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Peter Orszag on the Tough Specifics of Deficit Reduction

November 12th, 2009 . by economistmom

orszag-on-npr-nov09

The President’s budget director, Peter Orszag, was on NPR’s Morning Edition on Wednesday morning.  He talked about the really difficult fiscal policy dilemma the federal government faces right now–dealing with both an unusually severe recession and a worsening longer-term budget outlook (emphasis added):

“On the one hand, [you have] the GDP gap, the gap between how much the economy is producing and how much it could produce, and, on the other hand, these deficits,” he says.

“If we only faced one or the other, the way forward would be clearer. But balancing between the two keeps me up at night.

Sometime around 2011 to 2013, “that’s where we’re going to start to need some transition from the extraordinary assistance that the federal government has been providing to try to jump-start the economy,” he says. “We’re working through [this], and we haven’t made final decisions on the best path to walk down from where we are now to where we need to get.”

Personally, I’d like to believe they’re mulling over the Bush tax cuts and President Obama’s campaign promises, weighing economic and political costs versus benefits.  Here’s a little hint (emphasis added):

Orszag makes no apologies for not projecting a balanced budget anytime in the near-term: “You have to remember the situation that we inherited.”

The Medicare Prescription Drug Benefit and the 2001 and 2003 tax cuts weren’t paid for, he points out. That was compounded by the reduction in tax revenue from the economic downturn, the cost of the economic stimulus and the need for increased spending on unemployment benefits and food stamps.

“So, the point being, we inherited a big hole,” Orszag says.

Sounds like not paying for the 2001 and 2003 tax cuts was a bad idea, and that the current revenue system is not keeping up with our spending needs (even ongoing, not just the temporarily high spending needs associated with stimulus).  It sounds like by 2011-13 we ought to be considering a fundamental reform of the tax system.  I’d like to suggest that “fundamental tax reform” ought to mean more than deciding which parts of the Bush tax cuts should get extended.

And as Peter points out:

“The thing about the politics of the deficit is that the deficit is unpopular, but so are many specific steps to reduce it,” Orszag says. “There are some that will decry the deficit but are unwilling to embrace anything that will actually bring it down.”

Well, I think the Administration well understands the biggest (and specific) ways in which fiscal policy can affect the budget outlook over the next ten years– and it’s not health care reform (which is much more about the much longer-term outlook).  It’s the reason, by the way, why Concord’s online budget challenge (based on CBO’s “Budget Options”) seems lopsided in favor of tax increases over entitlement cuts:  because the fiscally-irresponsible policies of the Bush Administration that the Obama Administration now blames for the awful budget outlook were lopsided on the tax-cut side.  It’s not that CBO or Concord prefers raising taxes to cutting spending.  It’s that that’s where the biggest levers are to significantly change the budget outlook anytime soon–meaning right after the economy is strong again, maybe in 2011-13, like Peter says.

More on the “bias” in Concord’s Federal Budget Challenge tomorrow.  Coincidentally, I’m back in Denver, this time for the annual meetings of the National Tax Association.

30 Responses to “Peter Orszag on the Tough Specifics of Deficit Reduction”

  1. comment number 1 by: Brooks

    Diane,

    I see that you plan to address “bias” charge further tomorrow, but I assume what you mean in your explanation above is not literally that tax increases are “where the biggest levers are to significantly change the budget outlook anytime soon”, but rather the most politically plausible. As a matter of math and economics, an approach weighted toward reductions in projected spending could achieve the administration’s deficit-reduction targets for the next 10 years. I assume you’re saying that such an approach would just be much less likely to result from our political process, given the political calculus related to imposing one set of sacrifices vs. another.

    If the above is what you mean, I hope you’ll present that argument in your follow-up post, because I think it’s critical for both ideological/party “sides” to seriously consider how close to their (supposed) respective ideal solutions (to the long-term fiscal imbalance) they really have a decent chance at getting, the related risk that they won’t get that close anyway even if they resist greater compromise, and the damage that will be done over time the longer they hold out.

  2. comment number 2 by: SteveinCH

    Diane,

    I’ll look forward to tomorrow’s post, but as you write it, let me ask you to consider what you would have written in 1992 about the same topic. Tax rates were as low in 1992 as they are today and we still had a sizable current account deficit (in fact larger than we had in 2006, pre-the current economic downturn).

    I guess my question to you is to think about what you would have said in 1992. If you still would have argued for tax increases, your argument must have relatively little to do with the Bush tax cuts and more to do with what you think the necessary or appropriate Federal government share of the national economy ought to be.

    To make a point that is similar but maybe slightly different to Brooks’. The Bush tax cuts matter only because they reduced the share of the economy the government takes, not because they increased the deficit as the deficit could have been managed in other ways, although, as Brooks points out these ways would have been very difficult politically.

    What is disturbing however is that if you favor tax increases as a point in time where the government is taking 18 to 19 percent of the economy (in a steady state per admin projections), would you also favor them at 22 percent or 25 percent? In other words, how much of the national income do you believe the Federal government should take from its citizens and why? If you fail to answer that, you run the risk of sounding like A) you believe that repealing the Bush tax cuts is all that is necessary to solve the problem and B) you would favor tax increases at any current level of taxation.

