEA expenditure reports, and the executive can choose to whom in Congress to submit them, often leading to inaccessible records. Full‐​text versions of these reports are usually confined to internal congressional committee records.

For these reasons, the public usually only hears about major executive emergency abuses, such as President Trump’s border wall funding and President Biden’s student loan cancellations. The public is left in the dark about more insidious executive emergency spending abuse. This obscures the full scope of emergency spending.

On the heels of one of the most wasteful emergency spending splurges in U.S. history, legislators and the public should demand greater accountability from the executive by requiring more detailed and transparent emergency spending reporting.

Congress could amend the Congressionally Mandated Reports Act to make NEA reports available online. This would make the reports easy to locate for researchers and legislators, aiding Congress and the public in holding the executive accountable. Moreover, Congress could further define the format and content of NEA expenditure reports to add additional accounting details (something already done for some types of disaster assistance).

Senator Roger Marshall (R‑KS) and Representative Paul Gosar (R‑AZ) recently introduced the National Emergency Expenditure Reporting Transparency Act in the Senate and House, respectively. It would amend the Federal Funding Accountability and Transparency Act to include future NEA expenditure reports. Doing so would allow concerned legislators and members of the public to easily search for NEA‐​related funds.

The Bigger Issue

Emergency spending abuse goes hand in hand with expansive emergency powers. For decades, Congress has delegated away an array of emergency powers to the president. The progressive Brennan Center identifies more than 135 statutory powers that may become available when a president declares a national emergency. Thanks in part due to never‐​ending NEA declarations, Americans now live in a constant state of emergency.

As Cato’s Gene Healy explains, “emergency rule is a bipartisan temptation.” In 2018, President Trump invoked emergency powers to divert nearly $4 billion in military construction funds for a border wall against Congress’ wishes. As Trump himself noted, “I didn’t need to do this, but I’d rather do it much faster.”

President Biden similarly used emergency powers late last year in an attempt to cancel $430 billion in student loan debt. The Supreme Court shot down Biden’s scheme but didn’t stop Trump’s border funding.

Congress should rein in emergency spending powers instead of relying on the Supreme Court to police an overeager executive. The ARTICLE ONE Act would be a great start. The bill overhauls the NEA framework by having presidential emergency declarations automatically expire unless Congress affirmatively extends them.

As it stands, the emergency “state of exception” has become the norm. Congress should amend the NEA, the Congressionally Mandated Reports Act, and/​or the Federal Funding Accountability and Transparency Act to require easily accessible and detailed accounts of emergency expenditures. One key step toward limiting abuse of emergency spending powers is for legislators and the public to better understand the full size and scope of emergency spending.

Congress should hold the executive accountable. They can start by requiring stricter reporting about executive emergency expenditures.

Vanessa Brown Calder

This week, Claudia Goldin, the Henry Lee Professor of Economics at Harvard University, was announced as the 2023 Nobel Prize winner. Goldin’s work spans a variety of topics, including women’s labor force participation and economic history, education, immigration, and technological change. But among the myriad topics she is known for, one notable issue is the gender pay gap.

Goldin has applied an economist’s empirical eye and a balanced approach to her research on the pay gap, alongside an unusual humility regarding policy recommendations. In the process, she has brought various essential insights about the causes and implications of the gap to light.

Goldin’s work on the gender pay gap began decades ago. In her landmark book Understanding the Gender Gap: An Economic History of American Women, Goldin examined men’s and women’s labor market outcomes and argued that the historical persistence of wage and job level disparity could not be attributed solely to sex discrimination or underlying structural factors in the labor market.

In line with this, her later work finds measurable differences in experience and labor market behavior that result in pay gaps between men and women. In Dynamics of the Gender Gap for Young Professionals in the Financial and Corporate Sectors, Goldin and coauthors compare elite masters of business administration graduates and find that male and female MBAs earn almost identical following graduation. However, motherhood precipitates career interruptions, reductions in hours, and increasing preferences for flexibility that help explain the widening gender gap for female MBAs compared to male MBAs.

This conclusion comports with subsequent research confirming that motherhood and its attendant labor market changes are an important explanation for the pay gap more generally.

In A Grand Gender Convergence: Its Last Chapter, Goldin summarizes her extensive work on the pay gap and highlights certain noteworthy findings: the gender gap tends to widen as individuals age, it varies considerably by occupation, and non‐​linear returns to hours worked in certain professions drive the gap. She suggests that government intervention does not provide an easy answer to the pay gap, but instead that private firms should reduce the cost of flexibility for workers, as firms in sectors like healthcare, banking, and real estate have already done.

These insights are important. For instance, if inherent discrimination or bias against women causes the pay gap, we would expect women to be paid comparatively less throughout their working lives. However, Goldin finds that the gap grows with age, which suggests that sexism is not a significant driver. Moreover, Goldin’s finding that many jobs pay a premium for longer and more continuous hours, with greater round‐​the‐​clock availability, helps to explain why the gap grows following motherhood: mothers find it more challenging to be available in those roles or choose different opportunities.

In her most recent book, Career and Family: Women’s Century‐​Long Journey toward Equity, Goldin describes the trade‐​offs men and women make as they confront the reality of non‐​linear returns to hours worked. The subsequent decision to specialize in career or family to maximize family income means sacrificing time with family or sacrificing career advancement opportunities at a real cost to both parties. She suggests that the adoption of remote and flexible work policies during the pandemic provides some reason for optimism.

Despite the overheated political rhetoric on the pay gap, Goldin remains interested in drawing careful insights from the data. Indeed, subsequent economic research has drawn similar conclusions.

A forthcoming chapter on the gender pay gap in a new Cato Institute book, The War on Prices, also cites Goldin’s work. It concludes that the gender pay gap is not primarily the result of workplace discrimination but is driven by the way men and women combine professional and personal obligations, among other factors.

Therefore, the pay gap is more complex—and not as easy to modify or as obviously problematic—as a superficial reading indicates. In this area and others, Goldin’s insights are to thank for bringing greater clarity to a salient topic.