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    Britain’s Gamble on Tax Cuts has Economists Warning of Past Mistakes

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    The International Monetary Fund is just one of the many voices that have criticized a plan to cut rates for high earners.WASHINGTON — A stunning rebuke from the International Monetary Fund this week underscored one of the biggest risks of the new British government’s plan to slash taxes on high earners: It could exacerbate rapid inflation and destabilize markets at a precarious economic moment.The alarm from economists, central bankers, investors and top U.S. officials centered on the likelihood that the tax cuts could stoke consumer demand by giving people more money to spend, pushing crushingly high prices even higher. That would put the British government in direct conflict with aggressive efforts of the central banks around the globe — and in the United Kingdom — that are raising interest rates in a bid to bring inflation under control.Many economists say British officials are also ignoring the lessons of the most recent bout of tax cuts — those engineered in the United States by former President Donald J. Trump. Empirical research on the early results of those cuts suggests that they mostly helped the economy by temporarily increasing consumer demand, an outcome that could prove particularly damaging in the high-inflation environment that Britain and much of the world are experiencing.Liz Truss, Britain’s new prime minister, has staked her fledgling government on a oversize, once-in-a-generation package of tax cuts and deregulation meant to energize the economy. It includes a cut in rates for the country’s lowest income tax bracket — and, in what was a surprise move, a five-percentage-point cut in the country’s top income tax rate, which applies to those earning more than 150,000 pounds, or about $164,000, a year.The International Monetary Fund responded to those proposals with the sort of pointed criticism it typically reserves for an emerging-market economy, not for the economy of one of the wealthiest nations in the world.“Given elevated inflation pressures in many countries, including the U.K., we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,” the I.M.F. said in a news release on Tuesday.The statement noted that the tax cuts would most likely increase economic inequality, and it urged the British government to “provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners.”More on Politics in BritainPrime Minister Liz Truss was chosen by a divided British Conservative Party to lead a country facing the gravest economic crisis in a generation.A Domestic Push: After a period of mourning for the death of Queen Elizabeth II, the new government led by Ms. Truss began to work in earnest, announcing several initiatives to address Britain’s economic and social problems.A Turn Toward Thatcherism: Ms. Truss bet on a heavy dose of tax cuts, deregulation and free-market economics to reignite growth. The negative reaction from financial markets underscored the extent of the gamble.Seizing the Moment: Accusing Ms. Truss of losing control of Britain’s economy, the leader of the opposition Labour Party, Keir Starmer, staked his claim as the guardian of sound fiscal policy.Energy Policies: The British government said it would freeze electric and gas bills for households and cut energy costs for companies in an effort to mitigate the effects of Russia’s restriction of gas supplies to Europe.Investors have also recoiled from the plan, sending British bond yields soaring — forcing the Bank of England to intervene to stabilize them — and causing the value of the pound to plummet.Ms. Truss is not the first conservative politician in recent years to come into office promising to slash taxes. Mr. Trump also campaigned on — and ultimately delivered — “massive tax cuts” in 2017, a package that only Republican lawmakers backed. Decades ago, President Ronald Reagan and Prime Minister Margaret Thatcher of Britain both pursued tax-cutting agendas that cemented their legacies in office.Ms. Truss has been cheered on by conservative champions of supply-side economics in the United States, including many of the chief backers of Mr. Trump’s tax cuts. Stephen Moore, who served as an outside economic adviser to the former president, praised Ms. Truss for her willingness “to challenge the reigning orthodoxy by sharply cutting taxes to boost growth,” calling the package “a gutsy and sound policy decision.”“By far the most important change is the reduction in the top income tax rate from 45 percent to 40 percent,” Mr. Moore wrote. “This will bring jobs, capital and businesses back to the U.K.”A host of critics, though, have lined up to denounce the tax package, warning it will provoke economic war with the Bank of England and risk a damaging combination of economic contraction and soaring prices, which could in turn hurt the global recovery.The impact of previous tax cuts, including those signed into law by Mr. Trump in 2017, provides fodder for those critiques.Much as Ms. Truss has proposed to do, Mr. Trump reduced tax rates for income earners across the spectrum, including those in the highest bracket. He also cut a variety of business tax rates — a contrast with the British plan, which cancels a planned increase in corporate taxes. Mr. Trump said his full package of cuts would jump-start economic activity by encouraging businesses to invest, hire and raise wages.Yet initial evidence, which includes studies from I.M.F. economists, suggests Mr. Trump’s cuts did not deliver the steep gains in investment and productivity that conservatives had promised. If such gains came to pass in Britain, they could help counter inflation there.Instead, the cuts increased consumer spending, an outcome that helped temporarily expand growth in the United States, the I.M.F. found, but which could be dangerous in a high-inflation environment.“The record through 2019 from the Trump tax cuts is not encouraging for the U.K.,” said William G. Gale, a co-director of the Urban-Brookings Tax Policy Center in Washington.Last year, Mr. Gale and a colleague, Claire Haldeman, published a study on the effects of Mr. Trump’s tax cuts up until the start of the pandemic recession. They looked for supply-side effects — whether the cuts increased investment incentives and other means of stimulating sustained economic growth — and found little evidence of such results.Instead, they found that the cuts did little to promote job growth or investment outside the oil and gas sector, which is highly correlated with the global price of fossil fuels. And they found that the cuts significantly reduced federal tax revenues, contrary to Republicans’ promises that the cuts would pay for themselves by inciting additional economic growth.Broader research suggests that Ms. Truss’s cuts for top earners are unlikely to drive significant gains in economic growth. In a recent study of decades of tax changes, Owen Zidar, an economist at Princeton, found that cuts for the top 10 percent of earners did little to prompt job gains.The hope that cuts in Britain’s top rate will supercharge the economy, Mr. Zidar said in an interview, “is completely at odds with the empirical record of the United States since 1950.”Mr. Gale, Mr. Zidar and other economists joined the I.M.F. in noting a particular challenge for the British tax cuts: the likelihood that they will be offset by interest rate increases from the Bank of England, as it seeks to bring down price growth.Other rounds of tax cuts, like those under Mr. Reagan, helped to increase growth by working in tandem with interest rate cuts taken by the Federal Reserve, according to economists who specialize in tax policy. In Britain’s case, the opposite appears to be true: The Bank of England has already been raising rates, and it appears ready to push them even higher to offset the effects of Ms. Truss’s policies. Those rate increases would negate a major goal of the tax cuts — to make it cheaper for companies to invest — by raising the costs of borrowing across the economy.Economists say faster rate increases also heighten the risk of recession in Britain.Supporters of the British tax cuts are already accusing the central bank of crippling them — much as Mr. Trump accused the Fed of undermining his tax cuts when it raised interest rates repeatedly after they were enacted.