The Democrats have moved their huge tax-and-spend reconciliation bill through the House, and it now heads to the Senate. The bill includes large tax increases on businesses, investment, and high-earning individuals.

The bill also includes $80 billion of increased funding for the Internal Revenue Service (IRS). The IRS workforce would double, with the focus on expanded tax enforcement. The aim is to raise revenues by reducing the tax gap, which is the amount of taxes legally owed but not paid. I argue here and here that more aggressive IRS enforcement would impose substantial costs on Americans in terms of paperwork, lawyer fees, and civil liberties.

Democrats argue that more IRS enforcement is needed to combat rampant tax cheating. But international studies show that the United States has a fairly low tax gap and small shadow economy compared to other countries. In the studies below, the shadow economy generally refers to otherwise legal activities that are outside the government’s tax and regulatory grasp. The tax gap is the amount of revenue that would be raised if the shadow economy were taxed.

The table shows estimates of tax gaps and shadow economies as a percent of gross domestic product (GDP) for the United States and the averages for countries in the European Union (EU) and Organization for Economic Cooperation and Development (OECD). The estimates show that the U.S. tax gap and shadow economy are generally smaller than the country averages.

The last detailed IRS estimate put the net federal tax gap at 2.3 percent of GDP for 2011–2013. The Biden Treasury estimated that the 2019 net federal tax gap was 2.6 percent of GDP. To get the total U.S. tax gap shown in the table, I added estimated state-local tax gaps based on the ratio of total state-local to federal tax revenues (0.56 to 1).

In a 2018 study, Konrad Raczkowski and Bogdan Mroz estimated tax gaps for 35 countries including 28 EU countries and the United States. They put the U.S. gap at 3.8 percent and the EU gap at 7.7 percent.

In a 2015 study, Raczkowski estimated that the tax gap for 28 EU countries was 10.7 percent.

In a 2019 study, Richard Murphy estimated that the tax gap for 28 EU countries was 5.6 percent. Murphy says that his estimate is likely understated.

The EU tax gap may be higher than the U.S. tax gap partly because the overall EU tax burden is higher. We can adjust the EU tax gap estimates downward using the ratio of U.S. taxes-to-GDP to EU taxes-to-GDP of 0.64. The adjusted EU tax gap estimates are 4.9 percent for Raczkowski-Mroz, 6.8 percent for Raczkowski, and 3.6 percent for Murphy. These figures are still similar or higher than the U.S. tax gap.

In a 2018 study, Leandro Medina and Friedrich Schneider estimated the size of shadow economies for 158 countries. The U.S. shadow economy is the second smallest of all countries. Over the 2010 to 2015 period, the U.S. shadow economy at 7.7 percent of GDP is only a fraction the size of Europe’s at 20.2 percent and the OECD’s at 15.3 percent.

In a 2016 study, Mai Hassan and Friedrich Schneider estimated shadow economies for 157 countries. For 2013, the United States at 8.3 percent is much smaller than Europe at 23.1 percent and the OECD at 21.4 percent.

Tax gap studies find that higher tax burdens induce more tax cheating. Hassan and Schneider note: “It is widely accepted in the literature that the most important cause leading to the proliferation of the shadow economy is the tax burden. The higher the overall tax burden, the stronger are the incentives to operate informally in order to avoid paying the taxes.” Thus, Democratic plans to increase tax burdens would likely expand the U.S. shadow economy and related tax gap.

Also, some studies, such as this one, point out that tax gap estimates overstate revenue that would be gained from greater enforcement if they do not include behavioral responses. If the IRS were to squeeze more money out of small businesses, for example, some businesses would reduce hiring and investment or even close their doors. Those responses would reduce revenues raised. Tax cheating is unethical, but higher taxes would damage the private economy whether they stem from law changes or IRS crackdowns.

A final note is that all the estimates cited here should be considered rough. Tax gap estimates are “shades of gray,” as discussed in an excellent new paper by Daniel Hemel, Janet Holtzblatt, and Steve Rosenthal. The authors describe reasons why the actual federal tax gap may be either higher or lower than estimates by the IRS and the U.S. Treasury.

