Responding to me, Duke professor Michael Munger writes that, “If the real hawks like John Tamny get their way [full SALT deduction], with the cap going up to $100,000 or more, the loss in tax revenue could top a trillion in the next ten years.”
To be clear, I don’t think Munger thinks we work for government, but his commentary gives the impression of a cost to tax cuts that results in debt. He could probably be persuaded to rethink his argument. As is vivified in my upcoming book, The Deficit Delusion, governments don’t have debt because they tax too little, nor do they have debt because they spend too much. Let’s start with the spending side first.
If government debt were all about governments overspending, then it’s certainly true that Haiti, Peru, and Russia would have lots of debt. Except that they don’t. The biggest borrower of the three is Russia. $300 billion total. Haiti’s is a tiny fraction of Russia’s. Which is the point. Debt is an effect of market confidence in the incomings of individuals, businesses, and yes, governments. Since none of the countries mentioned has a promising economic future that would yield lots of tax revenue, none can borrow in any notable amount.
Which brings us to the tax side of debt. Munger contends that full SALT deduction for Californians would run up federal debt. Such a view implies that governments can just borrow. See above. They cannot. Borrowing, including government borrowing, is once again an effect of an entity’s ability to pay monies borrowed back. To suggest otherwise is to suggest rampant market stupidity.
Munger’s analysis implies that there wouldn’t be a market impact from Californians handing over much less money in federal taxes. Sorry, but that’s not true. If California were a country, it could lay claim to having the world’s fourth largest economy. The wealth in California is unrivaled in any other U.S. state, as are total federal taxes paid by Californians.
Which is a reminder that absent all the taxes paid by Californians to the federal government, the federal government wouldn’t have nearly as much debt. To suggest otherwise is to once again suggest impressive market stupidity. Munger knows markets are smart.
He writes that California “can only get away with that kind of spending [in state] because citizens in Texas and Florida are making up for the federal tax losses!” He knows better. California can get away with enormous amounts of waste in state because it’s the richest state in the U.S., by far.
Which explains my desire to put a fence around California not with a SALT deduction, but a SALT credit. Government spending is a tax. Precisely because Californians produce so much wealth, they by extension produce enormous revenues for the federal government that enable freedom and economy-sapping spending, but also a great deal more of the debt that Munger disdains.
He makes a brief plea for a “balanced budget” in his rebuttal of my argument, but it’s seemingly ignored by him that balancing a federal budget when you have taxable access to the wealth produced in California, New York, Illinois, Connecticut, and Massachusetts is the accomplishment equivalent of former Duke star Cooper Flagg slam dunking on a 9’ hoop.
Munger dislikes federal debt, but the professor in him ignores the market reality that federal debt is an effect of too much federal tax revenue now, and exponentially more in the future. As for SALT, Munger should love it exactly because he disdains government spending. The more that we can keep California wealth in California, the less damage national politicians can do with it.
