The credit does not affect hiring decisions, and its benefits overwhelmingly accrue to a handful of large corporations, not employees. Over the past 3 decades, the program has been renewed 13 times, and 7 of those renewals occurred after a temporary legislative hiatus.

As policymakers return to Congress after the midterm elections, they will have just 24 legislative days during the year-end lame-duck session, and they are likely to push once again for WOTC to be renewed a 14^th time.

As if renewing an expensive and ineffective corporate giveaway wasn’t bad enough, the renewed version of WOTC that is likely to be included in a tax extenders bill is an expansion of the existing program.

We know this because legislative efforts to renew WOTC last year included raising the credit to 50% of the first $6,000 in wages, plus 50% of wages from $6,000 to $12,000 for workers who reach 400 hours. That takes the standard maximum tax credit from $2,400 to $6,000.

The same proposal aims to index the wage caps to inflation and drop the under-40 age limit for SNAP recipients, while adding military spouses as a new target group and extending the credit through 2030.

While last year I noted that the existing WOTC costs about $25 billion over 10 years, a study conducted by Ernst & Young (EY) found that the combined cost of extension and expansion would be about $40 billion over the 2025-2034 period. However, this estimate does not account for the inflation indexing or the addition of military spouses in the latest proposal.

Notably also, their dynamic score assumes that spending through the tax code will be partly offset by cuts in government spending. In reality, the lame-duck package won’t cut spending, but will instead worsen the deficit even further.

A back-of-the-envelope estimate that indexes the EY figure for inflation and adds in military spouses as a new target group yields a 10-year cost figure of about $48.8 billion. Adding nearly $50 billion to the 10-year deficit is a bad idea given our dire fiscal trajectory.

If policymakers do renew and expand WOTC, the credits will be rewarded in 2027 for business hires made in 2026. This is a key problem with WOTC—it awards employers for decisions they made without even knowing whether a credit would exist. This shows that the credit works as a filing routine, and not as a serious factor in hiring decisions.

But we’ve known this for decades. As one WOTC recipient firm stated in a telephone survey: “The information is sent to our corporate office, a third party processes the forms, and the tax credits come back to us like a bonus.” In effect, the firms get “bonuses” for simply putting a form in their hiring packets and sending them off to be processed.

Even before the creation of the WOTC in 1996, there was a predecessor program with many of the same goals, the Targeted Jobs Tax Credit (TJTC). An audit report published by the Department of Labor in 1994 found that “92 percent of those individuals for whom employers could have claimed a credit would have been hired regardless of the tax subsidy.” The audit report concluded that “the program largely subsidizes the wages of those who are hired irrespective of their eligibility and the availability of a tax credit.”

This isn’t a unique finding for WOTC but tends to be a common feature among hiring tax credits broadly speaking. Economist Timothy Bartik reviewed the effect of Michigan’s MEGA tax credit program aimed at hiring or retaining workers, especially in the manufacturing sector. He found the tax credit incentive decisive in only 8% of cases, meaning 92% of credits subsidized jobs that would have existed regardless of whether the credit was offered.

A more recent meticulous analysis of 13 million workers over two decades suggests that the windfall rate is around 97%, and the authors could not rule out the statistical possibility that 100% of the hires would have occurred in the absence of the credit.

Even the aforementioned EY study, which was prepared for a staffing firm, Allegis Group, assumes that only about 13% of WOTC costs support jobs that wouldn’t otherwise exist. In other words, WOTC rewards $7.30 in credits for every $1 that actually changes a hiring decision.

This is particularly telling because most WOTC certifications are captured by temporary staffing agencies, and even studies produced for such staffing firms admit that they capture roughly 87% of the value of these credits as a windfall.

It should come as no surprise then that the biggest lobbyists for reviving and expanding WOTC are the same large staffing agencies that benefit from these billions in dollars of taxpayer funds.

Ultimately, the best thing Congress can do is let WOTC expire. If policymakers want to genuinely help disadvantaged workers, and not just subsidize large firms, more effective reforms are readily available:

• Lower regulatory barriers such as occupational licensing rules that keep would-be workers sidelined.

• Modernize work requirements and remove structural barriers to employment.

• Expand opportunities for independent contracting and flexible work arrangements.

These reforms actually improve incentives to work and grow the labor market. They do not require building subsidy-harvesting bureaucracies inside HR departments.

With the nation’s debt at historic highs, extending and expanding an ineffective, costly and regressive corporate subsidy is the opposite of responsible governance. Allowing the WOTC to expire would demonstrate that Congress can still distinguish between genuinely pro-worker policies and corporate tax preferences.

The business lobby wants lawmakers to believe that failing to revive WOTC would harm workers. The data show the opposite: The credit barely affects hiring decisions, and its benefits accrue overwhelmingly to employers, not employees.

Congress should resist the lobbying pressure, follow the evidence, and let the WOTC expire as intended. It is time to end this corporate handout and start building a tax code that truly reflects the nation’s priorities.

As you can imagine, I didn’t like that. The unfortunate – indeed, obnoxious – reality is that Bastian isn’t wrong. Washington rescued the airlines after 9/11 and again in 2020 and 2021, with tens of billions of dollars in payroll support. Each time, the lesson for airlines, their creditors, and their shareholders was that, in a crisis, someone else bears the downside. In fact, during the next emergency, watch how fast the airlines will be out begging for a bailout.

Now United’s CEO, Scott Kirby, is in the news saying things I don’t like either. When the New York Times asked him this past weekend about the public’s falling trust in CEOs, he didn’t talk about running a better airline. He said instead that society is threatened by wealth inequality. He wants a national wealth tax, because a state version “won’t work” when “people will just move.” Because such soaking the rich apparently isn’t enough, Kirby also wants inheritance taxes “close to 100 percent at some level.”

In a recent post, Leff gives some perspective on Kirby:

“I’ve compared Kirby to Captain Renault in Casablanca before. Under Biden, United leaned into diversity programs and pronouns, climate commitments, affirmative action and vaccine mandates. Under Trump, Kirby became a defender of the President’s tariff strategy and intentions. Now, speaking to the Times, he’s offering wealth redistribution. As Renault offered to Germany’s Major Strasser, ‘I have no conviction, if that’s what you mean. I blow with the wind, and the prevailing wind happens to be from Vichy.’”

Over at Fiscal Reality Check, Stanford’s Joshua Rauh offers several theories he had heard for why a man who sells a product built on charging more for a better seat would say such things. The one that stuck out to me is that Kirby may be pandering to the kind of government he expects to fund United’s next bailout. Once your business model includes a government rescue, keeping the rescuers happy becomes part of your job. You can see why I thought of Bastian.

But beyond this very real possibility, Rauh raises another strong point about Kirby’s policy recommendations, worth repeating here. A CEO works for the company’s owners. Kirby is using a platform his shareholders give him to campaign for a tax on those same shareholders. The whole post is worth reading, but here is the conclusion:

“Kirby is entitled to his views on wealth inequality. As a private citizen, he is free to advocate for whatever tax system he likes. He is also free to volunteer to pay higher taxes himself. What is harder to defend is the use of the platform he holds as United’s chief executive, a platform that exists because shareholders entrusted him with their capital, to campaign for policies aimed squarely at those same shareholders’ wealth.”

Rauh reminds us that if you think many of these shareholders would be spared by a billionaire tax or a high-threshold wealth tax, look at tax history. Inevitably, what starts as a tax on the very rich ends up spreading to many who do not consider themselves rich. Remember, for example, the history of the federal income tax, the alternative minimum tax – each extended to tax people initially said to be spared the tax. This wealth tax won’t be any different.

The bottom line is that Rauh is right: if you own an S&P 500 fund (which a very large number of people do), you’re one of Kirby’s bosses, and he just volunteered to have the state confiscate a huge chunk of your savings.

Of course, it’s always worth reminding people that the policy itself is as bad as the judgment behind it. Kirby concedes a core challenge facing wealth taxers is that people move. Making the tax national doesn’t fix that. Leaving aside the possibility of moving internationally (something the trio of French wealth taxers fighting to leave-no-fortune behind is working on with their global wealth tax), a wealth tax hits the normal return to saving, year after year. A 2% tax on an asset earning 4% takes half the return, which works out to a 50% income tax on the return to saving, before any income tax is even applied. An inheritance tax near 100% tells people to spend it all rather than leave anything behind. If the targets of the taxers cannot move themselves to lower-tax jurisdictions, these targets will move their assets into lower-tax uses – including consumption and even idleness. If you want a growing economy, you tax consumption, not the capital that makes workers productive.

Leff agrees and makes a strong case for how misguided this call is in the airline industry. But as he points out, Kirby might feel he can say all of this with few consequences, since it is unlikely to pass because of constitutional restrictions.

From now on, I would prefer airline CEOs focus on running their airlines in ways that can survive a downturn without a check from Washington, and earn people's trust by flying on time, comfortably, and safely, not by offering to tax the people who own the company.

As total debt held by the public exceeded $32 trillion at the end of fiscal year 2026, it would be valuable for policymakers to take stock of the nation’s balance sheet. At the end of FY 2026, U.S. debt held by the public is $32.43 trillion. This amount is an increase of $2.15 trillion from the same time last year, or an increase of more than $13,300 per federal taxpayer.

Public debt increased by roughly $750 billion during the 3 months from the end of June through the end of September, as figure 1 illustrates. As a share of GDP, the public debt ratio is 99 percent. This is close to record levels (the highest level was in 1946 at 106%), while the Congressional Budget Office forecasts our debt trajectory will reach a record high within the next three years.

At this level of public debt, the U.S. economy forgoes about 0.8 percentage points in potential economic growth, based on a synthesis of nearly 200 estimates in the empirical literature. In other words, real economic growth in 2026 would be about 3.1 percent rather than the forecasted 2.3 percent if our debt ratio were stable at 75% of GDP, as it was in 2019.

At the end of fiscal year 2026, the federal government has spent a total of $7.4 trillion, while bringing in a total of $5.4 trillion in receipts, according to the latest Monthly Treasury Statement. Federal revenues are slightly higher than last year, but spending increased by more than double growth in revenues. As a result, the budget deficit for FY 2026 is $1.99 trillion. As figure 2 shows, this year’s budget deficit is slightly larger than prior year’s.

Interest Rates and Interest Payments

One major federal outlay that has played a key role in driving spending levels higher in recent years is the growing burden of federal interest payments on the debt. Over the past 12 months, the average interest rate on U.S. government debt as a share of GDP has risen, reaching 3.4 percent in September. This rate is significantly higher than the 2000-2021 average of 1.76 percent, as shown in figure 3. As both the public debt ratio and the interest rate on U.S. Treasurys move higher, interest expenses crowd out a larger share of the federal budget, leaving less revenue to be distributed to other policy goals and programs. The larger budget deficit also crowds out economic growth by reducing private savings and investment.

As Treasury yields remain stubbornly high, interest payments continue their upward trajectory, resulting in a larger share of federal revenues being spent on servicing the debt. Figure 4 shows that, year to date, almost 20 cents of every dollar of tax revenues collected was spent on servicing the debt. This proportion is similar to the prior two years, but notably larger than in 2023 and more than double the share of revenues spent on interest in 2022.

Maturity Structure of Public Debt

The maturity structure of public debt is a critical indicator of fiscal risk, revealing how soon the government must refinance its obligations and how vulnerable it is to changes in interest rates. The U.S. debt maturity structure is relatively short-term, meaning most of the debt is regularly rolled over into short-to-medium-term Treasuries. Figure 5 shows the average maturity of public debt over time since 2000. Historically, the average maturity of U.S. public debt is 64 months or roughly 5 years, fluctuating between a low of 49 months and a high of 75 months. Looking at the most recent quarterly data (Jul-Sep), the average debt maturity is 70 months, or just under 6 years—similar to the last quarter.

Looking at the distribution of public debt by different maturities, we can see that 33 percent of all public debt matures within 1 year or less, while another 35 percent matures within 1 to 5 years. Figure 6 reveals that the debt maturity distribution has changed very little over time, with about 70 percent of debt consistently maturing within 5 years. The share of public debt with a maturity of more than 10 years has increased slightly, while the share with maturity between 5 and 10 years has decreased slightly over time.

Using the latest data from the Monthly Statement of the Public Debt (MSPD), we can see that in the coming quarter (Oct-Dec), the Treasury will roll over a little more than $6.16 trillion in maturing Treasurys, or roughly 19 percent of all marketable public debt. The fact that almost one-fifth of the entire debt stock gets rolled over in a single quarter demonstrates just how short-term the maturity structure of U.S. public debt is. Rapid and persistent increases in interest rates can have serious adverse consequences for federal budget sustainability—a risk that becomes more significant as the debt stock continues to grow.

Who Holds Public Debt?