In sum, the U.S. tax gap and shadow economy appear to be relatively small. In my view, reducing the tax gap by giving the IRS more enforcement power is not worth the likely damage to the economy and our civil liberties.

However, policymakers should pursue reforms to reduce the tax gap. They should provide funding and oversight for the IRS to improve its computer systems, employee training, and help services to reduce errors. They should repeal complex and fraud‐​ridden provisions such as the low-income housing tax credit. They should repeal provisions that impose excessive administrative costs such as the earned income tax credit. And finally, policymakers should not add special‐​interest breaks to the tax code, as the Democrats are proposing in their reconciliation legislation.

This graph compares the year-to-year percentage change in headline inflation (the blue line) with the monthly percentage change in the consumer price index (CPI) excluding energy (the red bars). Because the blue line has exceeded 5% since June and exceeded 6% in October, many are understandably convinced that inflation was lower in the spring and has accelerated since then.


As I recently demonstrated, however, large year-to-year percentage changes in the overall CPI have always been dominated by huge changes (both up and down) in the world price of crude oil. 

One way to partly correct for the distortion caused by oil price swings is to use the CPI excluding energy and look at in real-time rather than compared with 12 months ago. This is not a perfect solution because oil prices have powerful indirect effects on many goods (such as plastics) and services (transportation) that are still included in the CPI that excludes consumer energy prices per se. 

The red bars show that monthly changes in ex-energy consumer prices rose very rapidly in April, May, June, and, to a lesser extent, also October. Unlike the blue line, however, they show no monthly acceleration since June. The bars and the line convey quite different messages about the recent direction of inflation (though both are worrisome). 

Why should we exclude or ignore the doubling of crude oil prices over the past 12 months when trying to predict what may happen to prices in general over the next 12 months? The main reason is that it won’t happen again. Oil prices have never doubled for two years in a row, and they often fall as fast as they rose. Of all the price increases in any consumer or producer price index, none are so obviously “transitory” as a 108% 12-month rise in crude oil. 


We can be confident that this key element of past inflation will not keep rising nearly as quickly it did after the low 2020 base period of globally depressed sales and prices during the severe COVID-19 outbreak from October 2020 to February 2021. To maintain a similar pace of overall inflation from this point forward, several other important prices would have to rise faster to offset slow (or negative) increases in year-to-year oil prices.

The other reason to not use the broad energy-inclusive CPI to predict 12-month inflation rates is that next April, May, and June the 12-month percentage changes will be calculated from this spring’s high base. That high base will have the opposite effect of misusing the low 2020 base this September and October.


If conservative media keeps highlighting year-to-year changes as if that tells us what happened last month, those now shouting about the 6.4% figure as the latest measure of inflation may well be obliged to make the opposite mistake next spring and say that inflation is coming down — even if it isn’t. 

“U.S. Inflation Hit 31-Year High in October as Consumer Prices Jump 6.2%” That should make you wonder: What happened in 1990 to make that October’s year-to-year CPI inflation rate of 6.4% so much like October 2021’s 6.2%?

The first graph compares the 1990–91 year-to-year percentage change in the oil price (79.3% in October) to the tightly linked year-to-year percentage change in the CPI. The price of West Texas crude oil rose from $16.70 a barrel in June to $36.04 in October and the year-to-year CPI marched up in lock step to 6.4%. Then the year-to-year CPI inflation dropped back to 2.8% a year later as crude oil fell below $20. This was no coincidence.

Now, fast forward 31 years. The price of West Texas crude rose 106.8% from October 2020 ($39.40 a barrel) to October 2021 ($81.48). That was an even larger year-to-year percentage change than the Great Recession’s crushing 98.5% increase from July 2007 ($74.18) to July 2008 ($133.93).

The second graph goes back to August 1971 (Nixonomics). It shows that year-to-year percentage changes in the CPI (and all other price indexes) invariably go up and down with year-to-year percentage changes in the price of oil. This happened too regularly to prudently ignore. Higher oil prices also raise non-energy costs such as transportation, paint, and plastics, so even core inflation is affected.