“It hasn’t helped that the Bank of England has launched a public campaign to sabotage the Truss agenda,” Mr. Moore wrote this week, echoing comments he made about the Fed in 2019.The actions of the British government could reverberate far beyond that country’s borders given the flows of international trade and the potential for a far-flung financial crisis. In recent days, President Biden has grown more concerned with the situation in Britain. On Wednesday, he met with members of his economic team to discuss developments in global financial markets, instructing them to brief him regularly on the situation.“We’re watching this very closely,” Jared Bernstein, a member of the White House’s Council of Economic Advisers, said on Wednesday at the Peterson Institute for International Economics. “The president’s being kept up on all the developments.”When asked about the cuts this week, the White House press secretary, Karine Jean-Pierre, said the administration would leave British policy to Ms. Truss’s government. But other administration officials have criticized the plan.Speaking at an event at the Brookings Institution on Wednesday, Gina Raimondo, the secretary of commerce, said Britain’s combination of cutting taxes and increasing spending would neither help the country fight inflation in the short term nor send it in the direction of long-term growth.“Investors, businesspeople want to see world leaders taking inflation very seriously, and it’s hard to see that out of this new government,” she said, adding, “We’re pursuing a different strategy.”Ana Swanson More

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    How a New Corporate Minimum Tax Could Reshape Business Investments

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    With a new corporate minimum tax, Democrats would be adding complexity to an already byzantine tax system.WASHINGTON — At the center of the new climate and tax package that Democrats appear to be on the verge of passing is one of the most significant changes to America’s tax code in decades: a new corporate minimum tax that could reshape how the federal government collects revenue and alter how the nation’s most profitable companies invest in their businesses.The proposal is one of the last remaining tax increases in the package that Democrats are aiming to pass along party lines in coming days. After months of intraparty disagreement over whether to raise taxes on the wealthy or roll back some of the 2017 Republican tax cuts to fund their agenda, they have settled on a longstanding political ambition to ensure that large and profitable companies pay more than $0 in federal taxes.To accomplish this, Democrats have recreated a policy that was last employed in the 1980s: trying to capture tax revenue from companies that report a profit to shareholders on their financial statements while bulking up on deductions to whittle down their tax bills.The re-emergence of the corporate minimum tax, which would apply to what’s known as the “book income” that companies report on their financial statements, has prompted confusion and fierce lobbying resistance since it was announced last month.Some initially conflated the measure with the 15 percent global minimum tax that Treasury Secretary Janet L. Yellen has been pushing as part of an international tax deal. However, that is a separate proposal, which in the United States remains stalled in Congress, that would apply to the foreign earnings of American multinational companies.Republicans have also misleadingly tried to seize on the tax increase as evidence that President Biden was ready to break his campaign promises and raise taxes on middle-class workers. And manufacturers have warned that it would impose new costs at a time of rapid inflation.In a sign of the political power of lobbyists in Washington, by Thursday evening the new tax had already been watered down. At the urging of manufacturers, Senator Kyrsten Sinema of Arizona persuaded her Democratic colleagues to preserve a valuable deduction, known as bonus depreciation, that is associated with purchases of machinery and equipment.The new 15 percent minimum tax would apply to corporations that report annual income of more than $1 billion to shareholders on their financial statements but use deductions, credits and other preferential tax treatments to reduce their effective tax rates well below the statutory 21 percent. It was originally projected to raise $313 billion in tax revenue over a decade, though the final tally is likely to be $258 billion once the revised bill is finalized.The new tax could also inject a greater degree of complexity into the tax code, creating challenges in carrying out the law if it is passed.“In terms of implementation and just bandwidth to deal with the complexity, there’s no doubt that this regime is complex,” said Peter Richman, a senior attorney adviser at the Tax Law Center at New York University’s law school. “This is a big change and the revenue number is large.”What’s in the Democrats’ Climate and Tax BillCard 1 of 6A new proposal. More

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    The Carried Interest Loophole Survives Another Political Battle

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    The latest effort to narrow the preferential tax treatment used by private equity executives failed after Senator Kyrsten Sinema objected.WASHINGTON — Once again, carried interest carried the day.The last-minute removal by Senate Democrats of a provision in the climate and tax legislation that would narrow what is often referred to as the “carried interest loophole” represents the latest win for the private equity and hedge fund industries. For years, those businesses have successfully lobbied to kill bills that aimed to end or limit a quirk in the tax code that allows executives to pay lower tax rates than many of their salaried employees.In recent weeks, it appeared that the benefit could be scaled back, but a last-minute intervention by Senator Kyrsten Sinema, the Arizona Democrat, eliminated what would have been a $14 billion tax increase targeting private equity.Lawmakers’ inability to address a tax break that Democrats and some Republicans have called unfair underscores the influence of lobbyists for the finance industry and how difficult it can be to change the tax code.In addition to doing away with the carried interest provision, the deal Democratic leaders cut with Ms. Sinema included a 1 percent excise tax on stock buybacks and changes to a minimum corporate tax of 15 percent that favored manufacturers.On Friday, the private equity and hedge fund industries applauded the development, describing it as a win for small business.