Understanding who holds the U.S. public debt reveals not only the financial structure behind government borrowing, but also the potential economic and geopolitical vulnerabilities tied to our fiscal position. Up through the Great Financial Crisis, the dominant purchaser of U.S. Treasurys was foreign investors (foreign governments, central banks and foreign financial institutions). Between 2008 and 2015 about half of U.S. public debt was held by these foreign investors. For the past decade, however, the share of public debt held by foreign investors has declined, with foreign investors now holding less than 30% of public debt. Figure 7 shows the change in who holds U.S. public debt over the past 26 years, focusing on the four largest purchasers.

Notably, mutual funds now hold about 16 percent of treasuries—up from 10 percent 3 years ago, while depository institutions now hold 7 percent of treasuries—up from 4 percent 8 years ago. Also of note, the Federal Reserve restarted quantitative easing (QE) in December—buying nearly $400 billion of U.S. short-term Treasury debt since December. Since resuming QE, the Federal Reserve has absorbed about a quarter of the value of all newly issued debt during that period.

As of the latest Treasury Bulletin data (September report), foreign investors held 29 percent of U.S. public debt. Other major holders include the Federal Reserve with 14 percent, mutual funds with 17 percent, and money markets with 11 percent. While state and local governments and depository institutions hold about 5 percent. The pie chart (figure 8) breaks down the holdings of U.S. public debt.

The U.S. Balance Sheet Is Structurally Vulnerable

As treasury yields hit their highest levels in 24 years recently, the federal government now finds itself navigating a precarious fiscal landscape—marked by historically high debt levels, growing interest costs and a heavy reliance on short-term refinancing. Modest growth in revenues remain insufficient to close the widening gap between spending and receipts. With roughly one-fifth of public debt maturing in the next quarter alone, and interest payments claiming a growing share of the federal budget, the structural vulnerabilities of the U.S. balance sheet are becoming more difficult to ignore.

To monitor the fiscal outlook in real time, I’ll be updating “The Quarterly Ledger” series every quarter. Each edition will track key changes in the federal balance sheet, including public debt levels, budget deficits, interest payments and different measures of sustainability. Follow along for ongoing analysis and data-driven insights into the nation’s evolving fiscal position. You can read last quarter’s update here.

Well, well, well.

Paul Krugman has discovered that France has a debt problem. In a Substack post published this week, the Nobel Prize-winning economist warns that France is on an unsustainable fiscal path. Worse, because France is a member of the eurozone, its fiscal troubles could threaten the broader European economy.

But for those of us who warned about these very dangers after the financial crisis, his newfound concern is quite something to behold. I was among the economists arguing that European governments needed to get their fiscal houses in order, preferably by restraining spending rather than by raising taxes. Fiscal adjustments reduce the debt-to-GDP ratio more effectively through spending reforms than through tax increases, and France is already heavily taxed.

Paul Krugman and others, by contrast, argued that fiscal consolidation was misguided, even dangerous, especially while economies remained weak. Krugman was especially dismissive. In a July 2010 New York Times column, he mocked those of us who were nervous about excessive borrowing, suggesting our arguments rested on imaginary bond-market vigilantes and a mythical confidence fairy.

In November 2013, he published a column titled “The Plot Against France.” The occasion was Standard & Poor’s decision to downgrade French government debt. Krugman was outraged, arguing that French borrowing costs were low and that markets seemed unconcerned. He argued that the downgrade reflected an ideological campaign against a country unwilling to embrace the austerity agenda.

In January 2014, he attacked François Hollande’s turn toward spending restraint and supply-side reform. Later that year, in “The Fall of France,” Krugman again criticized Hollande for yielding to austerity pressures. According to the Nobel laureate, France didn't need the fiscal medicine its critics prescribed. The real danger was austerity itself.

Fast-forward to October 2026. France’s public debt is approaching 120 percent of GDP. Its deficit remains around 5 percent of GDP despite the absence of a major economic emergency. Its spending is around 57 percent of GDP, and it is the second-highest-taxed nation in the OECD. Borrowing costs have risen, investors are nervous and scaling back, and politicians are struggling to agree on even modest reforms. See the great piece by Mercatus’ Emergent Scholar Geert Ensing.

So now Krugman worries about France. What changed?

Certainly, interest rates changed. But that’s precisely the problem with the economic advice he and others offered the French government earlier. One central argument against fiscal consolidation after the Great Recession in the 2010s was that interest rates were low. Why worry about debt, the argument went, when governments can borrow so cheaply? We heard this in the U.S. too. Keynesian economists also argued that, at the zero lower bound, government spending would generate unusually large economic multipliers. Additional spending would increase output, employment, and tax revenues. Conversely, cutting spending would depress growth and could even worsen the debt-to-GDP ratio.

But as I mentioned before, the issue back in the 2010s was never that government couldn’t borrow at low rates. It was that it was unwise, given that we knew entitlement spending was on the verge of exploding without fiscal backing, requiring more debt. That meant that even if rates stayed low, low rates on enormous debt are expensive, and enormous debt is dangerous when rates start rising.

Indeed, the debt doesn’t disappear when interest rates change. As Stanford economist Hanno Lustig recently observed on X, “Government debt/GDP is a persistent state variable. Bond yields are not. If the only reason you’re changing your mind is that yields are up, then your advice wasn’t that good to begin with.” That distinction should have been central to the debate all along. France accumulated debt over decades. The stock remained even as the favorable financing conditions that made it seem manageable disappeared. It was never prudent to conduct fiscal policy on the assumption that exceptionally low interest rates were permanent. The same is true in the US.

The second mistake was treating government spending as though it could generate enough economic growth to substantially offset its own cost. This was always a much more uncertain proposition than the public debate suggested. In a 2021 paper with my colleague Garett Jones, “Keynesian Stimulus: A Virtuous Semicircle?,” we reviewed the empirical literature on government-spending multipliers. The evidence offered little support for the notion that additional government spending reliably produces such large increases in economic output that the spending effectively pays for itself. Multipliers vary considerably depending on economic conditions, the type of spending, monetary policy, and how the spending is ultimately financed.

In subsequent work with Jack Salmon, we examined another important finding. Fiscal multipliers tend to become smaller as government debt increases. If heavily indebted governments receive less economic stimulus from each additional dollar of spending, borrowing more becomes an increasingly expensive way to generate growth. In part, this is because large governments tend to spend mostly on transfer payments. France illustrates the problem. Successive governments responded to economic difficulties with additional spending and borrowing. Yet the country never generated sustained growth or fiscal surpluses necessary to reverse its debt accumulation.

The third mistake was forgetting something that American policymakers once understood remarkably well: The Hamilton norm. The idea goes back to Alexander Hamilton’s 1790 “Report on Public Credit” and the fiscal principles that helped establish the credibility of the young American republic. Governments must sometimes borrow heavily for wars, financial crises, pandemics, and other emergencies, which can justify extraordinary deficits.

But borrowing during an emergency comes with the obligation that, when the emergency ends, fiscal policy must adjust so the debt remains credibly backed by future government resources. In other words, deficits beget surpluses, as UVA’s Eric Leeper writes. The point isn’t that every dollar borrowed must be repaid immediately, or that governments must balance their budgets every year, but that borrowing must be accompanied by a credible expectation of future fiscal adjustment.

That expectation lets governments borrow during emergencies without undermining confidence in their debt. Government debt is ultimately a claim on future fiscal resources. Investors must believe that the government will generate sufficient future primary surpluses, appropriately discounted, to support the value of its outstanding obligations. If that expectation disappears, the consequences need not take the form of an immediate default.

These ill consequences can emerge through higher risk of premiums, financial instability, or inflation. The crucial insight is that fiscal credibility is accumulated over time. It cannot simply be summoned when investors become nervous. This is why waiting until bond markets force governments to act is such a dangerous strategy.

I am glad that Krugman has woken up to the fact that France faces a fiscal problem, but I would be gladder if economists were more consistent in acknowledging that the fiscal problem has always been there, and that it didn’t just emerge today through higher interest rate pressures.

Next month, Californians will vote on Proposition 40 to decide whether to authorize the state to impose a 5% tax on the entire net worth of roughly 200 residents, each of whom is worth more than $1 billion. Supporters call it a one-time ‘contribution’ to save health care from Washington’s cuts.

The reality is quite different.

The Hoover Institution’s Josh Rauh has done amazing work on his Substack, Fiscal Reality Check, with help from various coauthors, to set the record straight and remind us what’s at stake. I thought it was a good use of my time to summarize some of their contributions on the topic, in part because the work is excellent, but also because the call for a wealth tax in America will not end in California, whether this proposition wins or loses. So there are lessons for all of us.

California’s budget problems aren’t new. They didn’t start with the pandemic, and they didn’t start with the Trump administration, as some would like us to believe. And they have nothing to do with billionaires. Instead, they have a lot to do with state officials who, for decades, made promises to various interest groups they never intended to pay for and spent money they didn’t have. When they got federal funding, which they got a lot of, they expanded state spending. They didn’t create new programs they disliked or existing programs they didn’t want to expand. When that spending led to too much red ink, the big spenders kept spending, and now they’re looking for others to stick with the bill.

Start with pensions. For more than a decade, California’s state and local governments told public workers their retirements were secure and assured taxpayers the cost was manageable. Both claims rested on an arbitrary assumption that pension funds would earn about 7% a year. Josh Rauh and his colleagues have tracked what that fiction costs. Faced with enormous public pension holes, the state has had to grow its contributions to the state’s 33 largest pension funds from 20% of payroll in 2015 to 32% in 2024. By 2024, California governments sent $38 billion a year into those funds, about one-tenth of tax dollars. The private sector’s remarkable performance in the last few years has helped dig the government out of the hole. Still, the system’s pensions are, by their own rosy measures, only about 81% funded. If we value the pension promises the way a private insurer would, as guaranteed obligations discounted at Treasury rates, the funding ratio drops to roughly 63%.

That additional payroll tax money going to pensions has to come from somewhere. One source of that revenue is California’s schools. Rauh and Gregory Kearney write: “Over the past decade, pension contributions have consumed an increasingly large share of education budgets to pay down existing liabilities. In our own analysis of nearly 12,800 school districts nationwide, we find that in California pension costs nearly doubled as a share of the education budget meant for covered employees.” They found that pension costs nearly doubled as a share of the relevant education budget while enrollment fell 14%. If districts had held pension costs to their 2015 level, they would have saved nearly $6 billion more for other priorities in 2023 alone. Families aren’t losing school funding to billionaires. They’re losing it to retirement promises politicians made long ago to state employees.

The legislature still hasn’t learned. This summer, legislators in both houses passed AB 1383, in a bipartisan vote, which would have unwound part of Governor Jerry Brown’s 2012 pension reforms and sweetened benefits even further. CalPERS estimated the added cost at least $4 billion, excluding the county systems. Governor Newsom vetoed it, to his credit. But a legislature that votes to dig the hole deeper during high state deficits has told us how it thinks and what it prioritizes.

Then there’s health care, the cause Prop 40 claims to serve. The campaign says federal cuts are gutting Medi-Cal. They aren’t. Federal Medi-Cal funding is projected to rise from $117 billion this fiscal year to $133.5 billion next year, an increase of more than 14%. Much of that comes from hospital supplemental payments financed through a provider tax: the state taxes hospitals, uses the money to draw down federal matching dollars, and pays the hospitals back more than they put in. It’s the same trick California played with its tax on Medi-Cal insurers. Last year, Congress rightfully limited both, phasing in the limits over several years, and Sacramento is racing to collect every federal dollar before they take hold. That’s what Prop 40 advocates call a “cut”: modestly slower growth in federal money for financing schemes, in a program whose national spending is still projected to keep rising quickly for the next decade. Meanwhile, enrollment has slipped very slightly from 14.4 million to 14.2 million. Whatever Medi-Cal crisis California has, Washington didn’t cause it, and a billionaire tax won’t fix it.

Adding insult to injury, the Prop 40 revenue fix won’t fix much else either, except to satisfy those who believe success should be punished and that billionaires, as a class, shouldn’t exist. Rauh and his coauthors estimate that Prop 40 would raise $30 billion to $40 billion in direct revenue–not the $100 billion promised by those defending the tax. That’s about a tenth of the yearly state budget, collected once. In addition, billionaires who have left and who will leave the state in response to the wealth tax will stop paying taxes in California every year going forward. And these guys are enormous contributors, as you can imagine. Once you count those losses, Rauh and his team put the net present value of the measure at negative $25 billion. California would end up poorer.

The damage goes beyond the people who write the checks. About 1.2 million Californians work for venture-backed startups. Roughly 40% of the venture money flowing into the state comes from investors outside it, and they can put that money anywhere. Mark Cuban has already said he’ll require startups to locate outside California before he invests. Founders whose companies are valued on paper at $1 billion, but who have little cash, would have to sell large blocks of illiquid stock, pay capital gains tax on the sale, and give up control of companies they’re still building – all to pay a tax on value that might disappear. Investors understand this reality. Many of the next generation of large employers will simply be born, and remain, in Texas, Florida, or Nevada.

