Halloween happens to fall on a Sunday this year, which means my guest this weekend will have to weave the topic in with the spooky holiday. Chris Edwards, my go-to expert at Cato on all things debt and tax-related, should have no trouble frightening my listeners with his latest analysis.
Where to start? The skyrocketing debt has economists murmuring about inflation. But sometimes the proposed solutions are even more terrifying than the problem itself — as in the case of new taxes on capital gains, corporate income, and even a special so-called “billionaire’s tax” on unrealized capital gains. Edwards returns to the show to break down the folly of scapegoating the wealthy, and why this approach is likely to backfire.
All the while, tax revenues have actually grown to their highest rates. Yet rather than using the windfall to reduce debt, Democrats are proposing a new spending binge that makes the 2008 stimulus look like chump change. As always, the government promises that its spending spree will stimulate innovation and growth, but Edwards points to the well-established link between debt and reduced growth.
They say that death and taxes are the two inevitabilities. Massive debt, however, is not inevitable.
Tune in for a special Halloween edition of The Bob Zadek Show to hear how we can turn back the debt clock, or at least stop the ticking time bomb that it represents.
TRANSCRIPT
Bob Zadek 00:17
Is there anything else going on besides fiscal policies? If you had the bad judgment to listen to the daily news, you would think not. Since we are hearing so much about tax and spending policy, billionaires tax, increasing capital gains rates, and changing the global minimum corporate tax, it’s important that we understand a little bit about what is really going on. As we observe and vote on issues that are important to us, we ought to understand what is going on. To help us understand the issues, I’m delighted to welcome back to the show, Chris Edwards.
Chris is the director of tax policy at Cato and editor of, the topic says it all, downsizinggovernment.org, which is available through the auspices of Cato. Chris is a top expert on federal and state tax and budget issues and has spent his public and private life studying these issues.
Chris, at the risk of embarrassing you — whenever my wife and I get invitations to attend Cato events, we say, “Oh, great, Chris is speaking, we have to go.” Chris, you are the main event at most of these functions. Thank you very much for agreeing to share your wisdom this Sunday morning.
Chris Edwards 02:57
Thanks very much, Bob. In all truth, the people who support and follow Cato are some of the smartest people around as well. I learned a lot from people like you who support the Cato Institute. We are very appreciative.
What is a Good Tax Policy?
Bob Zadek 03:14
Thank you so much. Chris, this morning, let’s get into it. Major changes in both the policies surrounding how we tax income in this country is being discussed. Also, the other half of the equation is what the government does with the money once they take it from us. Those are two very different topics. We’ll try to cover them separately, so we can be careful and as thorough as we can in our analysis.
Let’s start with the very broad topic of tax policy. Clearly, irrespective of how anybody feels about the appropriate size and scope of government, government is essential to our well being. The government needs money. It doesn’t have any money. The only way it gets money is by taking it from its citizens and residents. The government has to take money in order to carry on the functions that we all agree are necessary.
In your judgment, Chris, applying your worldview, your philosophical view, your economic view, if you were designing, if you had the government start with no tax revenue and it needs tax revenue, what should the standards be? Forgetting about rates, forgetting about amount, what should be the standards in designing a tax policy? Putting the question a bit differently, what is good tax policy? Good for the country, very broad. I know. What is tax policy that is good for the country, as opposed to tax policy that is bad for the country? Of equal importance, how do you reach the conclusions you’re about to share with us?
Chris Edwards 06:06
There are three basic principles that the government ought to follow in tax policy. The first is they ought to extract the needed amount of taxes with the least damage to the economy. Unfortunately, the Democrats and Biden are going about it in the worst way today by raising taxes on corporate investment. Those things damage the economy more than most types of taxes. We want to have a flat low-rate system with a neutral base to create the least economic damage.
The second thing is that we want the simplest possible tax system, without special favors for individual industries. A flat rate with as few deductions and credits as possible. It’s easy for the IRS to raise the money. It doesn’t cause civil liberties to be damaged by the IRS searching around in your affairs. If you have a simple tax, it makes the administration easy. The paperwork costs that it takes people to comply with the IRS rules is a waste for society, so we should simplify the code.