“The private equity industry directly employs over 11 million Americans, fuels thousands of small businesses and delivers the strongest returns for pensions,” said Drew Maloney, the chief executive of the American Investment Council, a lobbying group. “We encourage Congress to continue to support private capital investment in every state across our country.”Bryan Corbett, the chief executive of the Managed Funds Association, said: “We’re happy to see that there is bipartisan recognition of the role that private capital plays in growing businesses and the economy.”Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent. A tax law passed by Republicans in 2017 largely left the treatment of carried interest intact, after an intense lobbying campaign, but it did narrow the exemption by requiring executives to hold their investments for at least three years in order to enjoy preferential tax treatment.An agreement reached last week by Senator Joe Manchin III, Democrat of West Virginia, and Senator Chuck Schumer of New York, the majority leader, would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to take advantage of the lower 20 percent tax rate.What’s in the Democrats’ Climate and Tax BillCard 1 of 6A new proposal. More

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    Carried Interest Is Back in the Headlines. Why It’s Not Going Away.

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    Changes demanded by Senator Kyrsten Sinema will preserve a tax loophole that Democrats have complained about for years.For years, Democrats and even some Republicans such as former President Donald J. Trump have called for closing the so-called carried interest loophole that allows wealthy hedge fund managers and private equity executives to pay lower tax rates than entry-level employees.Those efforts have always failed to make a big dent in the loophole — and the latest proposal to do so also faltered this week. Senate leaders announced on Thursday that they had agreed to drop a modest change to the tax provision in order to secure the vote of Senator Kyrsten Sinema, Democrat of Arizona, and ensure passage of their Inflation Reduction Act, a wide-ranging climate, health care and tax bill.An agreement reached last week between Senator Chuck Schumer, the majority leader, and Senator Joe Manchin III, Democrat of West Virginia, would have taken a small step in the direction of narrowing carried interest tax treatment. However, it would not have eliminated the loophole entirely and could still have allowed rich business executives to have smaller tax bills than their secretaries, a criticism lobbed by the investor Warren E. Buffett, who has long argued against the preferential tax treatment.The fate of the provision was always in doubt given the Democrats’ slim control of the Senate. And Ms. Sinema had previously opposed a carried interest measure in a much larger bill called Build Back Better, which never secured the 50 Senate votes needed — Republicans have been unified in their opposition to any tax increases.Had the legislation passed in the form that Mr. Schumer and Mr. Manchin presented it last week, the shrinking of the carried interest exception would have brought Democrats a tiny bit closer to realizing their vision of making the tax code more progressive.What is carried interest?Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent.The 2017 tax law passed by Republicans largely left the treatment of carried interest intact, after an intense business lobbying campaign, but did narrow the exemption by requiring private equity officials to hold their investments for at least three years before reaping preferential tax treatment on their carried interest income.What would the Manchin-Schumer agreement have done?The agreement between Mr. Manchin and Mr. Schumer would have further narrowed the exemption, in several ways. It would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to game the system and pay the lower 20 percent tax rate.Senate Democrats say the changes would have raised an estimated $14 billion over a decade, by forcing more income to be taxed at higher individual income tax rates — and less at the preferential rate.The longer holding period would have applied only to those who made $400,000 per year or more, in keeping with President Biden’s pledge not to raise taxes on those earning less than that amount.The tax provision echoed a measure that was initially included in the climate and tax bill that House Democrats passed last year but that stalled in the Senate. The carried interest language was removed amid concern that Ms. Sinema, who opposed the measure, would block the overall legislation.Why hasn’t the loophole been closed by now?Many Democrats have tried for years to completely eliminate the tax benefits private equity partners enjoy. Democrats have sought to redefine the management fees they get from partnerships as “gross income,” just like any other kind of income, and to treat capital gains from partners’ investments as ordinary income.Such a move was included in legislation proposed by House Democrats in 2015. The legislation would also have increased the penalties on investors who did not properly apply the proposed changes to their own tax filings.The private equity industry has fought back hard, rejecting outright the basic concepts on which the proposed changes were based.“No such loophole exists,” Steven B. Klinsky, the founder and chief executive of the private equity firm New Mountain Capital, wrote in an opinion article published in The New York Times in 2016. Mr. Klinsky said that when other taxes, including those levied by New York City and the state government, were accounted for, his effective tax rate was between 40 and 50 percent.What would the change have meant for private equity?The private equity industry has defended the tax treatment of carried interest, arguing that it creates incentives for entrepreneurship, healthy risk-taking and investment.The American Investment Council, a lobbying group for the private equity industry, described the proposal as a blow to small business.“Over 74 percent of private equity investment went to small businesses last year,” said Drew Maloney, chief executive of the council. “As small-business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on the private capital that is helping local employers survive and grow.”The Managed Funds Association said the changes to the tax code would hurt those who invested on behalf of pension funds and university endowments.“Current law recognizes the importance of long-term investment, but this proposal would punish entrepreneurs in investment partnerships by not affording them the benefit of long-term capital gains treatment,” said Bryan Corbett, the chief executive of the association.“It is crucial Congress avoids proposals that harm the ability of pensions, foundations and endowments to benefit from high-value, long-term investments that create opportunity for millions of Americans.”Jim Tankersley More