Supporters insist it’s a one-time tax. This claim is doubtful, if only because taxes rarely go away and never stay small. Further, the revenue need that gave rise to this wealth-tax campaign in California will not go away, especially if Prop 40 raises far less than its boosters predict and the legislature keeps behaving like the irresponsible spenders it has become. The measure lets the legislature amend the law as long as the changes further its purposes, which are to raise money and spend it. Wealth-tax thresholds of $100 million and $50 million are already part of the conversation. Once the principle is established that the state can tax the unrealized value of what you own rather than what you receive as income, politicians won’t stop taxing wealth to finance continued excesses.

Prop 40 also faces many legal issues. There is a strong case that the courts will strike this down.

Ultimately, California can either reform its pensions and stop gaming federal matching funds now, control its Medicaid spending, or spend the next decade looking for someone else to blame for its deficits. Prop 40 falls in the second category. I fear this is just the beginning.

France’s ballooning public debt—now around €3.5 trillion, or roughly 118% of GDP—has pushed investors to demand sharply higher compensation for holding French government bonds. The 10-year French yield recently approached 5%, its highest level since 2002, while the difference over Germany’s benchmark 10–year Bund widened to approximately 1.4 percentage points; remarkably, French borrowing costs have now risen even above those of Italy and Greece. As the graph from the FT below shows, French yields, a little over 2 years ago, used to be a whole percentage point below Italian ones.

The fiscal outlook offers little relief: the European Commission expects France’s deficit to remain around 5.1% of GDP in 2026, with debt forecast to reach 121% of GDP in 2027 and, under its baseline scenario, approximately 130% by 2034.

Yet despite the movements in spreads, and the growing alarm about French spending and political budgetary gridlock, the ECB has so far stated that it sees no cause to intervene in the French bond market.

Why France does not qualify for ECB intervention

In September, ECB President Christine Lagarde declined to comment directly on widening French spreads, saying they reflected “how markets perceived the strength” of individual sovereign bonds. On October 1, Bundesbank President Joachim Nagel reinforced this position, saying that the ECB’s bond-buying tools were designed to safeguard price stability, “not to target specific sovereign bond spreads” (Reuters).

Two days later in an FT interview, Banque de France governor Emmanuel Moulin was even more explicit: “The conditions are not in place now for an intervention by the ECB,” whose role, he said, is “not to deal with countries’ budget problems.”

The ECB’s current primary tool for intervention, the Transmission Protection Instrument (TPI), is tasked with ensuring that the monetary policy stance is transmitted smoothly across all euro-zone members. It is meant to keep ECB interest-rate decisions from affecting euro-area countries in sharply different ways for reasons unrelated to their finances. When member states’ interest rates diverge for reasons the ECB considers unrelated to “fundamentals”, the TPI can be used to purchase marketable public sector debt within a maturity range of 1–10 years.

However, the TPI remains highly unlikely for France. The ECB’s framework requires the Governing Council to assess compliance with the EU fiscal framework, fiscal sustainability, macroeconomic policy commitments and the other eligibility criteria. Although France’s ongoing Excessive Deficit Procedure does not automatically disqualify it—France has been assessed as taking effective action under the Council’s corrective path—the country still faces high medium-term debt-sustainability risks and a possible breach of its annual net-expenditure ceiling. More fundamentally, French borrowing costs appear to reflect fiscal fundamentals and political uncertainty, rather than an unwarranted impairment of monetary-policy transmission. The TPI is therefore unlikely to be activated.

Could bond markets force a course correction?

It is a step forward that the ECB is thus far allowing larger spreads that reflect the fiscal path of member states. Higher interest costs will force French politicians to face the cost of running sustained deficits since 1973 and finally make hard choices. It could try to raise tax revenue; however, according to the OECD, taxes already total 43.5% of GDP, second only to Denmark among OECD countries. Or it could cut public spending, which came in at 57% of GDP, second highest again among OECD states.

How long the ECB can stay out of French public finances comes down to interlocking questions: how long it can withstand French political pressure and how credible non-intervention is to French policymakers. If French policymakers truly believe the ECB won’t stabilize French interest rates through intervention, they might course correct before it comes to a full-blown crisis.

There are some early signs of higher rates disciplining French politics. The 2027 presidential front-runner, Marine Le Pen, recently released a plan for fiscal consolidation (spending cuts, transfer reductions, and/or tax hikes aimed at deficit reduction) at a National Rally (RN) press conference. Sparse on specific details for achieving its goals, it nevertheless outlines pragmatic and necessary spending and debt targets. According to Reuters, it aims to reduce the deficit to 3% by 2030, and 2.5% by 2032, the national debt from 121% to 112% by 2032, cut €140bn in spending net of a minimum of €30bn in tax cuts by 2032, and rein in public spending to below 50% of GDP. It also proposes an eventual golden rule capping debt at 60% of GDP, arriving by cutting net spending by 0.5% each year. Le Pen also promised significant cuts for the first time to healthcare systems, social housing, and civil servant headcounts, a major shift from previous stances.

It is not coincidental that the RN shifted course and promised fiscal reform at a moment in time when the markets see French bonds as risky. It is an early indication that bond market pain is starting to shape political discourse. While Le Pen’s plan lacks credibility, due in part to sparse details and tension with proposals such as reducing the young retirement age from 62 to 60, it does confirm the RN is on the right direction on fiscal matters.

France as a test of ECB discipline

Where does this leave the ECB? Arguably, in a position to address moral hazard in fiscal policy—the risk that governments, expecting central-bank support, will continue taking fiscal risks instead of putting their finances in order. If the ECB does not intervene until fiscal pain concentrates the minds of policymakers on a serious and detailed plan for fiscal consolidation, it will show other member states that there will be no bailouts. If a member with the stature and political weight of France won’t receive an ECB bailout, it will confirm to other states that their fiscal policy is their burden to bear and no one else’s.

The ECB should be ready to react to any bond crisis, and limit spillover and contagion to other eurozone markets, but any purchasing of French bonds should be conditional on spending cuts. Emergency measures should be judiciously applied and not subsidize current or future fiscal excess. The ECB Governing Council will have to walk a tightrope and convince both politicians and markets there will be no bailout, while readying all necessary tools in case of a crisis.

If its resolve fails, and it intervenes to subsidize French borrowing without imposing the needed discipline, it will put France and Germany on a collision course and threaten the existence of the Euro, perhaps the EU itself. Yet, if it can force a course correction, the Euro and ECB will be stronger than ever and send a clear message that it is not there to bail out member states. The crisis unfolding in France is both an existential threat and a golden opportunity. Though difficult and perhaps unlikely, if it can be mastered it could achieve what the ECB originally aspired to be: a truly independent central bank with a single mandate for price stability.

Even a relatively efficient tax, however, can expand government’s fiscal capacity if the institutions governing revenue, spending and borrowing are left unchecked. Preventing abuse of the least bad tax, therefore, requires limits on both revenue and spending.

Why Property Taxes Have Low Revenue Volatility

Using Census Bureau data going back to 2005, Salmon finds that personal income tax revenue has a volatility score of 9.7 compared with 4.6 for sales tax revenue and 25.8 for corporate income tax revenue. Property tax revenue, with a score of 4.3, is the least volatile of the major state and local revenue sources. Corporate income tax revenue was more than five times as volatile as sales tax revenue, while individual income tax revenue was more than twice as volatile.

Revenue volatility partly reflects how readily taxpayers can change their behavior. In economics, elasticity measures how much behavior changes when a price changes. The more substantial the behavioral change, the greater the elasticity of demand with respect to price.

The same intuition helps explain tax base elasticity, which describes how much taxpayers change their behavior when a tax changes. A relatively elastic tax base gives taxpayers more ways to reduce the amount subject to a tax when the tax burden rises. Businesses may change investment or production decisions, consumers can alter purchases, and workers or firms can eventually relocate. A relatively inelastic tax base offers fewer ways to respond. Furthermore, tax base elasticity can be greater over longer periods because households and businesses have more time to adjust where they live and work (students of economics will recognize this as the second law of demand).

Because of their low volatility, property taxes present taxpayers with fewer opportunities to adjust. Land can’t cross a state line when property tax burdens increase through higher rates or assessments. A homeowner cannot relocate a house to the next county. Real estate is observable, assessable and difficult to conceal. This relatively low elasticity helps explain both why property taxation creates fewer behavioral responses than other taxes and why its revenue is unusually dependable.

That same relatively lower elasticity also helps explain why governments and their creditors value property taxes so highly.

The municipal bond market provides an especially useful illustration. Property taxes are commonly associated with local general obligation finance, and investors place value on their stability. Property taxes are often cited as the largest and most stable source of local government revenue, and they are also credited as a major factor influencing municipal credit quality and lower borrowing costs. Both investors and credit rating agencies warn that eliminating or substantially weakening property taxes could increase revenue volatility and cause a reassessment of municipal credit risk.

From the taxpayer’s perspective, those same characteristics make property taxes an unusually powerful instrument for fiscal extraction because taxpayers have fewer opportunities to escape a larger fiscal claim. The revenue source that appears the most efficient under a fixed-revenue assumption may also give a revenue-seeking government considerable capacity to tax and borrow.

The Lesson: Starve the Beast of Responsibility First, Then Revenue

This is where public choice theory, which assumes that those in politics act in their rational self-interest and respond to incentives in the same way they do outside of politics, adds something to Salmon’s ranking. In “The Power to Tax,” Geoffrey Brennan and James Buchanan challenged the conventional assumption that policymakers begin with a fixed revenue requirement and merely choose the least costly way to meet it. Their “revenue-maximizing Leviathan” model is designed to ask how tax rules themselves affect government’s capacity and incentives to raise revenue. Different fiscal institutions can affect how much revenue government seeks in the first place.

The lesson of “revenue-maximizing Leviathan” is that fiscal rules should be designed with the possibility of revenue-seeking behavior in mind. A rule that constrains one tax without reducing spending, borrowing or alternative revenues may end up redirecting fiscal activity elsewhere.

That last point is why Brennan and Buchanan made an important distinction between the choices made within rules and choices about the rules themselves. If we want to stop government from abusing property taxes durably, the argument must extend beyond property tax rates to the rules governing government’s responsibilities and spending.

To this end, priority-based budgeting—a paradigm forged by Washington Governor Gary Locke, operationalized for cities by Chris Fabian, and made workable for states by Jonathan Williams and ALEC—replaces the standard incremental budgeting system—adjusting previous budget amounts slightly for the new fiscal period—with budgeting based on how proposed spending aligns with the proper role of government. To achieve this, priority-based budgeting poses five key budget questions: What is the proper role of government? What are the essential services the government must provide to fulfill its purpose? How will we know if the government is doing a good job? What should it cost? When cuts must be made, how will they be properly prioritized?

This process takes more careful consideration than the standard process, but it can generate savings by removing policies that do not serve the core functions of government. It is most successful if it treats government as a single entity and does not exclude agencies or enterprises from the priority-based budget process.

If government has effective limits on the role it plays in society, limiting its ability to exploit an immobile tax base is much easier than simply capping tax rates.

How To Stop the Abuse of the Least Bad Tax

Fortunately, there is no shortage of options available to limit property taxes, spending and scope of government.

One option is Utah’s Truth in Taxation system, which prevents increases in assessed values from automatically producing equivalent increases in property tax revenue from existing property. A cap on the nominal tax rate alone cannot accomplish this. For example, a home assessed at $350,000 will have a tax bill of $3,500 in a state with a 1% property tax rate. If the home’s assessed value increases to $400,000 next year, the property tax bill becomes $4,000. The homeowner sees a $500 tax increase even though the tax rate remained at 1%.

Instead, Utah’s system calculates a “certified tax rate” designed to generate roughly the same property tax revenue as the previous year with adjustments for new growth. If the value of existing property rises, the certified rate generally falls.

Local governments remain free to collect more, but they must be subject to the Truth in Taxation process. Before adopting a rate above the certified rate, the taxing entity advertises the proposed increase, holds a public hearing and then takes a publicly recorded vote. This allows taxpayers to see that the government is choosing to collect more money rather than sneaking increases through assessment values.

The transparency that comes from Truth in Taxation addresses the revenue side of the problem, but not the underlying demand for spending. Broader revenue and spending limits would complement transparency with voter approval required above the ceiling. Property tax rates could then fall when assessment growth exceeds the permitted levy.

Any rule’s perimeter should also be broad enough to capture special districts, public authorities and tax-supported debt so that fiscal activity does not simply migrate outside the constraint. To ensure that the fiscal rules remain durable, government’s spending commitments must be constantly reassessed.

Conclusion

Salmon’s ranking captures an important truth: Property taxes can raise relatively stable revenue while producing fewer economic distortions than many alternatives. The same immobility that makes the property tax base attractive to economists, however, also makes it dependable to municipal bond investors and difficult for taxpayers to escape.

The answer is to place rules around the fiscal capacity that property taxes create. The least bad tax may still be the easiest to abuse. Keeping it the least bad requires constraining how government raises money and how much government promises to spend.

