Notes for Chris Edwards - Debt & Taxes


Chris Edwards is the director of tax policy studies at Cato and editor of He is a top expert on federal and state tax and budget issues. Before joining Cato, Edwards was a senior economist on the congressional Joint Economic Committee, a manager with PricewaterhouseCoopers, and an economist with the Tax Foundation.

Edwards has testified to Congress on fiscal issues many times, and his articles on tax and budget policies have appeared in the Washington Post, the Wall Street Journal, and other major newspapers. He is the author of Downsizing the Federal Government and coauthor of Global Tax Revolution.

Edwards holds a BA in economics from the University of Waterloo and an MA in economics from George Mason University. He was a member of the Fiscal Future Commission of the National Academy of Sciences.


Blurb - Debt & Taxes

Halloween happens to fall on a Sunday this year, which means my guest this weekend will have to weave the topic in with the spooky holiday. Chris Edwards, my go-to expert at Cato on all things debt and tax-related, should have no trouble frightening my listeners with his latest analysis.

Where to start? The skyrocketing debt has economists murmuring about inflation. But sometimes the proposed solutions are even more terrifying than the problem itself – as in the case of new taxes on capital gains, corporate income, and even a special so-called "billionaire's tax" on unrealized capital gains. Edwards returns to the show to break down the folly of scapegoating the wealthy, and why this approach is likely to backfire.

All the while, tax revenues have actually grown to their highest rates. Yet rather than using the windfall to reduce debt, Democrats are proposing a new spending binge that makes the 2008 stimulus look like chump change. As always, the government promises that its spending spree will stimulate innovation and growth, but Edwards points to the well-established link between debt and reduced growth.

They say that death and taxes are the two inevitabilities. Massive debt, however, is not inevitable.

Tune in this Sunday for a special Halloween edition of The Bob Zadek Show to hear how we can turn back the debt clock, or at least stop the ticking time bomb that it represents.



September 27, 2021
The Democratic proposals are radical and out of step with the treatment of capital gains in other high‐income nations.

Punishes innovation and growth.

U.S. rate is higher than OECD average. Biden proposes doubling it to 37% - third highest.

Liberals define "income" to include paper wealth gains not yet realized as cash flow. Conservatives favor income definition closer to consumption.

To the extent that we need to tax, we should “tax the fruit of the tree, but not the tree itself.”
October 25, 2021
President Joe Biden and his fellow Democrats have been pushing tax increases to fund a large expansion of entitlement programs.
The second false narrative is that rich people don’t pay their "fair share" of taxes and enjoy lower tax rates than the middle class. Such claims are repeated endlessly by Biden , House Speaker Nancy Pelosi , and Senate Majority Leader Chuck Schumer . The president, for example, recently tweeted : "I’m sick and tired of the super-wealthy … not paying their fair share in taxes." … All authoritative data sources show that high earners pay much higher effective tax rates than the rest of us. IRS data show that the average individual income tax rate on the top 1% of households is 25%, which compares to just 7% for middle-income households and 3% for the bottom half of households.
tax hikes would punish success and damage the middle class by reducing investment and growth in the economy.
October 15, 2021

Democrats are using data that includes capital gains as income to make claims that the superrich only pay 8% of taxes.

If Jeff Bezos’ Amazon shares go up $10 billion in value, that is “income” and should be taxed right away even if Bezos has not realized the gains or used them for consumption.

Wealth disappears all the time as shares fall in value and investors lose money.

For consistency, the leftist Haigs-Simon model would similarly show a much lower effective tax rate for any middle income person who realized a gain of value in their house.

This punishes capital accumulation.

September 29, 2021

Promises of new innovation from government spending ignore the unseen costs of startups not formed, tech companies not expanding.

Angel investors are the guardian angels of growth in the economy:

America is blessed with 335,000 wealthy angel investors who fund technologies and entrepreneurs that governments and big corporations overlook. It would be foolish to raise a capital gains tax barrier to such socially beneficial activity.
September 29, 2021

Beneath the discussion of taxation is the question over the social value of wealth and whether wealthy people are net contributors. This article, focusing on angel investment, is a very compelling apology for high wealth individuals – from celebrities to CEOs.

Some policymakers complain that wealthy people and big corporations rig the economy and deny opportunities to others. But wealthy angels do the opposite: they fund startups that pry open rigged industries and generate competition. The best check on big corporations is vigorous competition in deregulated markets from well‐funded startups.

Capital gains tax applied to startups would kill American innovation.

Wealth is concentrated, but it's concentrated in the hands of business owners.

Looking just at billionaires, the consulting firm Wealth‐X estimates that just 2 percent of their fortunes consist of homes, yachts, jewelry, cars, and other luxury assets.