The third principle of tax policy that is often forgotten is transparency. We live in a democracy. We need to know what the government is doing. The government tax system has to be visible and as equal as possible, so we can see what the cost of the government is. When you go to the grocery store, you can see how much everything costs. You decide whether you want to buy it. We need the same for our government, but the current federal tax code is not transparent.
A good example is the three or 400 billion a year raised by corporations. That corporate tax burden is passed on to all of us as individuals, but it’s hidden from us as voters. This is one reason why Biden and the Democrats want to hike corporate taxes by hundreds of billions of dollars. It won’t be immediately visible to voters, yet it does huge damage to the economy. Again, the three principles are to do as little economic damage as possible, to be as transparent as possible, and to be as simple as possible. That’s what we want out of the tax code.
A Close look at Biden’s Destructive Tax Policy
Bob Zadek 08:41
The first sentence you offered in answer to my question, it should do as little damage to the economy as possible. You then observed that the current tax policy, especially what Biden and others are proposing, does damage to the economy. Help us understand how some tax policies do less damage to the economy than others.
Every tax policy takes wealth from the private sector. The private sector gets to decide how the money is spent and used, and gives it to the public sector government. It can decide how the money is spent and used. Wealth is transferred from the private sector to the public sector. If we start with that premise common to all tax policy, how does Biden’s damage the economy? It’s really important for our listeners to understand that. Then they can follow along with the debate on a much more informed basis. Help us understand that dynamic, if you would.
Chris Edwards 10:06
The first principle in tax policy that you learn as a tax economist is that the damage from taxes rises more in proportion as the rate goes up. In fact, as the tax rates go up, the damage rises as a multiple. That means that a 40% tax rate is actually four times as damaging as a 20% tax rate. It’s not twice as damaging, it’s four times as damaging. There are basic supply and demand reasons for that. Essentially, the higher the rate is, the more extreme that behavioral response to the tax rate is. Large behavioral responses create excessive damage. As tax rates go up, investment drops. Work effort drops. Innovation drops. The number of new startups and new enterprises in the economy drops. The first issue regards tax rates, you want low equal tax rates on everyone to minimize the damage.
The second major area of tax code efficiency is the tax base of what you tax. For a long time, libertarian and conservative economists have argued that a tax base of consumption is much less damaging than the current tax base that heavily taxes income and capital. Why is that? Because in the long run, the economy grows by business and an individual’s savings — building new factories, buying new machines, saving money and building capital for the future, etc. We want the tree of the economy to grow larger. We don’t want to chop down the branches or the trunk of the tree. We want to harvest the apples and then tax the apples as their consumer consumption.
Liberals don’t agree with that. Liberals want to tax capital heavily. The problem with that is it shrinks the overall size of the economy. The economy grows less because businesses have less money for investment. There’s less money flowing to new startup businesses. The second principle here is we want to tax consumption, which is essentially what people take out of the economy and consume. We want to tax capital less, so that the overall economy grows, which in the long run, it’s better for all of us.
Bob Zadek 12:49
That’s a wonderful analogy. If you cut the branches off the tree, you end up with less apples. If you tax the apples, the tree continues to produce at least the same quantity of apples, usually more because the tree is itself growing. The tree produces more and more apples each year. We still end up with apples being supplied to the economy, but we don’t eliminate the source of future apples. That’s a wonderful analogy. I like that a lot.
16th and 17th Amendments and the Meaning of “Income”
Bob Zadek 13:33
The Founders aboard were fearful of an income tax, so much so that in the Constitution, income tax was per se unconstitutional. It took one of the two worst amendments in my opinion to the Constitution to change that. They are side by side on the 16th and the 17th Amendment. It took the 16th Amendment in 1913, a constitutional amendment to permit the country to have an income tax. What was there about the income tax that so concerned the founders that they made the concept itself unconstitutional?
Chris Edwards 14:30
It wasn’t just the income tax. In the 1790s, there was a huge battle between Hamilton and the big government faction. Jefferson and Madison and the smaller government. Hamilton favored so-called “internal taxes.” He wanted to tax Americans directly, whereas the Jeffersonians basically wanted to rely on import duties to fund the Federal government. The election of 1800 was substantially fought over that issue. Jefferson won the White House and repealed all internal taxes, including the taxes on whiskey that had caused a huge rebellion in western Pennsylvania. The Jeffersonians didn’t like the idea of IRS type agents swarming around the country hitting people with taxation. Import taxes to them seems more transparent.