Thomas Savidge is a research fellow at the American Institute for Economic Research. Follow on X: @thomas_savidge.

Importantly, reductions in certain types of state tax result in shifting the composition of tax revenues. Aside from federal transfers, the four primary sources of tax revenue at the state and local level are sales taxes, income taxes, property taxes and corporate income taxes. The tax cuts that are the most politically popular might not be the ones that are most economically efficient.

There are several ways to measure what makes one tax economically preferable to another. This piece focuses on two metrics: (1) growth effects and (2) volatility. In other words, which forms of state taxation are most or least harmful to the economy, and which taxes provide the most or least reliable streams of revenue?

Choice of tax matters for preserving economic dynamism

Economists have extensively measured the effects of taxation on economic growth. Nearly two decades ago, the Organisation for Economic Co-operation and Development (OECD) published a paper using industry- and firm-level data to determine which tax structure designs are the most conducive to economic growth.

The authors found that taxes on immovable property were the least distortionary, followed by consumption taxes. They found that individual income taxes were more economically distortionary and that corporate income taxes were the most economically destructive. The authors recommended that growth-oriented tax reform should focus on shifting the revenue base from income taxes to property and consumption taxes.

Another OECD paper used panel growth regressions for 21 OECD countries to answer the question: Do tax structures affect aggregate economic growth? The authors found property taxes to be the most growth-friendly, followed by consumption taxes and then by personal income taxes. Corporate taxes were found to have the most negative effect on GDP per capita. The authors conclude by suggesting:

“A revenue-neutral growth-oriented tax reform would be to shift part of the revenue base towards recurrent property and consumption taxes and away from income taxes, especially corporate taxes.”

One 2021 journal article estimated the effects of exogenous changes in income and consumption taxes to determine whether these different taxes have different effects on economic aggregates such as income, private consumption and investment. The authors find that changes in income tax rates, defined as an aggregate of personal and corporate taxes, have large short-run effects on GDP, private consumption and investment.

In the article’s benchmark model, a percentage point cut in income taxes raises GDP on impact by 0.78 percent and leads to maximal present value multipliers of 2.36% two years after the shock. By contrast, the effects of cuts in average consumption tax rates on GDP and its components are found to be modest and not significantly different from zero.

Some taxes are a lot more reliable than others

To measure which state taxes are the most reliable and which are the most volatile, I pulled state revenue data from the Census Bureau’s Annual Survey of State and Local Government Finances (ALFIN) going back to 2005. I then calculated the standard deviation of annual percent change in real revenue for the typical state.

The steadiest, most reliable source of tax is property tax revenue, as shown in the figure below. Sales tax revenue is also incredibly stable and only slightly more volatile than property tax revenue. Individual income tax revenue is more than twice as volatile as sales tax revenue, while corporate income tax revenue is more than 5 times as volatile as sales tax revenue.

It is worth noting that property taxes are mostly local and not state taxes. About 97% of all property tax revenues are collected at the local level. The next chart shows annual swings in real revenues over time. Corporate income tax is omitted from this chart due to very large swings in volatility that would make other lines look flat in comparison.

These findings are broadly consistent with other examinations of state tax volatility. Pew conducted research in 2024 on tax volatility by state over a 15-year period and found that personal income taxes had a volatility score of 9.9 (compared to my 9.7) for the 15 years ending in fiscal year 2022 and a score of 13.2 for the most recent 5 years.

Pew found general sales taxes to have a volatility score of just 5.1 (compared to my 4.6), while corporate income taxes had a volatility score of 22.5 (compared to my 25.8) for the 15 years ending in fiscal year 2022 and a score of 29.9 for the most recent 5 years. These magnitudes of volatility are very similar to those that I found.

Overall, a broad sales tax produces a more predictable revenue stream than income or corporate taxes, while property taxes are typically the most stable annual revenue source. Corporate income taxes and taxes tied to capital gains, real-estate transactions and natural-resource extraction are the most volatile. Personal income taxes fall in between but can become highly unstable when they depend heavily on high earners, capital gains or progressive rates.

States looking to cut taxes should prioritize income and corporate tax reductions

If policymakers looking to reform their state tax code want to ensure that tax changes don’t reduce growth or expose the state to greater revenue volatility, then their priority should be lowering income and corporate tax burdens, as shown in the figure above.

Cutting sales and property taxes might seem like politically popular options for appealing to the broadest swath of constituents, but the long-term consequences would include a higher dependence on distortionary taxes and more volatile revenue streams.

The ideal tax reform would combine income and corporate tax reductions with sales tax base broadening, while also channeling a share of surpluses to bolster state rainy-day funds and reduce dependence on federal transfers.

Over the past year, the yield on the 10-year U.S. Treasury— a key benchmark influencing mortgage rates and other borrowing costs—has risen to just above 5%. Between September 18, 2025, and the same date in 2026, the increase was 90 basis points (0.9 percentage points), from 4.11% to 5.01%. Part of this can be attributed to higher expected short-term rates in the future (think recent, and possibly future, Federal Reserve rate hikes). In that same time, however, measures of expected inflation have moved horizontally.

The rise in interest rates is therefore largely driven by growing real (inflation-adjusted) interest rates. To understand what is behind this increase, we need to dissect the real long-term interest rate.

The Rising Term Premium

The term premium is the additional return investors require to hold a long-term bond instead of repeatedly investing in short-term debt. Holding a bond for 10 years exposes investors to uncertainty about future inflation and interest rates. Unexpected inflation erodes the purchasing power of the bond’s fixed payments; rising interest rates reduce its resale value.

Over the 2025–2026 period, the estimated term premium rose from approximately 46 to 96 basis points, as shown in the figure above—an increase of half a percentage point. Using these estimates, the term premium accounts for roughly 56% of the increase in the 10-year yield. The implication is significant: More than half the rise in yield reflects the market’s demand for greater compensation for holding long-term debt. Understanding why borrowing costs have increased therefore requires examining both the expected path of Federal Reserve policy and what is making investors demand a higher premium to lend for 10 years.

Losing the Convenience Yield

A higher term premium is only part of the story. Treasurys also appear to be losing the discount investors once accepted in return for their safety and liquidity. Traditionally, investors have been willing to forgo a certain amount of yield when holding Treasurys because of their apparent safety and high liquidity. This discount is called the convenience yield. Its size can be measured by comparing a Treasury to a “synthetic” Treasury, constructed by taking another debt security and insuring it.

Stanford economist Hanno Lustig does this by extending MITA finance professor Lira Mota’s approach of comparing yields of Treasuries and AAA-A (highly rated corporate) bonds with insurance against default (credit default swaps). Lustig finds that, as the figure below illustrates, the convenience yield has disappeared.

We can also compare Treasurys with foreign government bonds by using financial contracts (currency swaps) that convert their payments into dollars. Lustig does exactly this by building on work by Wenxin Du and Jesse Schreger and comparing Treasurys to G10 countries’ sovereign bonds using cross-currency basis swaps, as shown in the figure below.

The results of both comparisons are clear: Markets have lost their preference for Treasurys and, at the 5- and 10-year maturities, even prefer the sovereign debt of G10 countries. That fading preference matters even more when the supply of Treasury debt is rapidly rising thanks to ever growing deficits.

Who Absorbs New Debt Issuance?

Part of the picture, when it comes to rising yields and the disappearance of the convenience yield, is the decline of traditional price-insensitive buyers. Foremost among these is the Federal Reserve, which has reduced the size of its balance sheet by over $2.2 trillion from its $8.9 trillion high in April/May 2022, as the figure below demonstrates. Since then, marketable Treasury debt has ballooned by $8.75 trillion. It should not be to anyone’s surprise that when the Fed stopped increasing its exposure to Treasurys just as Treasury issuance surged, rates started to rise.

The relevant question is therefore how much additional debt—and how much long-term interest-rate risk—other investors must absorb. If that supply expands faster than investors’ willingness to hold it, prices must fall and yields rise to attract buyers. The maturity of new issuance matters, as does demand from domestic and foreign investors.

As existing debt matures and is refinanced, higher rates gradually feed into the government’s interest bill. Without offsetting revenue increases or spending restraint, that means more borrowing. If investors begin to doubt that future fiscal policy will cover these obligations, inflation expectations could rise alongside already elevated real yields.

With government borrowing on the rise, this creates a difficult prospect: higher financing costs today, growing pressure on the federal budget tomorrow, and potentially greater pressure on the Federal Reserve to intervene.

A growing debt burden must attract willing buyers through attractive rates. Credible deficit-reducing fiscal consolidation would ease that financing pressure. But doing nothing—or worse, pressuring the Fed into a new round of quantitative easing without even any lip-service to future fiscal consolidation—risks turning a problem of higher real yields into one of higher expected inflation as well.

The misuse of this BLS data to spread doomerism about declining worker welfare, billionaire enrichment, or economic injustice is not new.

Mismeasurement of income shares inflates the growing gap

Before diving into why a growing capital stock is not in itself a problem, but actually a blessing, it is worth pointing out what others have noted in the past. The decline in workers’ share of national output is largely a reflection of the fact that capital income is largely a residual of many different things. The Bureau of Economic Analysis separates several categories of income in the national accounts.

Many common measures of capital share are calculated using gross income, which includes depreciation, or the cost of maintaining the economy’s capital stock. The rising capital share, therefore, could reflect a more capital-intensive economy with greater depreciation expenses, not a larger flow of economic rents to wealthy owners.

Another factor explaining the decline in labor’s share of income is the increasing exposure of American industries to international competition. Imports rose from 5 percent of GDP in 1970 to about 15 percent in recent years, reflecting the integration of domestic firms and workers into increasingly global supply chains.

Greater import competition and the offshoring of labor-intensive production may have reduced employment in some sectors, shifting domestic income toward capital and other forms of intangible wealth. For example, an iPhone sold in the U.S. involves American engineering and software, but it is assembled overseas.

These dynamics inflate the capital share, which is integrated into global supply chains, and deflate the labor share, which reflects the wages of the domestic workforce—this isn’t apples-for-apples.

A 2013 Federal Reserve working paper sought to unwind what drove a 25-year decline in the labor share of income in the U.S. The authors confirm that offshoring of labor-intensive parts of the U.S. supply chain is responsible for about 3 to 4 percentage points of the labor share decline over 25 years.

But a far bigger factor that explain the growing income share gap visible in the data is the progressive understatement of the labor income of the self-employed. Overall, this mismeasurement of self-employed wages, evident since the 1980’s, is responsible for about one third of the decline in the labor share of income.

Americans workers benefit from a growing capital stock

But even if we look past the mismeasurement issue inherent in the income share data, there is good reason to be upbeat about what the data is fundamentally pointing towards: a growing capital stock.

Importantly, the period of declining labor share has coincided with rising real wages, higher living standards, greater worker ownership of capital, and significant improvements in technological progress. But sadly, optimism doesn’t sell as well as doomerism.

Suppose labor income rises from $60 to $110, while national income rises from $100 to $200. Under this scenario, workers real compensation, consumption, and employment opportunities are all improving, even while the labor share of national income falls from 60 to 55 percent.

Another point to highlight here is that a growing capital stock is immensely beneficial to workers, regardless of the distributional share of income. A growing capital stock means that each worker is more productive, which is largely why real earnings have increased significantly over time.

Thanks to the growth in capital over time, a typical American worker today is twice as productive as a typical worker in the early 1990’s, three times as productive as a worker in 1970, and four times as productive as a worker in the 1950’s.

A construction worker with site-surveying drones and LiDAR is more productive than a construction worker with 2D paper prints and manual surveying teams. The same goes for a nurse with modern diagnostics equipment or a computer programmer with powerful computing tools.

Ultimately, the capital-driven rise in productivity has driven long-term gains in the well-being of American workers.

Another point to consider when reviewing the declining worker share doomerism narrative is how it largely overlooks how markets have transformed over the years, and how workers participation in the market has transformed too.

For instance, in 1975 only about one in eight Americans owned stocks or mutual funds. Today, roughly six in ten American adults own stock, including through retirement accounts, a dramatic expansion of ordinary people’s participation in the ownership of American businesses.

For the typical American family with financial assets, the average value of pooled investment funds increased more than 8-fold between 1989 and 2022. This includes holdings of exchange trade funds, index funds, and real estate investment trusts, among other private investments.

At the same time, the percent of financial assets of all families in retirement and investment funds has more than doubled from 26 percent to 58 percent.

In other words, a larger share of American’s today earn income from investments, meaning that wage income is less important than it was in the past. This is especially true for older American’s who might be living off investment income and retirement accounts. In this sense, a declining compensation share of economic output would be expected.

Beyond the labor share doomerism

The labor share of economic output is a poor measure of worker welfare, and an even worse proxy for billionaire enrichment. It confuses relative shares with absolute gains, treats capital income as a residual, includes depreciation, overlooks ordinary Americans’ growing ownership of capital, and fails to account fully for globalization and self-employed income.