Congress or the White House could do extraordinarily little to prevent or undo the doubling of the oil price, because oil prices (and many food prices) are set in world markets by global supply and demand. Restrictions on U.S. oil and gas drilling are foolishly unhelpful, but the post-lockdown surge in world oil, gas and coal prices was dominated by global demand not local supply.

Past and pending federal “fiscal stimulus” sprees (regardless of their effect on budget deficits) are clearly imprudent when supplies of critical skills and resources are already too tight to meet both private and public demand. But government demand for fossil fuels is not big enough to have much effect on the world price. The Federal Reserve’s incestuous purchases of Treasury IOUs invites more fiscal excess. But higher interest rates could significantly affect world oil demand only by contracting U.S. industry and commerce.

As both graphs show, however, markets are self-correcting. Past oil price spikes also overstated year-to-year inflation statistics, such as the PPI and CPI, but not for long. Oil price spikes always proved transitory because steep energy prices squelch demand and boost supply. Oil prices spikes can also end too abruptly by triggering global recessions—as in 1974, 1979, 1990 and 2008. Recession risk is greater—as Ben Bernanke and others documented in “Systematic Monetary Policy and the Effects of Oil Price Shocks”– if the Fed overreacts to oil-based distortions in headline inflation by raising interest rates on bank reserves too aggressively.

If we do not stop obsessing over widely misunderstood year-to-year percentage changes—and rushing to blame someone at home for a global problem—policymakers could easily repeat bad mistakes.

The proposed $2.4 trillion reconciliation bill includes $80 billion for increased Internal Revenue Service (IRS) funding. The Democrats want to beef up the tax agency and expand its powers. The aim is to raise revenues by reducing the tax gap, which is the amount of taxes legally owed but not paid.

The large funding increase would double the IRS workforce, according to the Congressional Budget Office (CBO). About three-quarters of the increased funding would go toward enforcement.

Supporters think that greater enforcement would be good policy because the expected higher tax revenues would outweigh the cost of higher IRS spending. But that ignores the higher costs that would be imposed on the private sector, including tax compliance burdens and a loss of civil liberties. More aggressive IRS enforcement would mean more paperwork, more lawyer fees, more time consumed on tax matters, and more anguish and uncertainty for taxpayers. It could also result in less privacy and personal financial security. These private costs are difficult to measure, and are usually ignored by policymakers.

With IRS enforcement, there is a trade-off between the benefits of a lower tax gap and the costs to society of achieving it. If we wanted a tax gap of zero, we could hire an army of IRS agents to routinely search every home and laptop in the nation and impose root-canal audits on everyone. But people in democracies do not accept that level of government intrusion, and so every tax system has a tax gap.

The U.S. tax gap is fairly low by international standards. The official net federal tax gap of $381 billion is 2.3 percent of gross domestic product (GDP). One pro-enforcement group puts the gap at 2.5 percent of GDP. If we add in an estimated state-local tax gap, then the total U.S. gap would be about 3.9 percent of GDP. By comparison, this study estimated that the average tax gap in the European Union (EU) is 5.6 percent of GDP, while this study found that the average EU tax gap is 10.7 percent of GDP.

Another study estimated that the U.S. tax gap is 3.8 percent of GDP and the average tax gap in the EU is 7.7 percent GDP. Yet another study estimated that among 157 countries the United States had the second smallest shadow economy, meaning the economic activity outside of the government’s tax and regulatory net.

If the U.S. tax gap is already quite low, the marginal costs of reducing it further from enforcement is probably high. That is suggested by the recent Democratic proposal for the IRS to gather total inflow and outflow data from millions of household bank accounts. That would be a major intrusion into personal finances and could impose large compliance costs on financial institutions. But that is the sort of aggressive action that Democrats think they need to reduce the tax gap further through enforcement.

Another example of how civil liberties would shrink with more aggressive enforcement regards IRS penalties for taxpayer underpayments, which can be a steep 20 percent. In response to IRS abuses in the 1990s, Congress enacted a requirement (tax code section 6751) that supervisors must sign off in writing when IRS employees want to impose these heavy penalties. The National Taxpayer Advocate noted that this “provision protects a taxpayer’s right to a fair and just tax system.” Yet the Democratic plan (p. 135) would repeal this important procedural check on the powerful tax bureaucracy.