Fast forward a century, we get the 16th Amendment. We got an income tax. One of the problems with the income tax is that the Constitutional Amendment did not define “income.” The amendment says income from whatever source derived. There has been a battle since the beginning over the last century over what that means. Liberals have a very expansive idea of what income is. They tend to favor double taxing income. Conservatives and libertarians have a more limited understanding of what income is. In the end, they don’t think it includes this double taxation of savings that happens under the income tax.
Bob Zadek 16:29
Many students of the Constitution identify themselves as “originalists.” That is, you interpret the Constitution based upon the generally understood meaning of the terms at the time that Constitution was ratified. That’s a very simplistic but accurate summary of originalism. Let’s apply that to the 16th Amendment, which unhelpfully says income from whatever source derived. Is there any indication what the ratifiers of that amendment meant at the time it was enacted when they discussed income or is there no guidance? Ultimately, the court is on its own, which means the government is on its own to define income anyway it wishes.
Chris Edwards 17:25
Before the 16th Amendment was ratified, the federal government could tax income, but the burden had to be apportioned on a per capita basis between the states. The purpose of the amendment was so the government couldn’t just impose an income tax any way it wanted. Even before the 16th Amendment in 1909, the federal government imposed a corporate income tax. They got around the prohibition on apportionment by saying the corporate income taxes as an excise tax, so they didn’t even call it income taxes. In my view, the corporate income tax is the worst type of income tax we have. The government didn’t need the 16th amendment to oppose it. The 16th Amendment isn’t everything. The government was able to get around the prohibition on this really bad type of taxation before that.
Ever since the federal income tax was imposed, economists and members of Congress on the left have had this expansive idea of “income,” which economists call “Haig-Simons income,” which essentially includes the overall value of all your wealth appreciation during the year. If your house rises in value 10 or $20,000 in a year, this expansive left wing view of income suggests that you ought to be nailed by the IRS on taxes for that appreciation. Amazon’s wealth rose by 10 billion this year. Jeff Bezos ought to be banged right away with taxes on that. That is the left wing expansive view of income taxation.
Conservatives and libertarians have long thought that income should be more narrowly confined to consumption. If Jeff Bezos owns Amazon and he leaves his wealth invested in Amazon, that shouldn’t be taxed because his wealth is generating GDP for the overall economy. It is only when people take out their money that the income ought to be taxed. The current federal income tax is a compromise. We tax capital gains on realization. When he sells some shares of Amazon, he realizes the gain in tax then, but the Democrats are pushing to expand that. They want to tax capital gain appreciation when it happens and not wait till the realization advances.
The “Billionaires Tax”: A Wealth Tax
Bob Zadek 20:27
Taking what we have discussed so far and applying it to current events, this is what the left calls the wealth tax. What is the idea behind the billionaires tax? Why do you think it is the worst tax idea ever? Help us understand why a tax on wealth got your dander up and why it is so different from a tax on income.
Chris Edwards 21:59
You can look on the Cato website to see my study from a little while back called “Taxing Wealth and Capital Income.” Basically, more than a dozen European countries used to have these things called “wealth taxes,” which were annual taxes on the overall gross amount of the wealth of a wealthy individual. A wealthy individual in France or Sweden every year would add up the overall value of what they own, and the government would bang it with a tax. There are so many problems with this.
The first problem is that the government has always carved out exemptions. If the federal government tried to impose a wealth tax in this country, a large part of the wealth in this country would be farmland. The farmers are a powerful lobby. There is no way in hell that the federal government has imposed a wealth tax which would be able to impose it on farmland. Can you imagine the government hitting wheat farmers and corn farmers every year on the gross value of their farmland? There is no way it would happen. The government would end up having a narrower wealth base. There would be lots of assets like farmland that were exempt. Then rich people would move all their assets and start buying up the tax exempt assets like farmland and you get this really distortionary situation.
