"Kee" Points with Jim Kee, Ph.D.

  • Border Funds and Deficits
  • Taxing Share Buybacks

Border Funds and Deficits

President Trump declared a national emergency on Friday in order to secure funds for border security from other sources (like the military), and he signed a bipartisan spending bill that will keep key areas of the government funded through September (WSJ). Several legal challenges to the declaration are expected, and soon. With Congressional Budget Office estimates of a $1 trillion annual government budget deficit by 2022, funding for new programs would seem hard to come by. But many economists are less concerned, I would say, than the general public is with respect to the government’s fiscal position (e.g. a recent WSJ article, “Worry About Debt? Not so Fast, Some Economists Say”). Part of this is because deficit spending in the 1980s occurred amidst falling, not rising interest rates, which questioned the notion that government borrowing “crowds out” private sector borrowing through higher rates. The same thing has happened with the recent financial crisis, with government debt-to-GDP ratios more than doubling while interest rates have fallen. The other reason, I think, is that most economists know that future unfunded entitlements can’t be met (so they will be means tested), and they know that the current tax system is incapable of reliably increasing government revenues in the long run. So for a lot of economists, this is a slow-moving train that has been coming - and seen - for decades. Again, I would expect incremental changes rather than the wholesale scrapping of programs that the internet hypes (i.e., “Social Security and Medicare are bankrupt/going away, are you prepared?”).

Taxing Share Buybacks

Another item that has seen a lot of press attention lately has been bipartisan calls to tax share buybacks, allegedly with the hopes that this will cause businesses to invest the funds instead. That’s pretty silly. If a company doesn’t have good investment opportunities then it should return cash to investors, whether through share buybacks, paying down debt, or paying out dividends. Whether or not that money then finds its way into business investment spending depends upon the climate for business investments, and that - the climate for business investments (e.g. tax/regulatory) - is what policy makers should be focused on. Of course, since share buybacks are taxed at a lower rate (capital gains) than dividends, there is a case that taxes on buybacks should be brought up to parity with dividends (or dividend taxes brought down). But the value of an asset like a share of stock is equal to the (discounted) future cash flows or earnings that it will generate, and those earnings are already taxed. So there is a case that taxing the earnings of an asset, and taxing changes in the value of an asset itself, is double taxation. Perhaps more on this topic later, because the economics - as opposed to the politics - of taxation are really fascinating. I hope to see more economics in the discussion as we head into the 2020 election preliminaries.