Tax Gap Trade-Off Curve

Figure 1 illustrates the trade-off between the size of the tax gap (horizontal axis) and the private-sector costs imposed by more aggressive enforcement (vertical axis). On the bottom right, the IRS does little enforcement and the tax gap is large (which is bad), but the private-sector costs are low (which is good). On the top left, the IRS enforces aggressively and the tax gap is low but the private-sector costs are high.

The assumed shape of the curve suggests that starting from the right, initial enforcement efforts impose moderate private-sector costs and generate substantial revenue. As the government moves to the left to close the tax gap, extra enforcement brings in less marginal revenue but imposes higher costs on the private sector. On the figure, “Today” and “More aggressive enforcement” are where I think enforcement is now and where Democrats want to move us.

The Foreign Account Tax Compliance Act (FATCA) passed in 2010 indicates that we are on the top left of Figure 1 because it appears to have generated relatively little revenue but imposed large costs on the private sector. FATCA imposes complex rules on thousands of foreign financial institutions forcing them to find out which of their customers are American and to report the transactions of those customers to the U.S. Treasury. It also imposes compliance burdens on millions of Americans who live abroad, do business abroad, or who own foreign assets. The rules were layered on top of other foreign reporting rules that were already in place.

The FATCA rules may only raise about $200 million a year but have imposed tens of billions of dollars in compliance costs on financial institutions and their customers. FATCA creates major headaches and injustices for the nine million Americans who live abroad and for Americans pursuing foreign business opportunities. Financial institutions all over the world have decided not to provide services to Americans because of the extra compliance burdens involved. FATCA rules were overkill and should be repealed.

Another example of overkill on tax enforcement regards IRS Form 3520. People who receive substantial foreign gifts and mistakenly do not notify the IRS have been getting hit without warning with enormous 25 percent penalties on the gross value of the gifts, and the IRS has not been flexible in abating them. The heavy penalties are essentially theft because foreign gifts are not taxable under the federal income tax.

As with FATCA, tax experts know that Form 3520 enforcement is harmful and unfair, but it is very difficult to restrain the IRS once it is unleashed. A big problem with giving the IRS new enforcement powers, as the Democrats are proposing, is that the damage to citizens and the economy may be much larger than expected yet politicians almost never admit mistakes and backtrack to fix bad provisions.

Other problems with increasing IRS enforcement powers include:

• Compliance Costs. The income tax already imposes compliance costs on individuals and businesses of more than $400 billion a year. That is overhead for the economy and subtracts from our standard of living. More aggressive enforcement would impose higher compliance costs on millions of law-abiding taxpayers.
• False Positives. The IRS makes many mistakes, and it can be difficult for taxpayers to get the agency to admit error and back off. Tax litigation specialist Dan Pilla says that the “IRS’s audit results are incorrect between 60 and 90 percent of the time,” which the agency gets away with because many taxpayers don’t challenge them. More IRS enforcement means more targeting of people who end up being innocent. Individuals and businesses will have to invest more time and money in lawyer fees to defend against false IRS claims. With regard to the Democrat’s bank reporting proposal, Steven Rosenthal of the Tax Policy Center noted that it would “bury the agency in a sea of unproductive information.”
• Financial Privacy. Americans do not want giant computer systems amassing even more of their personal data, but that is what a more powerful IRS would do. With its treasure trove of information on every household, the IRS is an ideal hacking target for criminals and foreign governments. Earlier this year, ProPublica published private information on high-income taxpayers gained from thousands of stolen returns it had obtained. ProPublica’s irresponsible action could inspire criminals to steal tax returns of other well-known people to make a media splash, to sell information, or to extort payoffs. The IRS experiences “1.4 billion cyberattacks annually” and has a “track record of data breaches,” including data from 724,000 returns leaked in 2016. A study by Michael Hatfield of the University of Washington argues that the IRS’s vast pool of data is highly vulnerable to ransomware attacks, Chinese government hacking, and other criminal activity.