Of course, doomerism sells better than optimism, but the data broadly tells a positive story: capital accumulation, rising productivity, expanding investment ownership, and technological progress have materially improved the opportunities and living standards available to ordinary Americans.

Over the course of the past few weeks, this has been especially bad, going from $5.599 a gallon at the end of August to $6.285 a gallon by mid-September. This is a 12.3% increase in just 2 weeks, and at this rate it isn’t hard to imagine diesel rising as high as $7 a gallon as the national average price by October. For trucks with 36-gallon tanks, such as the Ford F150, this would mean spending $252 just to fill up once.

This rise from $6.285 a gallon to $6.999 a gallon would increase the cost of fueling once by $24.7, which is the equivalent of adding almost four gallons that need to be filled without any of the benefits of having the extra space. On top of this, these costs will inevitably be passed through diesel-heavy industries such as agriculture, manufacturing, transportation, and shipping, further decreasing affordability.

Long-range trucking will notice these costs even more than consumer-grade trucks. Semi-trucks typically have tanks ranging from 100-150 gallons in size, and many are fitted for interstate commerce and have two of these, meaning that this cost increase could push truckers to spend over $2,000 each time they want to fully fuel their trucks.

When input costs rise, companies offset them in part by raising retail prices. For diesel, this means that commercial trucks paying more for fuel will lead to higher shipping costs, which could lead to higher grocery and department store prices. This is true as well for agriculture, where the cost of producing each bushel is included in the price of the output.

The war in Iran has caused global shipping to take a hit in large part because of blockades and fighting near the Strait of Hormuz. Currently, about 20% of the world’s oil passes through the Strait, and when supply chains are stressed in this way, prices rise across the board. This becomes especially interesting when one considers how important affordability has been recently, and with the midterms approaching, this gives us a decent look into how the elections are going to go. Few things are as blatantly unpopular as costing Americans millions of dollars in excess fuel costs and rising prices.

Colorado was one of the earlier states to adopt a flat tax system in 1987. In the years since, 10 additional states have adopted flat income tax systems, bringing the total number of states to 15.

Some of the key benefits of a flat tax system over a graduated system include simplicity, lower compliance costs, better incentives to invest, neutrality, and faster economic growth. On that last point, the Cato Institutes Adam Michel recently published an excellent briefing paper demonstrating the growth effects of flat tax adoption.

In The Flat Tax Advantage, Adam Michel uses 45 years of data to empirically test whether states adopting flat taxes grow faster after adoption than graduated-tax states with similar average tax burdens.

Michel finds that the economic benefits of flat tax adoption are visible in the first year after adoption, and by year 5 per capita growth is about 1 percentage point higher than graduated-tax states. The effects are similar for annual GDP growth, with the largest effects 4-to-7 years after adoption.

Michel then analyzes Colorado’s flat tax adoption by conducting a difference-in-differences event study comparing the state to 13 graduated-tax states. 10 years after adopting the flat tax, Colorado’s per capita income was about 5 percent higher after 10 years compared to non-flat-tax states, or about $4,600 in 2025 dollars.

If Colorado were to replace its flat tax with a graduated system, it would also be repealing an engine of growth for the state.

Based on the broad economic literature, I have previously made the case for adopting a flat tax system at the federal level, precisely because of its pro-growth effects. My assessment of the potential macroeconomic effects of transitioning the US tax system toward a simplified flat tax model is that we could benefit from an additional 0.4 to 0.8 percentage points of annual growth during the transition period.

The economic benefits of a low-rate flat tax system are why only 1 state (Massachusetts) has switched to a graduated system in 3 decades, while 10 states have abandoned their graduated systems in favor of a flat tax during that same period.

Adopting amendment 87 and replacing the flat tax would also raise the broad income tax burden in the state. Differing tax burdens between states have significant impacts on the incentives of workers, businesses, and mobile residents.

In a recent project, I explored what factors are most closely associated with the net movement of Americans of across state lines. Every year roughly 7 million Americans pack-up and move states. Data covering the period 2018-2023 suggest that Americans are systematically moving to states with lower tax burdens.

So, raising Colorado taxes by $2.7 billion a year as amendment 87 proposes to do will likely result in mobile households, high earners, and entrepreneurs relocating towards lower tax states, reducing growth and narrowing the tax base.

Neighboring Utah has a competitive flat income tax, nearby Arizona has a 2.5 percent flat tax rate, Wyoming has no income tax, Nebraska’s top rate drops to 3.99 percent next year, and nearby Texas has no income tax. If the tax burden rises, Coloradan’s will vote with their feet.

However, amendment 87 also suggests that the revenues raised from these changes will allow the state to increase spending on K-12 public school education, health care, and early childcare and education services. This begs the question, do states that spend more per state resident on such services attract more new residents?

One way to answer this question is to observe the association between the level of government spending per resident, and the net movement of people across state lines.

Looking at the data plotted on the chart below, it seems that the general association runs in the opposite direction of what proponents of more government spending and program expansions might advocate for.

States spending less than $8,000 per resident averaged 25.4 net new residents per 1,000 people, while states spending more than $8,000 averaged a net outflow of 4.8 residents per 1,000. When residents vote with their feet, they tend to prefer states leaner governments, not big governments.

Having said that, if Colorado policymakers want to keep their state competitive, while also raising additional revenues, there is way to do that in a way that is consistent with the flat tax model.

According to a 2024 tax expenditure study conducted by the Colorado Department of Revenue, state revenues are roughly $9.7 billion lower than they would otherwise be due to the many dozens of tax expenditures in the state’s tax code. The authors also note that this is an understatement as some data is not collected, not retrievable, or incomplete.

While some of these provisions serve a legitimate purpose, such as preventing the repeated taxation of goods as they move through the supply chain, many of them distort economic decision-making, create unfair advantages, and complicate the tax system.

The total list of expenditures includes nearly $900 million in various income tax credits (EITC, CTC etc.), approximately $1.2 billion in income tax deductions, and nearly $6.9 billion in sales-and-use-tax expenditures and other carve-outs that narrow the state’s sales-tax base.

Rather than abandoning the flat tax and imposing higher rates on work, investment, and entrepreneurship, policymakers should preserve the flat structure, broaden the tax base, and eliminate preferential carve-outs wherever possible. That would make the tax code simpler and more neutral while raising revenue with less economic damage.

Abandoning the flat tax would move Colorado in the opposite direction. It would unwind one of the state’s most successful pro-growth reforms, increase the incentive for people and businesses to leave, and fund a larger government that residents in other states appear increasingly willing to escape.

Work-related pensions in the Netherlands are undergoing their largest reform in decades, moving away from a defined benefits model. Being a fully backed system, the pension reform will lead to a reallocation of pension savings that will provide better returns to contributing employees and end large regulatory induced flows into long maturity government debt.

The reallocation in one of the world’s largest pension fund systems will subject European governments to a much steeper yield curve by removing a traditional forced buyer, thereby raising borrowing costs at longer maturities. These developments raise further questions about the sustainability of fiscal trajectory in large deficit running economies in the Eurozone, such as France and Germany.

The Dutch pension system — Europe’s largest, with approximately €1.97 trillion in retirement assets at the end of March 2026 — is being fundamentally redesigned under the Future of Pensions Act (Wet toekomst pensioenen, WTP), enacted in 2023 and effective from July 1 that year. Dutch pension reallocation is already underway; ING estimated that roughly €900 billion of assets could transition in 2027.

How the Dutch Pension System Is Changing

Pensions in the Netherlands are structured in a three-pillar system: the basic state-provided old age pension (AOW), work-related pensions, and private individual retirement savings. The WTP affects the second pillar. By January 1, 2028, these work-related pension schemes must move from current arrangements — predominantly collective defined-benefit (DB) arrangements — to one of two age-sensitive defined-contribution (DC) contracts that retain some collective risk-sharing.

Under the old DB arrangement, employees contribute a percentage of their income in return for fixed benefits (pension payments) upon retirement. Ninety percent of employees in the Netherlands contribute to such a work-related fund and receive pensions based on their average salary and years worked. The employer-employee split and the percentage of wages contributed are determined on a company or industry basis, often through Collective Labor Agreements with unions.

Funds can choose between two new DC schemes: the Solidarity Premium Scheme (SPR) and the Flexible Premium Scheme (FPR). The SPR manages all pensions under one investment policy but distributes investment returns to personal capital balances. Moreover, it includes a built in “solidarity reserve” capped at 15% of total fund assets, to support pensions in years when returns fall below individual fund determined objectives. During years with “excess return,” part of the return replenishes the reserve.

The FPR, by contrast, works through individual portfolios, with employees able to choose between low risk/return vs. high risk/return, active vs. passive asset allocations. Prior to the reforms, some company or corporate funds were already operating under DC models, most of which are transitioning to the FPR. According to the bank UniCredit, 80% of Dutch pensions assets are held by industry-wide funds, which, largely due to union preferences, are almost all likely to adopt SPR funds.

Under the reforms, existing pension savings will be transferred into the two new systems, and investment risk will become more closely tied to individual accounts: Younger members can bear more equity risk, while portfolios become more defensive as participants approach retirement. The Dutch government stated that reform also requires compensation for groups — particularly workers aged 40–55 — who may otherwise lose from the shift to uniform contribution rates.

Why the Reform Changes How Funds Invest

So far, so good.

Changing from a DB to DC system, individualizing pension accounting, and tailoring asset allocation to contributors ages are all sound reforms that will greatly benefit those paying into the pension system, particularly younger workers. One particularly significant advantage will be its effect on pension portfolio management.

The goal of the old system was not to attain the best return for the pensioner within reasonable levels of risk, but to meet defined future benefits with as little risk as possible.

Under the old DB system, funds were incentivized to invest in a mix of extremely conservative instruments (50-year swaps, 30-year bonds) to meet specific future liabilities (the pensions). Funds hedged the duration (interest rate sensitivity) of their liabilities by locking in long-term fixed rates to protect against declining interest rates. However, this strategy did not offer much protection against rising interest rates, according to a Review of Financial Studies paper by Kristy Jansen and others. Long-maturity swap positions — in which the fund pays a variable rate in exchange for receiving a fixed rate — left funds vulnerable to margin calls when interest rates rose. The authors calculated that these swap positions could lead to margin calls exceeding 6% of fund assets, necessitating large sales of their safest and most liquid assets.

What Happens When a Forced Buyer Disappears?

These sound and beneficial reforms, however, will put European sovereign debt markets under great pressure.

The Financial Times estimates that Dutch pension funds hold 8% of all German bunds and 19% of all Dutch government debt. The reform changes pension funds’ demand for financial assets as much as it changes their accounting. Under the old defined-benefit model, funds hedged collective liabilities with long-duration government bonds and receive-fixed interest-rate swaps. Under the new model, younger members’ assets can be redirected toward equities, credit, private markets and other return-seeking investments, while older members retain shorter-duration protection.

The Dutch central bank, DNB, estimates that Dutch pension funds could reduce their positions in government bonds and interest-rate swaps with maturities of at least 25 years by approximately €100–150 billion.

Against roughly €900 billion of outstanding euro-area government and semi-government bonds in this maturity segment, that represents an 11–17% market-scale adjustment, although the actual reduction in cash-bond holdings would be smaller because DNB’s estimate also includes derivatives.

The effect is expected to be concentrated in the 30–50-year sector. PIMCO estimates that the reform could reduce pension funds’ long-term interest-rate sensitivity by approximately €230 million in PV01(a measure of how much the value of a position changes when interest rates move by one basis point, or 0.01 percentage points). ING forecasts approximately 10 basis points of further steepening in the euro-area 10s30s curve by 2027 from pension reforms alone. The 10s30s is the difference between the 30-year and 10-year government-bond yields.

These reforms come at an inconvenient time for the finance ministries of France and Germany, two of the largest eurozone debtors by size of issuance. DNB expects positions with maturities of 30 years and above to be downsized just as the German government has massively upscaled its borrowing.

The disappearance of a large, price-insensitive buyer at the long end of the yield curve forces large issuers (such as Germany and France) with two choices: reduce the average maturity of their debt or pay higher yields on the long end to more price-sensitive buyers.

Ultimately, for Dutch citizens, not having their savings forced into low-return, long maturity sovereign debt is a positive development. Yet a steeper yield curve might tempt term structures to favor shorter maturities, creating more roll-over risk. If markets become warier of the fiscal trajectory of EU members such as France, more frequent rollovers would leave average borrowing costs more susceptible to snowballing. For now, Eurostat shows both Germany and France maintain long term structures with average maturities of 8.7 and 8.5 years, respectively. But even if they resist shortening maturities, higher borrowing costs will still appear in new long-term debt issuance, albeit without the increased rollover risk.

Either way, as in the United States, Japan, Australia, and the United Kingdom, borrowing is becoming more expensive. French borrowing costs are expected to soar 25% to €65 billion in 2026 according to an estimate by the Financial Times. German borrowing costs are expected to reach €42 billion in 2027, up from €30 billion in 2026, a staggering 40% increase.