Those sorts of distortions are one of the things that ultimately killed the European wealth tax. Every country in Europe has repealed these wealth taxes because they were shot full of loopholes. They hit wealthy people unfairly in these unequal ways. They damaged investment. Here’s the basic math. People like Elizabeth Warren say, Well, my wealth tax would only be 2% a year. Suppose you had an asset that returned 6% a year in annual return, if you put a 2% wealth tax on that, it’s like 2% a third of the overall return. Essentially, like a 33% income tax banged on top of all the income taxes already on the return from the assets. These wealth taxes would be hugely damaging. It’s just why every country in Europe has repealed them.
Realistically it’s not going to happen. They use it though as a bludgeon to to batter wealth in this country. Here’s something that your listeners probably know. Wealth is beneficial. Economy wouldn’t grow without wealth. Bezos and Elon Musk both have a wealth of over $100 billion. That wealth is almost totally in business assets. It is not a personal consumption of assets. There is a statistic actually that the very wealthiest people in the economy have only 2% of their assets are personal consumption assets like homes, for example. 98% is their ownership of business assets. Those business assets produce millions and millions of jobs and GDP for the economy. Wealth is good. Wealth is business ownership. Business capital or business ownership is the creation of jobs. Amazon employs over a million people. They’re able to do that because of the wealth, the capital in the business. Wealth is a good thing, not a bad thing.
Bob Zadek 25:52
What strikes me as strange and irrational in the whole discussion of the billionaires tax is that it is not as if the government believes that ownership of marketable securities of stock in Amazon, investing in Amazon, is somehow bad for society. It’s the concentration of wealth. If Bezos’s wealth was scattered among 100,000 people, nobody would care. For some reason, we have decided the concentration of wealth in one person somehow makes it a target for taxation. I don’t understand.
Chris Edwards 26:45
Bezos’s wealth is not concentrated. It is actually distributed across the entire economy. Amazon owns warehouses and distribution facilities, logistics, fleets of trucks and planes, and the whole bit distributed across our entire economy, which is hugely beneficial for everyone, for people and workers and consumers in every state of the nation. I would argue that Bezos and Amazon wealth is not concentrated. It’s actually very much distributed across the whole economy.
Bob Zadek 27:23
The focus is on the fact that Bezos is a billionaire only because ultimately, at the very tippy top of the pyramid, it’s on his balance sheet rather than 100,000 people’s collective balance sheet. I could understand the behavior of having economic power. That power is then misused in ways that are illegal, or they violate public norms, bribery, and the like. It’s how you use the wealth that is either bad or good, but not the ownership itself. That is neutral in terms of its effect on the government.
Chris Edwards 28:21
People are worried that individuals had a substantial amount of power from their large ownership of large businesses, but the best way to control that power is intense competition. We need to open barriers in every industry for intense competition. The thing about wealthy people is that ultimately consumers decide how much money flows to them. But they are competing with one another and trying to undercut each other’s businesses. The best check on billionaires is other billionaires able to aggressively compete against them. As I’ve written in my Cato studies, we know one of the problems with economies is that the government itself puts barriers on competition that we ought to get rid of. Get rid of the barriers to competition. Allow the billionaires to vigorously dog eat dog go after the wealth of each other. That’s the way to check the power.
Bob Zadek 29:35
Needless to say you’re 100% right, unless you use your wealth to buy those barriers and to manipulate the government. At least at the space exploration exploitation level, we are watching Bezos and Branson and others competing to control the universe in an interesting battle by privatizing space travel. 10 years ago it was inconceivable that there would be private businesses making money off the universe.
Chris Edwards 30:29
If you look at that industry, it used to be a government monopoly owned by NASA. It was a monopoly. Economists don’t like monopolies because they become very inefficient and bloated and wasteful. That exactly was what NASA was. NASA was this hugely inefficient thing. Musk’s company is now the major launch provider for NASA, which is contracted out. He has slashed the cost of the NASA launches. That benefits all of us. Richard Branson, one of the other entrepreneurs in space, is one of the most remarkable entrepreneurs of recent decades. If you look at what he’s done, he has gone into the passenger rail industry in Britain. He has gone into the airline industry, into the music industry. Every time he’s gone into these industries with the purpose of undercutting the existing businesses and providing higher quality at lower prices. That’s what we want entrepreneurs to do. I don’t begrudge people like Branson at all for the large wealth they’ve created because they created it by providing better services at lower costs for consumers.