Democrat Plan Would Shift the Curve Upward

The Democrats want to increase IRS enforcement to reduce the tax gap, but their tax plan would increase tax-code complexity resulting in the opposite. Tax-code complexity increases tax avoidance and evasion by making IRS administration more difficult and by prompting taxpayers to combine disparate provisions in unexpected ways. In a recent report on tax enforcement, the CBO noted:

“The complexity of the tax code makes compliance more challenging and increases areas of potential dispute with the IRS. Eligibility requirements for certain tax benefits can be confusing and make it more difficult for taxpayers to determine their tax liability. Such eligibility may also be difficult for the IRS to verify.”

Unfortunately, the Democratic tax plan would increase disputes and confusion by adding dozens of tax breaks for energy, housing, manufacturing, education, and other items. The more such special-interest breaks there are in the tax code, the more information the IRS needs to collect on our finances, investments, purchases, lifestyles, and other personal details.

The IRS cannot properly administer the tax breaks it already has, let alone a raft of new ones. The earned income tax credit (EITC), for example, suffers from a 24 percent improper payment rate, despite many efforts to tackle the problem. Meanwhile, the Low-Income Housing Tax Credit is riddled with fraud by housing developers. The Government Accountability Office found that IRS oversight of the LIHTC is minimal and disorganized. The IRS auditing guide for the LIHTC is a massive 344 pages long, and that intense complexity is probably why the IRS does little policing of the credit.

Figure 2 shows that the Democratic tax plan would shift the tax gap trade-off curve upward to the right. While the Democrats want to beef up the IRS to reduce the tax gap, their plan would increase tax-code complexity, which would expand the tax gap.

Tax Reform Would Shift the Curve Downward

Movements along the tax gap trade-off curve illustrate IRS enforcement as a win-lose proposition—gains to the government through aggressive enforcement are losses to the private sector. But there is a way to generate a win-win. Reforms to simplify the tax code would shift the curve down to the left, which would reduce both the tax gap and private-sector costs.

There are two main reasons why the federal income tax is so complicated. The first is that politicians try to micromanage the economy through credits, exemptions, and other narrow breaks. Tax partner Chris Hesse noted to me, “Frequent changes to many of these special-interest provisions magnify the difficulty of IRS tax administration and financial planning for individuals and businesses.” Virtually all such breaks should be repealed, which would make IRS administration and taxpayer compliance much easier.

The second is that the income tax is based on an inconsistent and ad hoc definition of “income.” Many tax experts think that consumption would be a better base for the tax code and would greatly simplify the system. The Tax Foundation estimated that a consumption-based flat tax would slash tax compliance costs by about 90 percent.

Figure 2 shows that such a tax reform would shift the tax gap trade-off curve downward. Taxpayers would enjoy lower compliance costs and fewer civil liberties intrusions, and the IRS would benefit from easier administration and a lower tax gap.

In sum, it makes sense to improve IRS computer systems, employee training, and phone service to reduce taxpayer errors and shrink the tax gap. But it would be unfair and irresponsible for Congress to increase the agency’s enforcement powers when there is so much wrong with the current tax code and its administration. Congress should repeal enforcement structures such as FATCA that have higher costs than benefits, and it should repeal fraud-ridden provisions such as the LIHTC rather than adding new special-interest breaks.

Data Notes: The official net tax gap of $381 billion (for 2011 to 2013) divided by 2012 GDP is 2.3 percent. The tax gap estimate from www​.shrink​the​gap​.com of $574 billion is 2.5 percent of 2021 GDP. I assumed that the state-local tax gap is the same size relative to tax revenues as is the federal tax gap. These tax gap figures include all types of taxes.

Ilana Blumsack created the charts for this post.

The only good thing about the infrastructure bill that Congress just passed is that it doesn’t include any money for high-speed rail. Unfortunately, it did include far too much money for things like Amtrak, urban transit, and rural broadband.