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    States Turn to Tax Cuts as Inflation Stays Hot

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    WASHINGTON — In Kansas, the Democratic governor has been pushing to slash the state’s grocery sales tax. Last month, New Mexico lawmakers provided $1,000 tax rebates to households hobbled by high gas prices. Legislatures in Iowa, Indiana and Idaho have all cut state income taxes this year.A combination of flush state budget coffers and rapid inflation has lawmakers across the country looking for ways to ease the pain of rising prices, with nearly three dozen states enacting or considering some form of tax relief, according to the Tax Foundation, a right-leaning think tank.The efforts are blurring typical party lines when it comes to tax policy. In many cases, Democrats are joining Republicans in supporting permanently lower taxes or temporary cuts, including for high earners.But while the policies are aimed at helping Americans weather the fastest pace of inflation in 40 years, economists warn that, paradoxically, cutting taxes could exacerbate the very problem lawmakers are trying to address. By putting more money in people’s pockets, policymakers risk further stimulating already rampant consumer demand, pushing prices higher nationally.Jason Furman, an economist at Harvard University who was an economic adviser under the Obama administration, said that the United States economy was producing at full capacity right now and that any additional spending power would only drive up demand and prices. But when it comes to cutting taxes, he acknowledged, the incentives for states do not always appear to be aligned with what is best for the national economy.“I think all these tax cuts in states are adding to inflation,” Mr. Furman said. “The problem is, from any governor’s perspective, a lot of the inflation it is adding is nationwide and a lot of the benefits of the tax cuts are to the states.”States are awash in cash after a faster-than-expected economic rebound in 2021 and a $350 billion infusion of stimulus funds that Congress allocated to states and cities last year. While the Biden administration has restricted states from using relief money to directly subsidize tax cuts, many governments have been able to find budgetary workarounds to do just that without violating the rules.Last week, Gov. Ron DeSantis of Florida signed a $1.2 billion tax cut that was made possible by budget surpluses. The state’s coffers were bolstered by $8.8 billion in federal pandemic relief money. Mr. DeSantis, a Republican, hailed the tax cuts as the largest in the state’s history.“Florida’s economy has consistently outpaced the nation, but we are still fighting against inflationary policies imposed on us by the Biden administration,” he said.Adding to the urgency is the political calendar: Many governors and state legislators face elections in November, and voters have made clear they are concerned about rising prices for gas, food and rent.“It’s very difficult for policymakers to see the inflationary pressures that taxpayers are burdened by right now while sitting on significant cash reserves without some desire to return that,” said Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation. “The challenge for policymakers is that simply cutting checks to taxpayers can feed the inflationary environment rather than offsetting it.”The tax cuts are coming in a variety of forms and sizes. According to the Tax Foundation, which has been tracking proposals this year, some would be phased in, some would be permanent and others would be temporary “holidays.”Next month, New York will suspend some of its state gas taxes through the end of the year, a move that Gov. Kathy Hochul, a Democrat, said would save families and businesses an estimated $585 million.In Pennsylvania, Gov. Tom Wolf, a Democrat, has called for gradually lowering the state’s corporate tax rate to 5 percent from 10 percent — taking a decidedly different stance from many of his political peers in Congress, who have called for raising corporate taxes. Mr. Wolf said in April that the proposal was intended to make Pennsylvania more business friendly.States are acting on a fresh appetite for tax cuts as inflation is running at a 40-year high.OK McCausland for The New York TimesMr. Furman pointed to the budget surpluses as evidence that the $1.9 trillion pandemic relief package handed too much money to local governments. “The problem was there was just too much money for states and localities.”A new report from the Tax Policy Center, a left-leaning think tank, said total state revenues rose by about 17.6 percent last year. State rainy day funds — money that is set aside to cover unexpected costs — have reached “new record levels,” according to the National Association of State Budget Officers.Yet those rosy budget balances may not last if the economy slows, as expected. The Federal Reserve has begun raising interest rates in an attempt to cool economic growth, and there are growing concerns about the potential for another recession. Stocks fell for another session on Monday, with the S&P 500 down 3.2 percent, as investors fretted about a slowdown in global growth, high inflation and other economic woes.Cutting taxes too deeply now could put states on weaker financial footing.The Tax Policy Center said its state tax revenue forecasts for the rest of this year and next year were “alarmingly weak” as states enacted tax cuts and spending plans. Fitch, the credit rating agency, said recently that immediate and permanent tax cuts could be risky in light of evolving economic conditions.“Substantial tax policy changes can negatively affect revenues and lead to long-term structural budget challenges, especially when enacted all at once in an uncertain economic environment,” Fitch said.The state tax cuts are taking place as the Biden administration struggles to respond to rising prices. So far, the White House has resisted calls for a gas tax holiday, though Jen Psaki, the White House press secretary, said in April that President Biden was open to the idea. The administration has responded by primarily trying to ease supply chain logjams that have created shortages of goods and cracking down on price gouging, but taming inflation falls largely to the Fed.The White House declined to assess the merits of states’ cutting taxes but pointed to the administration’s measures to expand fuel supplies and proposals for strengthening supply chains and lowering health and child care costs as evidence that Mr. Biden was taking inflation seriously.“President Biden is taking aggressive action to lower costs for American families and address inflation,” Emilie Simons, a White House spokeswoman, said.The degree to which state tax relief fuels inflation depends in large part on how quickly the moves go into effect.Gov. Laura Kelly backed a bill last month that would phase out the 6.5 percent grocery sales tax in Kansas, lowering it next January and bringing it to zero by 2025. Republicans in the state pushed for the gradual reduction despite calls from Democrats to cut the tax to zero by July.Understand the 2022 Midterm ElectionsCard 1 of 6Why are these midterms so important? More

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    Modern Monetary Theory Got a Pandemic Tryout. Inflation Is Now Testing It.