VAT taxes versus Income Taxes
Bob Zadek 31:49
In the beginning of the show, I have asked you to observe and establish your standards for what would be good or beneficial tax policy. You and I both know about all of the insidious weaknesses and flaws in a VAT tax. A VAT tax is a consumption tax. We can explain that very briefly to our audience. In general, is an income tax, per se, the wrong way to raise revenue as compared with excise or VAT taxes?
Chris Edwards 32:44
Yes, the current income tax is a grossly inefficient and complex beast. If you look at what the Democrats and President Biden are proposing now, they go the wrong way in all three of my criteria for the tax code. On simplification, they go in the wrong direction. I’m all in favor of eliminating loopholes and narrow tax breaks in the tax code for wealthy people. The Biden people are going the wrong direction. They have proposed dozens of new tax breaks and tax credits for electric vehicles and renewable energy. They are going to increase the frenzy of corporate lobbying around the tax code with what they’re proposing and make it even more complicated.
In transparency, they’re going the wrong direction because they are increasing taxes and extremely complicated ways for corporations. That is going to damage our economy. It’s going to be bad for all of us as citizens. It will be a hidden burden for citizens and voters.
Finally, Biden and the Democrats are raising taxes in the most inefficient way by raising rates on high earners, entrepreneurs, and small businesses, by taxing corporate investment. This is going to reduce corporate investment and thus job opportunities for all of us. On simplification, transparency, and efficiency, Biden and the Democrats are going completely in the wrong direction.
The Democratic Plan to Destroy Innovation and Entrepreneurship
Bob Zadek 34:24
You have written extensively on the subject of the obvious need for innovation that is the secret sauce that drives our economy. You have written about angel investors and the vital role they provide. They are risk takers, and people have to be motivated to take a risk or else there will never be innovation. Innovation is always a gamble. When you are innovating, you hope you’re right, but you do not have the certainty of knowing whether the money you invest will be down the toilet with nothing to show for it or will be wildly profitable.
You have written about the need for the 300,000 Angel investors in this country who provide the petri dish for innovation. Please help our audience understand how the proposed tax policies of the Biden administration take that fertilizer for innovation and destroy it both with this approach to capital gains treatment and in taxing high networth individuals with a so-called “billionaires tax,” because without innovation, we are toast.
Chris Edwards 36:05
That’s right, Bob. One of my recent studies at Cato looked at “angel investments.” I was interested in what it is that wealthy people do with their money. One very interesting thing that wealthy people do with their money is invest in startup companies. Elon Musk himself took some of his previous wealth from PayPal and about 15 years ago invested in this startup called Tesla. No one knew that it would be successful. He was investing in a startup car company going against all the big three car companies and all the Japanese car companies. With Tesla he had this crazy idea that they could build a car company and compete against the big boys. He’s been very successful.
Same with Apple computers in the 1970s, founded by Jobs and Wozniak, or if you go back to Henry Ford’s ford motor in the first decade of the 20th century. We remember the great entrepreneurs, but if you look at those great entrepreneurs, you almost always find a wealthy person who was willing to take a big risk and invest in that startup company. The company that became Ford Motor Company was actually Henry Ford’s third try at starting a car company. His two previous car companies had failed. He found an investor that was willing to take a risk and put his money into Henry Ford, and that third trial was successful.
Similarly, Jobs and Wozniak were nobodies. They were just these young long haired kids in Silicon Valley in the late 70s. They had this crazy idea that they could create this personal computer. Back then IBM was the dominant company, and who would have thought that these two young kids could start it could start this whole new industry that became the personal computer industry, but they went out and they found this investor who was willing to put $100,000 into them.