The infrastructure bill is really two bills in one: first, a reauthorization of existing federal spending on highways and transit; and second, brand-new spending on highways, transit, Amtrak, electric vehicles, airports, ports, clean water, clean energy, and broadband. This entirely new spending is almost entirely unnecessary as the infrastructure crisis was mostly fabricated in order to get Congress do what it always does, which is throw money at problems that are perceived to exist, whether they are real or not.

About half of the transportation dollars in the bill are dedicated to Amtrak and urban transit, modes of transportation that carry less than 1 percent of passenger travel and no freight. While the other half appears to be dedicated to highways, much of that will be spent on projects that will reduce, not maintain or increase, roadway capacities.

All of this is based on a presumption that automobiles are evil and the primary goal of government should be to wean Americans off the automobile and get them into various forms of government-owned mass transportation. Even if you believe that automobiles are a major contributor to global climate change, many states and cities have made enormous efforts to get people to reduce their driving since 1970, and all of them have failed.

States are already lining up to get some of the $66 billion that the bill included for Amtrak. But even if the bill had spent twice that on Amtrak, it wouldn’t have significantly increase passenger train ridership. In most of the markets where Amtrak wants to expand service, airlines and/​or bus companies already provide excellent service at fares that Amtrak won’t be able to match even with all of its subsidies.

Senate Republicans managed to get the new funding for urban transit reduced from Biden’s proposed $80 billion to about half that. But it is still way too much, especially considering that the reauthorization half of the bill includes more than $70 billion for transit.

The reality is that transit and intercity passenger trains are obsolete technologies that only survive because of giant taxpayer subsidies. I personally love passenger trains, but I don’t think they should be subsidized any more than Tom Hanks, who collects manual typewriters, thinks taxpayers should subsidize a manual typewriter industry. If we end the subsidies, transit will survive in New York City and a few passenger trains might survive on especially scenic routes, but elsewhere no one would particularly notice their absence.

The bill also includes $65 billion for rural broadband based on overestimates of how many people lacked access to high-speed internet. According to the White House, which originally proposed this spending, “more than 30 million Americans live in areas where there is no broadband infrastructure.” But according to the Federal Communications Commission, only 21 million Americans “lacked access to fixed terrestrial” broadband in 2019, and all of those Americans had access to satellite broadband if they wanted it. The main beneficiaries of this $65 billion will be broadband companies and high-income exurbanites.

All of this spending is on top of the three coronavirus relief bills passed by Congress in April and December, 2020, and March 2021, which included more than $116 billion for transportation. Some 59 percent of the transportation dollars in those bills, or $69 billion, was dedicated to transit systems that had lost more than half of their riders due to the pandemic. In retrospect, considering the supply-chain problems we are experiencing today, that money should have been spent on freight transportation instead.

The infrastructure bill does include $17 billion for ports, but most of this will be too little, too late to solve today’s supply-chain problems. The real lesson of this bill is that the government shouldn’t be involved in funding marketable services, like transportation and broadband, as it is too likely to get captured by entrenched interests while it ignores real problems.

There are still those who believe Congress should fund a high-speed rail network, but recent news about China’s high-speed rail systems provide another lesson about government failure. China has twice as many miles of high-speed rail lines as the rest of the world combined. To build those lines, China State Railways and provincial governments have gone trillions of dollars in debt. Some of China’s high-speed rail lines earn less in ticket revenues than the cost of the electricity used to power those lines, and the system as a whole is losing $44 million per day.

To help pay for the lines, China State Railways has increased freight rates 11 times so that it now costs twice as much to ship freight by rail as by truck (compared with less than one-fourth as much in the United States). As a result, the share of freight moved by rail has declined from 50 percent in 2005, when China began building high-speed rail, to 17 percent in 2016, and probably less today.

Some experts, including Beijing Jiaotong University Professor Zhao Jian, believe that China’s high-speed rail program will lead to a debt crisis far worse than the Evergrande crisis (which was manufactured by the government to punish wealthy housing developers). Americans can count ourselves fortunate that we at least dodged this bullet train.