Most of it is to the benefit of consumers.

Wealth takes active management and stewardship to maintain. It can only grow if it provides benefits to people.

In market economies, old wealth is often in decline as new wealth is being created by entrepreneurs starting and growing businesses.

Angel investment requires wealthy individuals who take risks with their money.

How Angel Investing Works

Startups are experiments.

Most fail. A few succeed and make large amounts of money. Angel investing depends on reaping the large rewards of a small number of successful bets.

Angel investors and venture capital provide large amounts of funding to projects with intangible assets:

the main assets of some startups are intellectual property, which is not easy for potential lenders to evaluate. In these circumstances, equity financing is needed.

Angels fill the information gap between startups themselves, whose technology is hard to assess, and the larger pools of capital from venture capital firms.

Angels use their personal wealth to invest directly in startups, whereas VCs are structured as limited partnerships and raise funds from wealthy individuals, family offices, corporations, pension funds, university endowments, and foundations.
Angel investments are long term, risky, and highly illiquid. It is only people with substantial wealth, time, and expertise who can fill this unique role in the economy.

Billionaire's task

Musings on Markets - Sent by Bob
In conjunction with this widening inequality, the perception is building that the wealthy don't pay their fair share in taxes, even though the question of whether they are depends upon the prism you look through. If you focus just on federal tax dollars paid by each group, the wealthy are actually paying a larger share of federal taxes collected than ever before in history, undercutting the claim that they are welching on their tax responsibilities.

Biden promised not to raise taxes on those earning less than $400,000, and promised to raise taxes on those not paying their fair share:

In keeping with these two promises, the version of the big infrastructure bills that was initially promoted by the administration raised a significant portion of revenues from changes in tax rates for the wealthiest individuals (by raising the marginal tax rate from 37% to 39.6% for those in the $400,000 plus income range and by adding a surtax on capital gains for those making more than a million dollars in income) and by raising corporate tax rates from 21% to 28%. After months of back and forth between members, the House Ways and Means Committee approved tax provisions on September 15 that included many of these proposals, raising the corporate tax rate from 21% to 26.5%, while putting limits on interest tax deductions, and the individual tax rate to 39.6% (for income) and 25% (for capital gains).

Billionaires' tax proposed as a compromise with democrats like Kristen Sinema, who didn't like the tax hikes on those earning 400,000.

Taxing unrealized gains on all kinds of assets.

This violates the golden rule of taxation to keep a broad base with low rates. Makes evasion easier, and changes behavior of individuals in a way that maximally distorts the economy, reducing the tax base, and thus long term revenues, despite the higher rates.

Like the Alternative minimum tax, that which initially only targets a small number of taxpayers will eventually encompass millions.

Volatility of capital gains (and countercyclicality) makes them unreliable.

How do you come up with cash for unrealized gains?

Taxpayers will have to get appraisals all the time.

Tax Revenues

October 13, 2021 by Chris Edwards
Congress should use the current revenue gusher to reduce dangerously high deficits and debt. Government debt in the United States at 141 percent of gross domestic product is above the average of other high‐income countries, and it is well into the danger zone above 100 percent of GDP where it appears to reduce economic growth.
October 20, 2021, National Review, Chris Edwards

Taxes undermine future prosperity.

Interest rate payments increasingly eat up revenues, leaving less money for other programs and expenditures.

Federal interest payments are projected to rise from $331 billion in 2021 to $910 billion by 2031 — approximating our total projected spending on national defense.

A fiscal crisis is possible - which could result in new taxes like the VAT, which "which now hammer the middle class [in Europe] with an average 21 percent tax rate on most consumption goods."

Interest abroad means domestic wealth is siphoned away.

Allowing debt to grow allows wasteful spending on low-value programs.

October 19, 2021
Salmon updated his debt and growth research in the Cato Journal. He found 36 studies that identified a statistically significant negative effect of government debt on growth.
October 6, 2021
Democrats and Republicans are currently battling over who will get blamed for raising the government’s statutory debt limit above $28 trillion. But both parties are to blame for the mountain of accumulated federal debt, which is roughly eight times larger than total state and local government debt of $3.2 trillion.
September 21, 2021

slower wage growth, less innovation, higher taxes on individuals, increased tax evasion, increases tax complexity, enables wasteful higher spending. All on top of the fact that we already have a higher than average corporate tax rate.

September 7, 2021

Videos & Podcasts

Cato Daily Podcast, September 20, 2021
Joe Biden wants to raise taxes on some, subsidize others, and snoop on everyone’s bank accounts. What could go wrong? Chris Edwards explains.
Free Thoughts, September 17, 2021

Ryan Bourne and Chris Edwards interviewed by Trevor Burrus on inequality

The Washington Examiner, April 30, 2021

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