Throughout our history, it has been crucial to take these huge risks. On the startup companies, if you look behind just about any of the current successful high tech businesses, whether it is Amazon, or Spotify, or Airbnb, or Uber, no one knew that those companies would succeed. They all entered very risky industries but they were able to convince wealthy people to put money in initially. What is the reward for those wealthy people to invest in startups? Ultimately, it is a capital gain. They hope that maybe one in five or one in 10 of their investments will be successful. If it’s successful, they get a big capital gain years down the road when they sell their stock. That’s why capital gains taxation is so important because high capital gains tax greatly reduces incentives for wealthy angel investors to invest in startup companies.
Bob Zadek 39:28
Those who invest in startups make a calculation that if nine fail and one succeeds, then that will compensate for the nine failures. Thus, it makes sense because ultimately your decision to be an angel investor will be rewarded. If you tax the heck out of the benefit, that means that now the angel investor cannot just succeed in one out of 10 to get the same return. It can only succeed in one out of six, which means it can take less risk. So, riskier ventures don’t get any money, and we stifle innovation. It’s really that simple.
Chris Edwards 40:35
That’s right. Investors always have alternatives. If we make investing in startups too burdensome from a tax perspective, investors are going to invest in government securities, or tax-free muni bonds, or make dividends by paying safe corporations. That is not good for the economy. If we push everyone toward just investing and safe assets, we’re not going to get the innovation in the economy we need. Everyone wants America to be the lead at the leading edge of all of today’s innovation industries, whether it’s biotech or software or whatever. To get that investment in these leading edge innovative industries, we need to have a low capital gains tax. We need to encourage investors to invest in those risky industries.
Bob Zadek 41:27
Especially if that is simply used to transfer wealth through entitlement programs. The money you transfer into entitlement programs does not produce collective wealth in the economy. It encourages a bit of consumption, but the benefit to the economy of increased family consumption is quite modest, indeed negligible compared to the benefits to the economy from innovation.
It’s a misuse for the government to transfer wealth from the productive segment of the economy, which benefits everybody to the private to entitlement programs, which only benefit the recipient with not much spillover effect. It’s not good for the country. It may be good for the ballot box, a buying votes kind of transaction. It may be good for the ballot box. It may be good for the politicians who vote for it, but it’s bad for all of us.
Wealth Inequality in America
Bob Zadek 42:49
One would like to think our government makes decisions that are good for the country at large, not for individual voting blocks. Now, Chris, there has been a discussion about the subject of wealth inequality. Is our country guilty of exacerbating income and wealth inequality? Is it a leveler, making people more equal? Or is it a contributing factor to the cancer of wealth and income inequality?
Chris Edwards 43:46
If you look across countries in the world, some countries have more measured wealth inequality than others and truthfully, the data we have on wealth is not very good. The government collects income data on Americans through your annual tax return. The government has no real solid data on wealth. The thing with wealth is this. Either it can be gained in an inappropriate and inefficient and unproductive way as we were touching on earlier, through subsidies and cronyism and that stuff.
If you look at some of the countries around the world with the highest levels of inequality, like Russia, a lot of that inequality is driven by cronyism. We all agree that that is a bad thing. You get cronyism when you have a big government and when politicians have their octopus tentacles in every part of the economy.
In a market economy, the wealth gets created and accumulates through entrepreneurs creating things that consumers want to consume. America is still mainly a model economy. We’ve got way too much cronyism. But if you look at the Forbes list of 400 wealthiest Americans every year, the great majority of people on that list are entrepreneurs, who are great at creating these great companies that benefit all of us. As I said, we want all those folks to compete against each other. Competition is a great thing. I don’t begrudge those wealthy people at all if they’ve generated the wealth through making consumers happy through creating better products. You have to really look behind what works. Cronyism is bad. Market generated wealth is good, and it benefits all of us.
Bob Zadek 45:45
You made a point that I make quite often on this show. When I hear somebody’s opinion, the opinion itself as a standalone one sentence explanation is uninteresting, but the reason you have that opinion is. You’ve just made the exact same point with respect to wealth. Wealth, per se, is just a calculation. It is irrelevant to society. So long as you obtain wealth through socially acceptable beneficial means through competition and providing consumers with what they want, at a price they’re willing to pay for it, that means you have succeeded in making a lot of people’s lives better, and you are simply rewarded for benefiting so many people. It’s never the wealth per se. It’s how you got it.