President Biden and congressional leaders are searching for ways to raise $2 trillion to fund proposed spending increases. They have been floating many harmful tax ideas, receiving blowback on them, and then proposing new ideas that are just as bad. They seem to think that they can find a magical revenue source that sucks $2 trillion out of the private sector without causing major damage.

The recent Biden framework included a new minimum business tax of 15 percent on financial statement (or book) income. The tax would apply to companies with income of more than $1 billion, and would supposedly raise $325 billion over 10 years. A group of Democratic senators are championing the plan.

This is a really bad idea. For one thing, it would add needless complexity to the tax code—supporters have already said that the new minimum tax would retain various narrow tax breaks, such as those for research, energy, and housing. The new tax would also discourage the beneficial use of stock-based compensation and undermine investment by limiting deductions for capital purchases.

Perhaps the worst effect of the proposed minimum tax would be to corrupt corporate financial reporting. Currently, financial statements are constructed according to Generally Accepted Accounting Principles (GAAP), which are set by the independent Financial Accounting Standards Board (FASB). The GAAP rules aim to generate useful information on company performance and aid in the efficient allocation of capital across the economy.

But a minimum tax tied to book income would create harmful distortions. For one thing, corporations would likely adjust or manipulate their book income to reduce the hit from the new tax. That would undermine the usefulness of financial statements for markets and investors. At the same time, politicians would likely start pressuring FASB to change GAAP rules for their tax-policy ends, which would further reduce the utility of financial statements for capital allocation.

A Bloomberg piece identified other possible negative side-effects of such a minimum tax, including companies increasing their lobbying over accounting standards, FASB becoming biased in decisionmaking as it considered tax consequences, and markets increasingly relying on unofficial financial statements as politics distorted GAAP.

Accountants are worried about the prospect of politicians distorting financial statements. When Senator Elizabeth Warren proposed a corporate tax on book income in 2019, accounting professors Michelle Hanlon and Jeff Hoopes noted: “The influence of Congress on FASB would almost certainly increase if financial accounting income was taxed. As a result, the usefulness of financial accounting to investors and creditors would be damaged.” Similarly, accounting professor Scott Dyreng wrote at the time: “If taxes become tied to GAAP earnings, financial accounting standards will inevitably be distorted. Politicians would pressure the Financial Accounting Standards Board to adjust GAAP in a way that increases government revenue, or punishes or rewards certain corporate expenditures.”

The American Institute of Certified Public Accountants (AICPA) noted that when Congress tied the tax code to book income in 1986, the “approach was quickly repealed because many firms and businesses adjusted their financial accounting choices to reduce their income rather than having a primary focus of providing the most transparent and useful financial results to the capital markets.”

With regard to the current Democratic proposal, the AICPA says: “Public policy taxation goals should not have a role in influencing accounting standards or the resulting financial reporting. Independence and objectivity of accounting standards are the backbone of our capital markets system.”

The Biden administration and Congress have been warned.

As discussed in a previous blog post, proposed spending on U.S. ports in the bipartisan infrastructure bill is not only unnecessary but might actually slow down needed upgrades in the our port system, which ranks as one of the more expensive and least efficient systems in the world. Buried in the latest version of congressional Democrats’ reconciliation bill is more bad news: the $2.65 billion in additional federal spending on ports (to reduce air pollution) appears to exclude investment in automation – the lack thereof being one the key reasons that U.S. ports are currently so inefficient.

In particular, the bill provides grants for U.S. ports to purchase and install “zero-emission port equipment or technology” at their facilities. However, the bill’s new definition (at pp. 307–308) of eligible projects reads as follows (emphasis ours):

The term ‘zero-emission port equipment or technology’ means human-operated equipment or human-maintained technology that (A) produces zero emissions of [relevant air pollutants]; or (B) captures 100 percent of the emissions described in subparagraph (A) that are produced by an ocean-going vessel at berth.

Robots therefore need not apply.

As noted, there was already little reason for subsidizing U.S. port modernization, but that’s especially the case where those funds can’t be spent on the very modernization that ports need most. 

But, hey, at least the longshoremen’s unions – long resistant to U.S. port automation – are probably pleased.