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    The sun was sinking low over Long Island Sound as Stephanie Kelton, wearing the bright red suit jacket she had donned to give a virtual guest lecture to university students in London that morning, perched before a pillow fort she had constructed atop the heavy wooden desk in her home office.The setup was meant to keep out noise as she recorded the podcast she co-hosts, a MarketWatch production called the “Best New Ideas in Money.” The room was hushed except for Ms. Kelton, who bantered energetically with the producers she was hearing through noise-blocking headphones, sang a Terri Gibbs song and made occasional edits to the script. At one point, she muttered, “That sounds like Stephanie.”What Stephanie Kelton sounds like, circa early 2022, is the star architect of a movement that is on something of a victory lap. A victory lap with an asterisk.Ms. Kelton, 52, is the most familiar public face of Modern Monetary Theory, which posits that if a government controls its own currency and needs money — to make sure its citizens have food and places to live when, say, a global pandemic pushes many out of work — it can just print it, as long as its economy has the ability to churn out the needed goods and services.In the M.M.T. view of the world, “How will you pay for it?” is a vapid policy question. Real-world resources and political priorities determine how much lawmakers can and should spend.It is an idea that was forged, and put to something of a test, during a low-inflation era.When Ms. Kelton’s book, “The Deficit Myth,” was published in June 2020 and shot onto best seller lists, inflation had been weak for decades and had dropped below 1 percent as consumers retrenched in the pandemic. The government had begun to spend rapidly to try to prop up flailing households.When Ms. Kelton appeared on a Bloomberg podcast episode, “How M.M.T. Won the Fiscal Policy Debate,” in early 2021, inflation had bounced back to around 2 percent.But by a chilly January afternoon, as ducks flew over the frosty estuary outside Ms. Kelton’s house near Stony Brook University, where she teaches, inflation had rocketed up to 7 percent. The government’s debt pile has exploded to $30 trillion, up from about $10 trillion at the start of the 2008 downturn and $5 trillion in the mid-1990s.The good news: The government has had no trouble selling bonds to fund its spending, contrary to the direst projections of deficit scolds.The bad news: Some economists blame big spending in the pandemic for today’s rapid price increases. The government will release fresh Consumer Price Index data this week, and it is expected to show inflation running at its fastest pace since 1982.And that may be why Ms. Kelton, and the movement she has come to represent, now seem anxious to control the narrative. The pandemic spending wasn’t entirely consistent with M.M.T principles, they say — it wasn’t assessed carefully for its inflationary effects as it was being drawn up, because it was crisis policy. But the situation has underlined how hard it is to know just where the economy’s constraints lay, and how difficult it is to fix things once you run into them.Last summer, Ms. Kelton called inflation a temporary sign of “growing pains.” By the fall, she painted it as a good problem to solve, compared with a continued weak economy. As it lingers, she has argued that diagnosing what is causing it is key.“Can we blame ‘MMT’ for the run-up in inflation?” she tweeted rhetorically last month, just hours before her podcast recording.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.“Of course not.”Emon Hassan for The New York TimesThe economy is the limitTo understand how M.M.T. fits in with other dominant ways of thinking, it’s helpful to take a trip to the beach.In economics, there’s a school of thought sometimes called “freshwater.” It’s the set of ideas that became popular at inland universities in the 1970s, when they began to embrace rational markets and limited government intervention to fight recessions. There’s also “saltwater” thinking, an updated version of Keynesianism that argues that the government occasionally needs to jump-start the economy. It has traditionally been championed in the Ivy League and other top-ranked schools on the coasts.You might call the school of thought Ms. Kelton is popularizing, from a bay that feeds into the East River, brackish economics.M.M.T. theorists argue that society should feel capable of spending to achieve its goals to the extent that there are resources available to fulfill them. Deficit spending need not be constrained to recessions, even theoretically. Want to build a road? No problem, so long as you have asphalt and construction workers. Want to feed children free lunches? Also not a problem, so long as you have the food and the cafeteria workers.What became Modern Monetary Theory began to percolate among a small group of academics when Ms. Kelton, a former military brat and one-time furniture saleswoman, was a graduate student.She had a gap period between graduating with a bachelor’s degree from California State University, Sacramento and attending Cambridge University on a Rotary scholarship, and her college economics professor recommended that she spend the time studying with L. Randall Wray, an early pioneer in the set of ideas.They hit it off. She remained in Mr. Wray’s circle, and he — and Warren Mosler, a hedge fund manager who had written a book on what we get wrong about money — convinced her that the way America understood cash, revenues and budgeting was all backward.Ms. Kelton earned her doctorate at The New School, long a booster of out-of-mainstream economic thinking, and went on to teach at the University of Missouri-Kansas City. She, Mr. Wray, who was there at the time, and their colleagues mentored doctoral students and began to write academic papers on the new way of thinking.But academic missives reached only a small circle of readers. After the 2008 financial crisis punched a hole in the economy that would take more than a decade to fill, Ms. Kelton and her colleagues, invigorated with a new urgency, began a blog called “New Economic Perspectives.” It was a bare bones white, red and black layout, using a standard WordPress template, that served as a place for M.M.T. writers to make their case (and, in its early days, featured a #Occupy[YourCityHere] tab).The theory picked up some fervent followers but limited popular acceptance, charitably, and outright derision, uncharitably. Mainstream economists panned it as overly simplistic. Many were confused about what it was arguing.