The steepening of the yield curve, combined with the general rise in rates, raises fundamental questions about the path of fiscal policy in Europe.

Will finance ministers take these developments as signals to tighten fiscal discipline? Will European governments find new ways of engineering financial repression to replace the demand generated by the Dutch pension system? Or will higher interest costs accelerate and escalate deficits and lead to fiscal crisis?

In fact, they already have. Earlier this year Senator Bernie Sanders and representative Ro Khanna introduced the Make Billionaires Pay Their Fair Share Act. The legislation would impose a 5 percent annual tax on the wealth of the nations 989 billionaires.

Punishing private wealth creation

The first thing to recognize, is that the billions of dollars in wealth held by the almost 1,000 billionaires in the U.S. isn’t cash that is being hoarded under a mattress waiting to be taxed. For instance, Elon Musk’s roughly $900 billion fortune is mostly stock held in SpaceX and Tesla.

What’s more, Musk’s personal fortune represents only about one-third of the combined value of the companies he has founded.

The remaining two-thirds is represented by factories, equipment, intellectual property, business assets, and claims held by other shareholders, including pension funds, mutual funds, and ordinary Americans who own shares directly or indirectly. The companies also employ tens of thousands of workers whose wages support household incomes and consumption.

For other billionaires, the share of wealth kept for themselves versus the share granted as value created for wider society is even larger than that of Musk. Mark Zuckerberg’s personal fortune represents about 13 percent of the market value of Meta. The other 87 percent is owned by shareholders, ordinary investors, or represented as data centers, servers, other productive assets, and nearly 79,000 employees.

In other words, the wealth of billionaires is a small share of the trillions of dollars in private wealth that they have created for millions of ordinary American’s. The free enterprise system rewards this kind of entrepreneurial activity and innovative behavior that in turn promotes productivity and growth. Removing these rewards by confiscating their personal assets and handing them over to the state would instead punish such activity.

A 5 percent wealth tax is a 99 percent income tax

The second thing to recognize is that the proposed 5 percent tax on wealth is a much larger tax on the returns of investments.

Consider the average market return over the 25 years between 2000 and 2025. Assuming dividends are reinvested, this comes out to 8.17 percent. With this return, the 5 percent wealth tax is a 61 percent tax on investment returns.

But we also have to account for the invisible tax that we all pay—inflation. Once inflation is factored in, market returns drop to 5.48 percent. At that level, the wealth tax is a 91 percent tax on investment returns. If we also assume that capital gains taxes are applied to dividends, then the after-tax return drops to just 5.05 percent. In this case, the wealth tax is effectively a 99 percent tax on investment income.

A 99 percent tax on investment income will have a significant impact on the incentives of investors. One of the incentives that will undoubtedly change is that people will take less risks. Low risk investments have lower rewards, and this will be felt by everyone, not just the billionaires that the policy targets.

Slower capital formation, weaker productivity, lower wages and fewer opportunities for workers and businesses affect all workers and consumers, not just wealthy ones.

We already have a wealth tax of sorts

As Stanford economist John Cochrane recently pointed out on his Substack, the U.S. already taxes wealth in certain circumstances. For example, the estate tax applies to the assets of the deceased when it is passed onto an heir.

Importantly, I should point out that a tax on the transfer of property is very different to a tax recurring tax on property ownership. The Supreme Court has also made a strong distinction between these types of taxes too, as it considers the estate tax an indirect excise tax on the transfer of property.

As Cochrane points out, the estate tax attracts a significant amount of perfectly legal avoidance. Although the tax applies at a much lower threshold than the proposed wealth tax, at $13.99 million, the Treasury estimates, that combined with gift tax receipts, the estate tax raised $29 billion in revenue in FY2025, or less than 0.1 percent of GDP.

Even a study published by supporters of a wealth tax found that the estate tax collects just 300-to-400ths of a percent annually of the Forbes 400 wealth.

The revenue gain is about $200 billion a year

So how much revenue do proponents of a wealth tax suggest it would raise if implemented in the U.S.?

French economists Emmanuel Saez and Gabriel Zucman estimate that a 5 percent wealth tax will raise $4.4 trillion over 10 years. To get this figure, they assume a tax evasion rate of 10 percent. This implies an elasticity of taxable wealth around -2. This assumption is significantly out-of-whack with the bulk of economic literature.

Evidence of savings effects based on Norwegian micro data estimate elasticities of taxable wealth around -7 under a comprehensive tax base. Similarly, evidence from Switzerland using cantonal variation finds that a one-percentage-point reduction in the wealth-tax rate increased reported taxable wealth by at least 43 percent after six years.

One 2021 journal article used rich administrative data from Colombia and a government-designed program for voluntary disclosures of hidden wealth to estimate the behavioral effects of wealth tax. The authors found that two-fifths (40%) of the wealthiest 0.01 percent evade taxes, with these evaders concealing one-third of their wealth offshore.

Using Danish administrative data, Jakobsen et al. find that reductions in the wealth tax increased taxable wealth by 31 percent among the very wealthy over eight years. Their estimates incorporate saving, portfolio and asset-composition responses, legal avoidance, and possible evasion of self-reported assets. The net-of-tax rate elasticity is therefore estimated at around -11.

With these estimates in mind, budget scoring organizations often use more realistic elasticity estimates that are more aligned with the economic literature. For example, the Tax Foundation models wealth tax proposals using a semi-elasticity assumption of -8, while Penn Wharton applies semi-elasticities of evasion and avoidance around -9.

If we replace the elasticity assumptions of Saez and Zucman with a more realistic semi-elasticity of around -8, then the revenue raised by the tax drops from $4.4 trillion to $3.3 trillion over 10 years. This isn’t an outlier assumption. In fact, Sanders and Warren used a 33% avoidance assumption in their 2020 wealth tax campaigns.

Factoring in baseline avoidance in the existing tax system and stronger behavioral responses, tax scholar Kyle Pomerleau applies an elasticity of -13. This results in a 10-year revenue yield of $2.3 trillion, or roughly half the Saez-Zucman figure. This amounts to a little over $200 billion a year in additional revenues, or about 10 percent of current deficits.

A high price for the U.S. economy

A 5 percent wealth tax isn’t just a tax on billionaires, it is a tax on investment, a tax on risk-taking, a tax on capital accumulation that drives productivity, higher wages, and job growth. The people who ultimately bear those costs would include workers, consumers, retirees, and the millions of ordinary Americans whose savings are invested in the companies billionaires helped build.

Wealth is not cash sitting idle in a bank account. It is the factories, companies, technologies, and investments that generate future income for millions of people. Taxing wealth at punitive rates may satisfy a desire to punish the rich, but it risks shrinking the very economic base from which future prosperity will come.

Let’s not tax away our productivity, innovation, and growth for the sake of political symbolism.

In a new NBER working paper, MIT economist Ricardo Caballero asks a different question: even if U.S. public debt remains safe and the government never defaults on its obligations, can issuing more of it still hurt the economy? His answer is yes, and we are nearly at the point whereby this starts to occur.

U.S. Debt as a Safe Asset

For years economists have highlighted how investors value the liquidity and safety of U.S. treasuries. The argument is that government bonds are not just IOU’s issued to fill budget gaps, but they are also the economies go-to safe asset.

For example, banks use treasuries as collateral and money managers use them as a savings vehicle. Based on these dynamics, proponents of the safe asset theory argue that issuing more debt makes people feel wealthier, which encourages them to spend more, driving demand higher. Under this model, as long as the government doesn’t go bankrupt, more debt equates to more economic stimulus.

Of course, anyone well versed in the Fiscal Theory of the Price Level (FTPL) would counter that the backing of newly issued debt matters just as much. If debt is issued without a credible commitment to future surpluses, then you don’t get stimulus, you get inflation.

If debt outpaces the public’s expectations of future fiscal discipline, the market will revalue those ‘safe assets’ down via inflation until the real value of the debt matches the real value of the government’s expected surpluses.

Safety Isn’t Free to Produce

Aside from the FTPL critique, this new NBER paper makes a more interesting observation. Government debt only stays liquid and tradeable because banks and bond dealers actively make markets in it. They do this by including it on their balance sheets, buying it from sellers, financing it, and re-selling large amounts of debt stock every time bonds mature.

All of this marketability requires bank balance sheet capacity, and balance sheet capacity is not infinite. It is capped by leverage and capital requirement regulations.

We can think of this as a grocery store shelf. The first units of debt are cheap to stock, but as the government continues to issue more debt relative to the size of the shelf (the financial systems ability to absorb it), dealers have to work harder to continue taking on greater risk to keep placing it, and they charge more for that higher risk.

These pressures on the financial system show up as a spread, which Caballero calls the Treasury absorption premium). Importantly, the government effectively pays for this premium spread even though the bond itself doesn’t stop being “safe”.

The Debt Laffer Curve

At low levels of debt, proponents of the safe asset theory argue that issuing more debt boosts the economy. However, as the debt grows larger relative to the financial system’s ability to absorb it, the cost of safety rises and eats into that positive effect. Eventually more debt issuance passes a point whereby more issuance makes demand worse, not better. This is the safe-debt Laffer curve.

Caballero attempts to measure this “cost of safety” for the U.S. treasury market using bond-swap spreads and inflation-protected bond pricing as his data.

He finds that between 2015 and 2026, the marginal cost of producing a safe treasury dollar has more than doubled from about 80 basis points (bps) to about 187 bps. For the positive wealth effect, he finds an extra dollar of safe debt of roughly 330 bps. The safe debt margin is, therefore, about 143 bps.

Based on 2026 Congressional Budget Office projections, Caballero estimates that this safe margin is shrinking by about 18 bps every year, and this rate of shrinkage will accelerate if debt grows faster than forecast. In other words, we are less than 8 years away from being on the wrong side of the debt Laffer curve.

An Important Caveat

There is an important caveat to Caballero’s framework. The peak of the safe-debt Laffer curve should not be interpreted as the point at which government debt first begins to harm economic growth. Traditional crowding-out effects can operate well before the financial system reaches its Treasury absorption limit. As government borrowing rises, it reduces national saving, puts upward pressure on borrowing costs, and diverts capital away from private investment.

In a recent study of the United States, I found that higher debt is associated with slower growth in the private capital stock, and that slower capital accumulation in turn reduces economic growth. In other words, government borrowing can already impose a supply-side cost by displacing productive private investment long before Caballero’s safe-asset margin reaches zero. His Laffer curve therefore identifies an additional constraint on debt issuance, not the first point at which debt becomes economically costly.

No Easy Fix

To remedy the problem of a shrinking safe debt margin, Caballero hints at loosening bank leverage and capital rules. This is a bad idea. The leverage ratio exists specifically to cap how much banks can hold using borrowed funds. Exempting government debt would let banks hold far more government debt without raising new capital—effectively a form of quantitative easing, just run through private bank balance sheets instead of the Federal Reserves.

Capital rules exist to keep banks solvent, not to subsidize the fiscal profligacy of Congress. Loosening these rules also concentrates interest rate risk onto banks at, as we saw in 2023, can be sunk by safe government bonds when rates move the wrong way.

Another problem with Caballero’s easy fix is that it overlooks the incentives problem. Politicians face a diffuse, delayed cost (a future banking shock) against a concentrated, immediate benefit (cheaper borrowing today). This is the classic asymmetry behind fiscal illusion. Importantly, the absorption premium is a price doing real work, signaling genuine scarcity. Suppressing that premium by regulatory fiat doesn’t remove that scarcity, it hides it and invites the “one exemption invites the next” ratchet regulators themselves have warned about.

There is No Free Lunch

The debate over government debt has mostly been “can we ever pay it back?” This paper says that’s not the only question worth asking, and it also quietly forecloses the easiest-looking answer. If loosening the rules that constrain banks just relocates the cost onto the banking system instead of removing it, then there’s no free lever left to pull.

Even a government that never misses a payment can, at some point, be asking the financial system to absorb more debt than it can comfortably supply, and when that happens, more borrowing doesn’t stimulate the economy, it drags on it. We just crossed $40 trillion in debt. On Caballero’s numbers, we only have a few more years to find out whether we’re already asking for more than the shelf can hold.

This gross figure includes approximately $7 trillion in intragovernmental debt, money the federal government technically owes to its own trust funds such as Social Security and Medicare. That internal ledger is likely to face massive pressures as major entitlement trust funds barrel toward depletion in 2032 and 2033, which could force abrupt structural adjustments.

Even so, economists typically look past this internal tally and focus heavily on debt held by the public (cash borrowed from outside investors and foreign governments), which now sits around 100% of GDP.

Last week, the Treasury Department reported that total federal debt had reached $40.047 trillion. Debt held by the public stood at roughly $32.3 trillion, approximately equal to the size of the U.S. economy. At the same time, the federal deficit is running at roughly 6% of GDP, and through the first 10 months of fiscal year 2026, the government has already accumulated a $1.8 trillion deficit.