Chris Edwards 46:54
When wealth comes from innovation, that benefits all of us. Democrats just seem to want to confiscate money and use it for government purposes, and I am baffled by where people like Bernie Sanders think that innovation comes from. It is not from the government. If you look at all the great innovations in the American economy over the last century or so, they almost all come from startup companies like Apple computers. Individual people had these really bold ideas.
They went out and they found some private funding for it. They really ran with it. The breakthrough vaccines from Moderna of Massachusetts and this other company BionNTech of Germany were privately funded innovations. Those companies didn’t depend on government subsidies. They are privately funded innovations that have benefited all of us. The fact that Moderna of Massachusetts now is making a lot of profits on vaccines, that’s great. It’s going to turn around and invest those profits into new innovations and development. Innovation and wealth go hand in hand. It’s something that the private sector can do. It’s always done and the government cannot do it.
The Looming Debt Crisis
Bob Zadek 48:24
We haven’t spent much time on the $29 trillion of debt and growing. That’s for another show, Chris. Throughout my entire life, every time we hit a new level of debt in this country, debt as a relation to GDP, there have been predictions that we’re at the tipping point. Yet even when the tipping point was way below what it is now, we didn’t tip there. How will one know when we really have hit the tipping point in debt? Or are we just about there?
Chris Edwards 49:23
All debt is a cost pushed forward to the future. All of this all that $28 trillion of borrowings, ultimately we’re going to have to pay the interest and principal back on that. It’s going to reduce the standard of living in the future. Every dollar of it reduces our standard of living and our children’s in the future. That’s one issue.
The second issue that you’re touching on is it will create a crisis. When will it create a crisis? We don’t know exactly. We do know that when countries get above around 90% of GDP in debt it really starts reducing economic growth. When Greece went into their big crisis a decade or so ago, they’re at about the same level of debt that we are here in the United States now. Those are two different questions. All government debt is going to reduce our standard of living in the future. The second question is whether it is going to precipitate a giant financial crisis. I think it is. No one knows when that’s going to happen.
Bob Zadek 50:24
I will just mention a minor comment. It is misleading to compare Greek debt with US debt. Greece was not the reserve currency. The United States is. The dynamics in the world are different between people who stop buying US debt versus stop buying Greek debt. It is really unknown. We don’t know yet. We’ll know only when it happens.
Chris Edwards 51:04
Yes, we are a different country than Greece. The United States is about a fifth of the entire world economy. It would be much more disastrous if the United States ran into a giant financial crisis for the overall global economy. Greece created a lot of ripple effects around Europe. Imagine if the United States got into such a crisis. It would be a terrible global crisis. In my view, it is even worse that a big country like the United States is in debt than a small country like Greece.
Bob Zadek 51:36
Chris, how can our friends follow your work at Cato?
Chris Edwards 51:40
You can just Google Chris Edwards. I also run Cato’s website, Downsizing Government. If you want to know the solution to all this, ultimately it’s cutting government spending programs. That’s what the Downsizing Government website is all about.
Bob Zadek 51:56
This is Bob Zadek. I was spending an hour with Chris Edwards, who is the director of tax policy over at Cato. We’re talking about debt and taxes, not particularly happy subjects but an enjoyable hour, Chris. Thank you so much. If you’ve enjoyed the show, please let us know at my podcast, bobzadek.com. Give us any suggestions and comments and rate us if you feel like doing so. Thank you so much for your time this Sunday. Thanks again to Chris. I hope to see you soon again in person, Chris, and have a nice weekend.
LINKS:
RELATED SHOWS:
- Auditing the Corporate Income Tax with Richard Rubin, May 20, 2021
- Is it too late to step back from the edge of fiscal insanity? with Chris Edwards, December 20, 2020
- The Flight of the Golden Geese with David Lesperance, November 29, 2020
- Garrett Watson on Elizabeth Warren’s Deathly Taxes, November 15, 2019
- Where Is Everyone Going? (Redux) with Chris Edwards, October 25, 2018
- As Tax Day Approaches, So Does Tax Freedom Day® with Joe Bishop-Henchman, April 15, 2018
- Fiscal Cliff — The Ultimate Self-Inflicted Wound with Will McBride, November 18, 2012