“I have heard pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not,” Jerome H. Powell, the Fed chair, said in 2019. “The idea that deficits don’t matter for countries that can borrow in their own currency is just wrong.”Ms. Kelton kept the faith. She and her colleagues held conferences, including one in 2018 at The New School where she gave a lecture on “mainstreaming M.M.T.”Rohan Grey organized the conference and a media reception afterward at an Irish pub (“‘Shades of Green,’ monetary pun intended,” he said). It was attended by organizers, academics, “lay people” and lots of journalists. At the happy hour — which lasted until 1 a.m. — Ms. Kelton was mobbed when she walked in the door. “She was already on her way to super celebrity status at that point,” said Mr. Grey, an assistant professor at Willamette Law.When she gave presentations on her ideas, Ms. Kelton would occasionally display a quote often attributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you. Then you win.”And her star was rising more broadly. She advised Bernie Sanders’ presidential campaigns in 2016 and 2020, getting to know the Vermont senator. He never fully publicly embraced M.M.T., but he nevertheless advanced policies — like Medicare for All — that reflected its ideals.She amassed a following of tens of thousands, later growing to 140,000, on Twitter. Her first handle, @deficitowl, prompted ardent fans to gift her wise bird figurines, some of which are still on display in her home office. She cultivated a small coterie of prominent journalists who were interested in the idea, most notably Joe Weisenthal at Bloomberg. She signed a book deal. She was regularly talking to Democratic lawmakers, sometimes in groups.Her idea percolated through Washington’s media and liberal policy circles. Mainstream economic predictions that huge debt loads would come back to haunt nations like Japan had not played out, the anemic rebound from 2008 had scarred society and called the size of the crisis response into question. Ms. Kelton and her colleagues were ensuring that their theory on benign deficits was an ever-present feature of the blossoming debate.Then the pandemic hit, and suddenly the theoretical question of just how much the government could spend before it ran into limits faced a real-world experiment.The $1.9 Trillion FloorWithout thinking about paying for it, Donald J. Trump’s government quickly passed a $2.3 trillion relief package in late March 2020. In December, it followed that up with another $900 billion. President Biden took office in early 2021, and promptly added $1.9 trillion more.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    European Steel Plan Shows Biden’s Bid to Merge Climate and Trade Policy

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    A potential agreement on steel trade provides the clearest look yet at how the Biden administration plans to implement a trade policy that is both protectionist and progressiveWASHINGTON — President Biden has promised to use trade policy as a tool to mitigate climate change. This weekend, the administration provided its first look at how it plans to mesh those policy goals, saying the United States and the European Union would try to curb carbon emissions as part of a trade deal covering steel and aluminum.The arrangement, which American and European leaders aim to introduce by 2024, would use tariffs or other tools to encourage the production and trade of metals made with fewer carbon emissions in places including the United States and European Union, and block dirtier steel and aluminum produced in countries including China.If finalized, it would be the first time a U.S. trade agreement includes specific targets on carbon emissions, said Ben Beachy, the director of the Sierra Club’s Living Economy program.“No U.S. trade deal to date has even mentioned climate change, much less included binding climate standards,” said Mr. Beachy.The announcement was short on details, and negotiations with European leaders are likely to face multiple roadblocks. But it provided an outline for how the Biden administration hopes to knit together its concerns about trade and climate and work with allies to take on a recalcitrant China, at a time when progress on multicountry trade negotiations at the World Trade Organization has stalled.“The U.S. leads the world in our clean steel technology,” Gina Raimondo, the secretary of commerce, said in an interview on Monday. She said the United States would work with allies “to preference cleaner steel, which will create an incentive to make more investments in technology,” resulting in fewer carbon emissions and more jobs.In the same interview, Katherine Tai, the United States Trade Representative, said the potential agreement would restrict market access for countries that don’t meet certain carbon standards, or that engage in nonmarket practices and contribute to global overcapacity in the steel sector — accusations that are often levied at China.The effort would seek to build “a global arrangement that promotes not just fair trade in steel but also pro-climate and responsible trade in steel,” Ms. Tai said.Kevin Dempsey, the president of the American Iron and Steel Institute, said at an industry forum in Washington on Tuesday that the arrangement would be “positive for the U.S. industry,” which has the lowest carbon intensity per ton of steel of the major steel-producing countries.China accounts for nearly 60 percent of global steel production. Its use of a common steel-production method causes more than twice as much climate pollution as does the same technology in the United States, according to estimates by Global Efficiency Intelligence.In its announcement on Saturday, the Biden administration also said it had reached a deal to ease the tariffs that former President Donald J. Trump had imposed on European metals while the governments work toward the carbon accord.The United States would replace the 25 percent tariff on European steel and a 10 percent tariff on European aluminum with a so-called tariff-rate quota. In return, the European Union would drop the retaliatory tariffs it imposed on other American products, like bourbon and motorcycles.Under the new terms, 3.3 million metric tons of European steel would be allowed to enter the United States duty-free each