Yet the day after the $40 trillion milestone, Treasury Secretary Scott Bessent offered a remarkably confident response:

“There’s nothing magic about the $40 trillion number,” Bessent said. “And we can grow our way out of that.”

There’s no magic bullet, either. Stronger economic growth is certainly desirable and would help our dire fiscal situation. But economic growth is not going to solve the underlying problem of out-of-control spending.

Importantly, the extent to which higher economic growth can help largely depends on what “grow our way out” actually means.

Growth will not make the debt disappear

First, we have to make a distinction between growing our way out of the debt in nominal terms (the total dollar amount owed) and reducing the debt-to-GDP ratio (debt as a share of the economy).

If the federal government continues to run a large deficit (a safe assumption based on history and projections), then the nominal debt will continue to rise. A $2 trillion deficit adds another $2 trillion to the debt regardless of whether real (inflation-adjusted) economic growth comes in at 2% or 6%.

To actually reduce the $40 trillion in dollar terms, policymakers would have to turn our persistent 6% deficit into a budget surplus.

Perhaps what Bessent meant was that we could “grow out of it” relative to the economy. While this goal is more plausible, it requires much more growth than the United States has historically delivered. Figure 1 below shows real growth rates since 1990, with a historical average annual growth rate of 2.5%.

Three scenarios illustrate the challenge. The current public debt ratio is around 100% of GDP, while budget deficits will consistently run at around 6% for the coming decade.

1. Growth reaches 3.9%: Under these conditions, real GDP must grow at about 3.9% every year, assuming 2% inflation, just to stabilize the debt at 100%. A growth rate of 3.9% would not reduce the debt ratio. This level of growth would merely stop it from going any higher. Excluding the COVID recovery year of 2021, this level of growth has only been achieved in five out of 35 years, and all in the mid-to-late 1990s boom.

2. Growth matches the historical average: If we instead grow at historical average rates of about 2.5%, and inflation runs at around 2.5%, then a persistent 6% deficit would push the debt ratio to roughly 107% over 10 years.

3. Growth reaches 4%: If by some miracle we achieved 4% real growth and maintained this growth rate every year for an entire decade, the debt ratio would fall from 100 to 96% of GDP. Unfortunately, the historical record gives little reason to assume that this is remotely likely.

Of course, this assumes no major economic crises, which have historically added about 20 percentage points to the debt ratio within just a few short years.

These projections may also be optimistic because higher debt reduces economic growth potential.

The arithmetic is even worse once interest is included

The arithmetic so far has been rose-tinted and generous because it treats the budget deficit as constant at roughly 6% of GDP.

That approach ignores the fact that the federal government now spends about $1 trillion a year on servicing the debt, and interest rates remain elevated, with the yield on 30-year Treasury bonds now well above 5%.

As the growth of public debt continues unabated, interest payments get even larger, which increases the size of budget deficits, which again increases the pace of growth in debt. This creates a dangerous feedback loop, whereby the prospect of growing our way out diminishes as the debt gets larger.

Growth is part of the solution, not the whole solution

Faster economic growth is an ambition that policymakers should aspire to achieve. The country desperately needs policies that make it easier to invest, innovate, and increase productivity. But this is an argument for more growth and fiscal prudence, not growth instead of fiscal prudence.

Real and persistent annual growth of 3% would certainly help in stabilizing the growing debt ratio, but to get the debt in a downward trajectory policymakers would also need to ensure that mandatory spending — programs funded automatically under existing law — does not grow faster than 3% per year.

Spending restraint is not the only option.

Another debt reduction option at policymakers’ discretion involves eliminating tax expenditures that serve as pure tax breaks for special interests. We compiled a list of 175 deductions, credits, exclusions, and exemptions in the federal tax code.

Policymakers could easily find between $300 billion and $400 billion in additional annual revenues by reforming and eliminating some of the tax code’s most economically distortive provisions — those that encourage inefficient economic decisions or favor special interests.. This would significantly improve the nation’s fiscal trajectory, while also working toward a tax system that is simpler, less distortive, and more conducive to economic prosperity.

Another fiscal benefit of simplifying the tax code is that it would shift the needle toward sustained 3% growth. As I previously argued in my research, moving toward a simplified flat tax system could add 0.4 to 0.8 additional percentage points of annual growth over 10–20 years.

Ultimately, the United States does not have a $40 trillion growth problem. It has a fiscal imbalance. Growth can make that imbalance easier to manage, but it cannot make arithmetic disappear.

The sooner policymakers recognize that distinction, the better.

Adjusting for inflation, the average yearly tuition and fees charged for full-time undergraduate students increased from about $6,000 in 1980 to over $20,000 by 2019, an increase of some 234 percent.

Figure 1 displays the trend of average tuition and fees since 1968. The data show that tuition rates, in real terms, were relatively affordable in the 1970’s by modern standards. Interestingly, the data also show that tuition costs have been in decline since 2019, falling for four consecutive years to about $18,000 by 2023.

Demographics are undoubtedly one factor that explains the downturn in tuition prices as the pool of available students shrinks, reducing demand for higher education. But the decisions of high school graduates also matter. Figure 2 below shows that after decades of a growing share of high school graduates enrolling in college, this trend has reversed since the late 2010’s.

In 2016, 70 percent of high school graduates enrolled in college, up from about 50 percent in the 1970’s and 1980’s. However, since 2018 this share has fallen for five consecutive years from 69 percent to just 61 percent in 2023, the lowest share since 1990.

Another potential factor behind an increasing share of high school graduates choosing not to go to college might be the flattening of the wage premium. As we have noted in prior research, in the 1980’s and 1990’s going to college paid an increasing return on investment compared to simply finishing high school. However, since the turn of the century that wage premium has flattened.

As figure 3 shows, going to college still rewards young workers with a roughly 60 percent wage premium compared to high school graduates, but over the past decade, this premium has not increased. If anything, its slightly lower now that it was a decade ago.

As for students’ financial aid, since 2010 the share of students receiving federal grants or taking out student loans both decreased from 48 percent and 50 percent respectively to 42 percent and 37 percent in 2023. Meanwhile, as figure 4 shows, the share of students receiving institutional aid and scholarships has increased significantly from 36 percent in 2010 to 55 percent in 2023.

However, federal grant aid only makes up a fraction of total federal and state government financial aid. Figure 5 shows federal grants, federal loans, state grants, and state loans going back to 1970, all the way up through 2024. In 2024, total government aid was roughly $173 billion. More than half of this government aid is federal loans, nearly a third is federal grants, while about 18 percent is state loans and grants combined.

Finally, with aid in mind, financial risk is another factor that prospective students must consider when deciding whether to invest in higher education. Figure 6 shows the rate of delinquency since 2010, which represents the share of student loans that are unpaid for more than 90 days. Historically, this rate fluctuated between 8 and 10 percent, before falling below one percent during the repayment freeze policy period of 2020-2024.

With the end of the repayment freeze policy in 2025, delinquency rates increased notably, before falling back down to their lowest level outside of the pandemic repayment freeze period, at just 7.4 percent as of Q2 2026.

On the other hand, the share of federally managed student loans in default (270+ days of non-payment over a lifecycle) has climbed to record highs in recent quarters. As figure 7 shows, the default rate on outstanding principal and interest balance of direct loans and ED-held FFEL program loans is now 20 percent, or 1-in-5 student loan borrowers.

For decades, colleges operated in an environment in which demand for higher education seemed almost inexhaustible. Enrollment was rising, the earnings premium from a degree was increasing, and expanding federal grants and subsidized student lending increased students’ purchasing power, allowing colleges to capture part of those subsidies through higher tuition. In effect, policies intended to make college more affordable helped weaken the price discipline that normally constrains sellers.

That environment is beginning to change. Colleges are competing for a smaller and increasingly price-conscious pool of students, while the economic payoff from a degree has stopped rising as it once did. The recent decline in tuition may therefore be an early sign that market discipline is returning to higher education. Policymakers should be careful not to reverse that adjustment by pouring still more taxpayer subsidies into the sector.

Decades of federal intervention have demonstrated the problem with trying to make college affordable by subsidizing demand: when government gives students more money to spend on higher education, colleges have less incentive to economize and more opportunity to raise prices. A better approach would be to reduce the federal government’s role in financing higher education and allow colleges to compete more directly for students on price and value.

Generally speaking, economists have an ambivalent attitude toward their predictive accuracy. Douglas Elmendorf, who once served as the director of the CBO, said, “The CBO was much more accurate than the guesswork by many individuals. [It] turned out to be not exactly right but much more right than most of the critics.” This is a bit of a compliment, but from the way it was phrased, it sounds as if he was giving the organization a C, or a C+. Certainly, Elmendorf wasn’t saying that the CBO is a paragon of predictive excellence.

Luckily, we don’t only have to rely on expert testimony when determining whether they are effective forecasters. Each year, the CBO releases a set of long-term projections, so to check their accuracy, we need only to look at their methodology (to ensure that it’s sound) and the general trajectory of their predictions. If they release a statement in 2025 saying that the economy will be perfect in 2055 but in 2026, they say that the economy will be ruined by 2056, it’s reasonable to assume that their models are, at the very least, unstable.

When reviewing the numbers, we unfortunately see exactly this. The following table shows their long-term projections for the debt-to-GDP ratio released between 2023 and 2026.

Base Year: 30-Year Debt-to-GDP ratio projection

2023: 181%

2024: 166%

2025: 156%

2026: 175%

It should be noted that initially the debt-to-GDP estimate in 2023 was 195% but was later lowered to 181%.

Of course, predictions are hard, and no one should expect CBO to be able to estimate precisely what the government will choose to spend money on ten years from now. It is strange, though, that their predictions vary so much year-over-year. To make matters worse, they don’t ever explain their methodology, so we are left to guess how they came to these conclusions without knowing whether or not they did something that actually makes sense.

Regardless of what they did, we can infer that their method was far too dependent on the initial state of the system. If the base year strongly affects the long-term fiscal outlook, then the model is weighing the base year far too highly. Using other information that they’ve presented on things like the 10-year fiscal projections, we can assume that they are linearly extrapolating the current year’s deficits, meaning that changes in discretionary spending in the current year have huge effects on long-term projections. A truly predictive model would take older information, condition current information on said information, and use that to produce forward-looking projections.

As it stands, this currently satisfies the requirements laid down in the CBIA of 1974. They provide the forecasting, as described. Legal requirements, however, don’t establish optimality. The point of predictions is to inform us about the future, so if they aren’t accomplishing this, then why would we waste our time and energy creating them?

To further highlight this point, we can compare the CBO’s projections to historical trends or even other predictive models. In this case, we are looking at the 10-year Treasury note yield instead of the long-term debt-to-GDP ratio.

From this chart, we can see that, as of recently, the CBO has underestimated the actual 10-year Treasury yield. Note that they are not the only organization that does this; plenty of other groups have similar, though certainly less inaccurate, estimates. Further, they’ve been known historically to instead overestimate these yields, and rather highly at that. It seems, then, that their projections are quite chaotic and almost random; this isn’t terribly shocking. Predictions, especially economic ones, are incredibly challenging, and by critiquing the CBO and its methods, I don’t mean to imply that they could easily implement one specific shift and everything would change.

The fundamental issue with the CBO is that their incentives don’t align with producing accurate projections. Instead of optimizing their methodologies to best respond to new leaps in data science and statistics, they focus on following through on the promises they’ve made to Congress through the establishment of their office. In this way, they are constrained by the law instead of being bolstered by it, and Congress has diminished its ability to understand macroeconomic trends.

One potential solution could be to introduce a private market incentive. One way to do this would be to have a competition each year to see who can produce the best predictions, and at the end of the year, the model with the least “loss,” or inaccuracy, would receive a cash prize. Since this is an objective metric of accuracy, it wouldn’t be subject to perverse incentives in the same way as today. Another important thing about this competition is that all of the models would be posted publicly for anyone to see, meaning that economists and data scientists could easily use and access the best predictive models for their work. In this way, the government could serve to bolster economic research instead of being something of a confounding factor as it is today.

In my previous post, I defined tax increment financing (TIF) and answered frequently asked questions about TIF. If you are unfamiliar with the policy, feel free to check out that piece first. In this post, I will use Iowa as a case study to examine one state’s TIF policy.

My critique of widespread TIF rests on three key arguments.

First, governments face an information problem. Local officials cannot reliably determine which projects would occur without subsidies or accurately predict future property value growth decades into the future. As a result, TIF often produces long-term debt obligations based on optimistic assumptions that may never materialize.

Second, TIF has expanded far beyond its original purpose. Rather than primarily financing public infrastructure that addresses genuine market failures, many TIF districts subsidize commercial buildings, residential developments, hotels, and other projects that private investors would ordinarily finance themselves. This broad use of subsidies increases the risk of political favoritism, rent-seeking, and the misallocation of taxpayer resources.

Third, TIF operates with insufficient transparency. Most states provide little or no comprehensive reporting on TIF districts, making it difficult for taxpayers, policymakers, and economists to evaluate whether projects satisfy statutory requirements or produce meaningful public benefits. Without reliable data, it is nearly impossible to measure TIF’s effectiveness or hold local governments accountable for diverting future property tax revenue.

Luckily for me, the state with the most TIF districts — a total of 4,260 urban renewal districts as of 2025 — is also one of the few that produces a comprehensive annual report. And while the Iowa 2025 Annual Urban Renewal Report is only 20 pages long, it contains statistics and admissions that paint a remarkably different picture of how TIF operates in practice.

TIF isn’t mostly funding infrastructure

TIF is supposed to work as a funding mechanism for public infrastructure that private companies would not provide. In Iowa, however, of $368.4 million in FY 2025 nonrebate TIF expenditures, only 44.3% went toward roads, bridges, and utilities. The remaining 55.7% financed other activities, including commercial buildings, industrial projects, property acquisition, recreation facilities, residential development, administrative expenses, and public buildings. This is shown in table 1 below.

These data undermine the argument that TIF primarily exists to finance public infrastructure that enables private investment. Rather than simply providing the infrastructure private developers need, TIF increasingly subsidizes the developments themselves. This distinction matters because infrastructure improvements are meant to help the public at large, making the use of tax revenue to finance them easier to justify. In contrast, subsidizing individual developments shifts the costs from developers and forces taxpayers to fund projects from which they may never benefit.

The debt is much larger than expected

Another notable finding in the report is the sheer level of outstanding TIF debt held by local governments. Table 2 shows that municipalities reported $4.681 billion in debt that they expect to repay with future TIF revenue — an amount equal to 9.8 years of current TIF property tax collections.

Included in the debt are over $600 million in interest payments. The fact that the policy creates billions of dollars in debt that rely on external forces such as economic stability and consistent growth undermines the claim that TIF is self-financing. If the future growth in property values that TIF depends on fails to materialize — which can happen for many reasons — those obligations become much more difficult to service.

And these debt obligations matter, because TIF districts are financed by capturing future growth in property tax revenue that would normally go to cities, counties, school districts, and other taxing jurisdictions. Until the debt is repaid, the incremental revenue will continue to be diverted to a special TIF fund rather than being available for public services.

Many TIF districts are based on 20–30-year debt payment schedules. The report states that “local governments reported 940 separate general obligation bond debts, with debt payments totaling $2.690 billion with the longest payment schedule extending through FY 2050.” Decades-long debt repayments that rely on property value growth in order to be repaid are vulnerable to several extrinsic circumstances. Economic downturns, natural disasters, or simply slower-than-expected economic growth can all leave districts financially underwater. This is why debt financing is the riskiest way to implement TIF.

By allowing municipalities to borrow against uncertain future property tax growth, debt-financing TIF encourages both local governments and developers to pursue projects they might not otherwise undertake while shifting much of the financial risk onto taxpayers.

Debt financing, however, is not the only way TIF districts are funded. Under a pay-as-you-go TIF arrangement, local governments do not issue bonds or make large upfront payments to developers. Instead, developers typically finance the project themselves and are reimbursed over time as the project generates new property tax increment.

This approach avoids public borrowing while still redirecting future property tax growth to the project rather than to general government purposes during the life of the TIF district. While this method encourages more responsibility, it still imposes a burden on other local taxing jurisdictions.

Proponents argue that TIF does not harm public services because cities, counties, and school districts continue to receive property taxes on the original, or “base,” value of the property. Since these governments operated before the TIF district was created, the argument goes, they can continue operating with that same revenue while the incremental tax growth pays for redevelopment.

But this overlooks the very premise of TIF.

If the policy succeeds in attracting new residents, businesses, and investment, it also increases demand for public services. More homes and businesses require additional police and fire protection, road maintenance, inspections, and other local services. Yet the additional property tax revenue generated by that growth is diverted into the TIF fund rather than flowing to the governments responsible for providing those services.

As a result, local governments face higher service demands without receiving the corresponding increase in tax revenue until the TIF obligations are retired. Meanwhile, municipalities continue adding new TIF obligations before existing ones have expired.

This is reflected in the figure below. The debt payment schedule is set decades out with no indication that additional debt will not just pile onto the existing billions.

California dealt with a similar problem after 50 years of widespread TIF policy. In 2012, the state was facing a major debt crisis caused in part by tens of billions of dollars in outstanding TIF debt and obligations. To alleviate some of this debt, Governor Jerry Brown chose to dissolve the program.

California has since resumed TIF policy, but in a much more restricted way that disallows any funding diversion from school districts. If Iowa doesn’t change course and rein in TIF spending, it will likely reach a breaking point like California’s, in which they have the default on their books.

Iowa can’t fully account for its TIF districts

Continuing further into the Iowa report, there is a section labeled “Identified Problems with the Reporting Process.” This section highlights one of the biggest problems associated with TIF across the country: the complete lack of transparency.

The section begins by noting that some local governments do not submit their required annual TIF reports on time. Some didn’t even submit one at all. And of those that did submit reports, many failed to adhere to the designation requirements set by law.

Local governments are required to report whether each TIF district was created based on findings of slum conditions, blight, economic development, or some combination of those purposes. This is shown in the figure above. Yet 35.9% of Iowa’s TIF districts failed to report any designation in the statewide database. Those undesignated districts nevertheless accounted for approximately $4.0 billion in TIF increment value during FY 2025. While this does not necessarily mean the districts were created unlawfully, it prevents taxpayers from verifying whether the statutory basis for the districts was properly established.

If Iowa is transparent, what are the other 47 states hiding?

This lack of transparency and compliance is troubling, but Iowa is still ahead of most states. At least it publishes a statewide report that makes these shortcomings visible. In contrast, 47 states (excluding Iowa, Nebraska, and Alaska) provide no comparable statewide urban renewal or TIF report, leaving taxpayers, researchers, and policymakers with little ability to evaluate how TIF is being used or whether local governments are complying with state law.

We should demand transparency if only because it is the law. But there are also plenty of practical reasons why more transparency will help both sides of the TIF debate.

Having clear reports that allow us to analyze the effectiveness of TIF in both intrastate and interstate contexts would help policymakers better understand the implications of tax increment financing. Without complete reporting, taxpayers cannot determine whether TIF districts satisfy statutory eligibility requirements, whether promised public benefits materialized, or whether governments are complying with legal restrictions on TIF use.

Iowa deserves credit for publishing one of the nation’s most comprehensive TIF databases. Ironically, that transparency also shows how difficult it is to monitor the program. If one of the country’s best reporting systems still reveals billions of dollars in outstanding debt, widespread reporting deficiencies, and extensive use of TIF beyond traditional infrastructure, taxpayers should question what remains hidden in the dozens of states that provide no comparable statewide reporting at all.

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Originally created during the fallout of the Great Depression, the farm bill (officially the Agricultural Adjustment Act of 1933) was intended to provide financial support to poor farmers and struggling agricultural workers. Over the decades, the nature of the farm bill has evolved into a mega spending bill giving handouts to wealthy landowners, breaking down economic dynamism in the agricultural industry and expanding food assistance programs in ways that weaken work incentives and encourage dependence on government support.

In its February 2026 baseline projection, the Congressional Budget Office (CBO) estimated a mandatory spending baseline of around $1.4 trillion in farm subsidies and food stamp costs for the coming decade (2027-36).

Farm Subsidies

The scale of the federal crop insurance program has more than doubled in its coverage of acres over the past decade and a half. At the same time, commodity program subsidies make up more than 10 percent of total farm bill funding. Combined, farmers will receive around $300 billion in federal government subsidies in the coming decade.

Source: US Department of Agriculture

While in 1960, the average household income of a farmer was 35% lower than the national average household income, by 1990 it had reached parity, and by 2024 the average farm household income was 32% higher than the national average household income. As of 2024, average farm household income was almost $160,000.

Despite this, policymakers often claim that farm subsidies go toward alleviating rural poverty. In reality, it is the largest and wealthiest farms that benefit most from billions of dollars in federal subsidies. According to the 2022 Census of Agriculture, only 19% of the value of farm subsidies goes to small farms (with sales of less than $100,000), while 58% of the value of subsidies goes to large farms (sales of $500,000 or more).

The average small farm recipient received an average annual government payment of $5,651, while the average large farm recipient received an average annual government payment of $60,592. This data hardly paints the picture of a subsidy program targeting the most vulnerable farmers.

In addition to the regressive nature of farm subsidies, financing crop production and subsidized crop insurance dissuades farmers from making decisions to improve market efficiency. Instead, federal subsidies lead to overproduction, distorted land use and inflated land prices.

Subsidies may also increase the cost of food because they act as nontariff barriers to agricultural products from overseas. As Montana State University economist Vincent Smith explains, “By subsidizing crop insurance, taxpayers are encouraging farmers to work less efficiently, produce fewer crops, and make smaller contributions to the overall productivity of the U.S. economy.”

SNAP Program Funding

Farm subsidies aside, by far the largest and burgeoning portion of the farm bill is the nutrition title of the bill, which includes nutrition assistance to low-income households through the Supplemental Nutrition Assistance Program (SNAP). This portion of the farm bill comprises 72% of total spending, or nearly $1 trillion in total outlays over 2027-36.

When the SNAP program was first expanded nationally in the early 1970s, there were around 4 million SNAP recipients, or about 1 in 50 Americans. Today there are over 37 million SNAP receipts, or about 1 in 9 Americans. The 9-fold increase in beneficiaries wasn’t driven by a surge in poverty; in fact, the poverty rate in recent years has been notably lower than that of the early 1970s.

Notably, the SNAP program expanded significantly during the COVID-19 pandemic in 2020, and enrollment remained very elevated at about 43 million participants through 2024. This was largely driven by the waiving of work-training requirements and significant increases in benefit generosity under the Biden administration.

In an effort to constrain the excessive growth of the SNAP program, policymakers enacted reforms within the OBBBA in 2025 that place some of the funding responsibilities on state governments. Historically, SNAP benefit costs were fully funded by the federal government, while administrative costs were split evenly between states and the federal government. Beginning in 2027, states will be responsible for 75 percent of administrative costs, with the federal government covering only 25 percent.

More importantly, for the first time in the program’s history, states will also share direct responsibility for benefit costs themselves. Under the new structure, states will cover between 5 and 15 percent of benefit costs depending on their payment error rates. States with high erroneous payment rates will pay more, while states with lower error rates will pay less.

Under the previous structure, states faced weak incentives to aggressively reduce payment errors because the federal government absorbed nearly the entire cost of mistakes. The new system introduces real fiscal consequences for poor administration.

Policymakers Must Not Backslide on SNAP Cost Sharing Reform

Unsurprisingly, state policymakers are resisting SNAP cost-sharing requirements. The latest draft of the farm bill would postpone SNAP cost-sharing requirements until fiscal year 2029 in order to secure additional farm subsidies. Earlier this month, Senate Democrats rejected this proposal, instead demanding these changes be delayed to fiscal year 2030. This would push the timeline back to October 2029, which happens to be post-Presidential election, and a new administration could repeal the requirements before they take effect.

As the Cato Institute’s Romia Boccia puts it, “Once Congress establishes a precedent for delaying accountability, it becomes easier to delay it again, or for a future Congress to abandon the measure altogether.” She further adds that backsliding “would effectively hand a future Democratic administration a window to repeal the requirements before they take effect.”

A Better Path Forward

As I noted the last time policymakers were debating the farm bill in 2022:

True food security and abundance is not likely to come from endless expansions of government welfare programs. Rather, it will be achieved through innovations in agricultural technology. The adoption of vertical farming—the practice of growing crops in vertically stacked layers—would lower transportation costs, reduce carbon emissions and increase the freshness of our food. The development of genetically modified foods would engineer more nutritious foods at lower prices than traditional methods of livestock farming.

Achieving abundance through innovation will also involve moving away from the old model of subsidizing big agribusiness. Policymakers should look to New Zealand for inspiration. In 1984, the government of New Zealand (a country four times as dependent on farming as the U.S.) ended all farm subsidies. The result was a significant increase in productivity, earnings and output. Land use in New Zealand was diversified, the quality of produce improved and food costs decreased.

Once market signals were allowed to operate unfettered, farmers in New Zealand realized that lands formerly used for sheep grazing, farmers were paid a subsidy per head of sheep, were better suited for growing grapes. This led to the launch of the very lucrative New Zealand wine industry.

As the farm bill debate returns in September, policymakers should use this time to reevaluate the costs, regressive nature and market-distorting effects of this old, outdated model. That means resisting efforts to shower large agribusinesses with still more subsidies, preserving the new fiscal accountability built into SNAP, and beginning the longer-term process of unwinding federal interference in agricultural markets. The lesson from New Zealand is that agriculture does not need government protection from market forces to thrive. Quite the opposite: competition, innovation and market discipline are what allow farmers, and consumers, to prosper.

The farm bill was created to address the economic conditions of the 1930s. Nearly a century later, Congress should stop treating those emergency interventions as permanent features of the American economy.