year, with any steel above that volume subject to a 25 percent tariff.European producers would be allowed to ship 18,000 metric tons of unwrought aluminum, which often comes in the form of ingots, and 366,000 metric tons of wrought or semifinished aluminum into the United States each year, while volumes above that would be charged a 10 percent tariff, the commerce department said.To qualify for zero tariffs, the steel must be entirely made in the European Union — a provision designed to keep cheaper steel from countries including China and Russia from finding a backdoor into the United States via Europe.Supporters of free trade have criticized the Biden administration for relying on the same protectionist trade measures used by the Trump administration, which deployed both tariffs and quotas to protect domestic metal makers.Jake Colvin, the president of the National Foreign Trade Council, said the announcement would ratchet down trade tensions between the United States and Europe. But he called the trade barriers “an unwelcome form of managed trade” that would add costs and undermine American competitiveness.Ms. Tai said the administration had made a deliberate choice not to heed calls “for the president to just undo everything that the Trump administration had done on trade.”Mr. Biden’s plan, she said, “is that we formulate a worker-centered trade policy. And that means not actually going back to the way things were in 2015 and 2016, challenging us to do trade in a different way from how we’ve done it earlier, but also, critically, to challenge us to do trade in a way different from how the Trump administration did.”A factory in southern China that makes steel parts. The trade proposal would block dirtier steel and aluminum produced in countries including China.The New York TimesThe focus on carbon emissions differs from that of the Trump administration, which rejected any attempts to negotiate on carbon mitigation and withdrew the United States from the Paris Agreement on climate change.But negotiations with Europe will face challenges, among them developing a common methodology for measuring how much carbon is emitted as certain products are made. Still, the announcement suggests that the United States and Europe might be ready to work toward a collaborative approach on lowering carbon emissions, despite past differences on how the problem should be addressed.European leaders have long advocated an explicit price on the carbon dioxide that companies emit while making their products. In July, the European Union proposed a carbon border adjustment mechanism that would require companies to pay for carbon emissions produced outside Europe, to discourage manufacturers from evading Europe’s restrictions on pollution by moving abroad.An explicit tax on carbon has met with more resistance in the United States, where some politicians want to update regulatory requirements or put the onus on companies to invest in cleaner production technology.Todd Tucker, the director of governance studies at the Roosevelt Institute, said the latest announcement suggested that the European Union may be “a little bit more flexible” on how the United States and other partners would go about lowering emissions. Mr. Biden’s reconciliation bill, for example, contains a proposal for a “green bank” that could provide financing for firms to transition to cleaner technologies, he said.“If the U.S. ends up achieving decarbonization through more of an investments and industrial-policy approach, it seems like they’re OK with that,” Mr. Tucker said.Though the earliest negotiations over carbon emissions in the steel sector involve the European Union, the Biden administration says it wants to quickly extend the partnership to other countries.In twin announcements on Sunday, the Department of Commerce said it had begun close consultations with Japan and the United Kingdom “on bilateral and multilateral issues related to steel and aluminum,” with a focus on “the need for like-minded countries to take collective action.”Both Japan and the United Kingdom still face a 25 percent tariff on steel exports to the United States imposed by Mr. Trump.The talks suggest a template for how the Biden administration will try to engage allies to counter China’s growing economic heft and make progress on goals like climate and workers rights.The administration has rejected Mr. Trump’s “America First” approach to trade, saying the United States needs to work with like-minded countries. But they have also acknowledged that the inefficiency of negotiations at the World Trade Organization, and distanced themselves from broader, multicountry trade deals, like the Trans-Pacific Partnership.The announcements suggest that the Biden administration may not see comprehensive trade deals as the most effective way to accomplish many of its goals, but rather, industry-specific agreements among a limited number of democratic, free-market countries. That approach is similar to the cooperation the United States announced with the European Union for the civil aircraft industry in June.Ms. Raimondo said the agreement to ease the tariffs on the European Union was a “very significant achievement” that would help to alleviate supply chain problems and lower prices for companies that use steel and aluminum to make other products.“It’s all kind of a table setter to a global arrangement, whereby we work with our allies all over the world over the next couple of years,” she said. More

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    Democrats Push for Agreement on Tax Deduction That Benefits the Rich

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    Lawmakers are coalescing around a deal to suspend a $10,000 cap on state and local tax deductions that was imposed during the Trump administration.WASHINGTON — Democrats were readying an agreement on Tuesday that would repeal a cap on the amount of state and local taxes that homeowners can deduct as part of a broader $1.85 trillion spending bill, a move that could amount to a significant tax cut for wealthy Americans in liberal states.But some liberals quickly balked at the emerging agreement, which would suspend a $10,000 cap on the so-called SALT deduction for five years, removing a limit that Republicans included in their 2017 tax package as a way to pay for cuts for corporations and the rich. The suspension would kick in for deductions related to property taxes and state and local income taxes accrued in 2021 and would run through 2025.If it passes, the deal would be a major concession to a handful of Democrats from high-income states like New York and New Jersey who have insisted on lifting the cap, in order to win their votes for President Biden’s social policy and climate change package.But liberal Democrats have scoffed at the push to include the costly proposal in the domestic policy package, particularly as party leaders have curtailed or eliminated other spending priorities as they pare down a $3.5 trillion blueprint to appease moderate and conservative-leaning Democrats.Senator Bernie Sanders of Vermont, the chairman of the Budget Committee, blasted the repeal on Tuesday as a giveaway to the rich that went against the Democrats’ priorities.“I think there is a compromise to be reached here, a middle ground, which says that for families earning less than $400,000, they can take a complete exemption, but not families earning more than that,” said Mr. Sanders, who had released a blistering statement criticizing the agreement. “What exists is unacceptable, and one way or another it will be dealt with.”It remains unclear whether the agreement would apply broadly or if Democrats planned to impose an income cap to prevent the wealthiest Americans from receiving what amounts to a tax cut.A straight repeal of the cap for every household that claims the deduction would siphon huge amounts of revenue from the federal government: about $90 billion per year, according to budget experts.To get around that, the five-year suspension assumes that the cap is reinstated in 2026 for another five years, allowing Democrats to use a budget sleight of hand to show its removal as revenue neutral in the traditional 10-year window that lawmakers look to when considering a bill’s impact on the federal deficit.Three people with knowledge of the emerging agreement described it on the condition of anonymity and cautioned that discussions were continuing. Details of the talks were first reported by Punchbowl News.With Republicans opposed to Mr. Biden’s domestic policy plan, Democrats must win the support of all 50 senators who caucus with the party and all but three House lawmakers for the plan to become law. That effort is further complicated because Democrats are using an arcane process known as budget reconciliation, which shields fiscal legislation from the 60-vote filibuster threshold in the Senate.Those restrictions mean that any lawmaker, particularly in the Senate, could effectively tank the legislation over his or her priorities, including insisting that the bill repeal SALT. Democrats from the high-income states that have been most affected by the limit have spent the past five years searching for an opportunity to roll it back for their constituents, despite complaints that it would largely benefit the wealthy.House Democrats including Representatives Tom Suozzi of New York, Mikie Sherrill of New Jersey and Josh Gottheimer of New Jersey have made clear that they will not support the broader spending package without a SALT repeal. Mr. Gottheimer wore a large button emblazoned with the words “no SALT, no dice” to votes on Capitol Hill on Tuesday. Senator Chuck Schumer of New York, the majority leader, has also voiced support for getting rid of the cap.“We’ve been fighting for this for years,” Mr. Gottheimer said on Tuesday, adding that reinstating the full deduction would amount to giving “tax relief to families that deserve it and who got hosed in 2017.”Delaying the cap for five years in a 10-year window could effectively allow lawmakers to claim that the proposal would not have an impact on the package’s cost. Yet some Democrats appeared confident that lawmakers would act again in five years to prevent the cap from going back into effect.“It’ll be pretty clear when they get tax relief, it’s going to be hard to take that back,” Mr. Gottheimer said, referring to families in his district.The SALT limit resulted in tax increases for wealthier Americans beginning in 2018, particularly higher earners from high-tax states, and helped Democrats capture some House seats that Republicans previously held in New Jersey, California and elsewhere.The deduction is largely used by wealthy homeowners who itemize their deductions and live in states and cities with high taxes, which tend to be led by Democrats. Democrats accused Republicans of using the cap to pay for other tax cuts for the rich and to penalize liberal states.“My guess is the majority of Americans with a net worth of $50 to $300 million would get a tax cut under the Build Back Better plan with a full repeal of SALT,” Jason Furman, an economist at Harvard who was the chairman of the White House Council of Economic Advisers under President Barack Obama, said on Twitter on Tuesday. “The bill would do more for the super-rich than it does for climate change, childcare or preschool. That’s obscene.”But several lawmakers in the New York and New Jersey delegations have warned that their votes for the domestic policy package hinged on the inclusion of the provision, and Democrats have haggled for months over a possible solution.“We’re still going at it over it,” said Representative Richard E. Neal of Massachusetts, the Democratic chairman of the Ways and Means Committee, who joked on Tuesday that he had earned “a Ph.D. in the SALT deduction because it’s been argued from every perspective I can think of.”The Committee for a Responsible Federal Budget described the repeal of the SALT cap as a “regressive” tax cut, estimating that it would cost $90 billion a year in lost government revenue. The wealthiest would make out the best, with a SALT cap repeal distributing more than $300,000 per household in the top 0.1 percent of earners and only $40 for a middle-income family over the first two years.“With the SALT cap repealed and current tax rates retained, in fact, the reconciliation package might actually offer a net tax cut for most high-income households,” the group said.The right-leaning Tax Foundation estimated that repealing the cap would increase after-tax income of the top 1 percent of earners by 2.8 percent, while the bottom 80 percent would get minimal benefit.Republicans seized on the agreement on Tuesday, accusing Democrats of hypocrisy for backing an “anti-progressive” handout.“First Democrats cut out paid leave,” J.P. Freire, a spokesman for Republicans on the House Ways and Means Committee, said on Twitter. “Now they’re shoveling money to the rich.” More