    One more thing for you to reflect on. The Bush admin was fiscally irresponsible but probably the most irresponsible thing it did was Medicare Part D which as Orzag points out was additional spending and a long term entitlement that was not paid for. The tax cuts were similarly fiscally irresponsible because Bush did not make offsetting cuts in spending.

    Your argument about Bush to me betrays your partisanship. I’m no defender of Bush and I think he was irresponsible fiscally; however, blaming tax cuts as opposed to any other costly policy of the last 60 to 75 years is simply a bias that you and others show. It indicates that you value (as an example) giving healthcare to (relatively) wealthy seniors through Medicare more than allowing people to keep their own money. That is fine by me but you need to recognize that every piece of new spending and every reduction in revenue are equally to blame in creating the deficit.

    Let’s just take the current health care bill for example. Let’s say is passes and let’s also say it costs twice as much as projected. I believe that you would be here 10 years from now arguing for a tax increase because the Obama admin was irresponsible in not providing enough revenue and offsets to fund the program. If that’s the case, the only constraint on taxes is the government’s ability to give our money away and I fear for my children.

    In any event, I look forward to your post tomorrow and to continuing the dialog

  3. comment number 3 by: SteveinCH

    Diane,

    One more thing. I just went back to look at the CBO historical numbers for receipts and spending during the Bush years as CBO keeps them. I thought I might include them here as food for thought.

    Year Receipts Outlays
    2001 1991

  4. comment number 4 by: SteveinCH

    Sorry all, I hit the return key which submits by mistake. Found a better source so here’s the numbers in terms of percent of GDP

    Year/Recipts/Outlays
    2001/19.8/18.5
    2002/17.9/19.4
    2003/16.5/20.0
    2004/16.4/19.9
    2005/17.6/20.2
    2006/18.4/20.3
    2007e/18.5/20.2
    2008e/18.3/20.0

    So from beginning to end, Bush lowered receipts as a percentage of GDP from 19.8 to 18.3 and increased outflows from 18.5 to 20.0. So in effect, the impact on the deficit is statistically equal from increased spending and decreased receipts. If you wanted to argue that receipts were the bigger driver over the course of Bush’s two terms, that’s a fair argument; however, it’s not a fair argument on a forward looking basis, based on the numbers.

    I simply don’t understand therefore, unless it is Brooks’ point above about political feasibility, why anyone would argue that the tax cuts are THE cause of the incrased deficit.

  5. comment number 5 by: Brooks

    Steve,

    Re: how much of the national income do you believe the Federal government should take from its citizens and why? If you fail to answer that, you run the risk of sounding like A) you believe that repealing the Bush tax cuts is all that is necessary to solve the problem and B) you would favor tax increases at any current level of taxation.

    Perhaps you’re simply saying that you think there is that risk with someone unfamiliar with EconomistMom, but anyone familiar with EconomistMom (1) would know that she doesn’t think your “A” and (2) wouldn’t presume or even have reason to suspect your “B”, but rather would think that, at any given level of spending, she would prefer a responsible degree of alignment with tax revenues (i.e., avoiding irresponsible levels of deficits, all things considered).

  6. comment number 6 by: AMTbuff

    Diane, what is politically possible today is very different from what will be politically possible when the market will no longer buy US government bonds. At that point, the economy will be hurting badly and revenue increases will be very hard to find.

    Until the crisis arrives, nothing major will be enacted. When the crisis arrives, the spending cuts and tax increases will dwarf any proposals that have been scored by CBO. That’s why it makes sense to put even the wildest tax increases and spending cuts on the table in the Challenge, to balance the two by including everything.

    If Concord needs ideas for spending cuts or tax increases to include, just ask people here to post some. Also, the Challenge badly needs several VAT options, since one of them is sure to be part of the post-crisis package.

    If there is any way to add default on government debt to the list of options, that should be included too. Then you might have a tool that could some day be called prescient.

  7. comment number 7 by: AMTbuff

    One other point on balancing tax increases and spending cuts in the challenge. This is crucial to maintaining Concord’s reputation as an honest player in the fiscal debate. Once lost due to careless slippage into partisanship, that reputation will be almost impossible to restore.

    Here’s what I wrote recently about another organization with a similar mission to be an honest broker, the Tax Policy Center:

    The TPC makes a concerted effort to be non-partisan and non-ideological. This alone makes the TPC a rarity today. The new director should guard this principle with his life.

    One can argue that the TPC sometimes lets a hint of bias slip, but their people are human like the rest of us. I greatly respect their effort and their achievements in elevating the quality of the debate on tax policy.

    TPC reports contain plenty of common sense that people of all political persuasions can agree on. We may disagree on some specifics, but the TPC’s restrained approach shows just how much the political warriors have exaggerated the partisan divide for their own gain.

    The TPC is the only organization of its type that virtually never attempts to conceal crucial facts unfavorable to its arguments. The world needs more TPCs, even if they are slanted slightly to the right or slightly to the left. The commitment to an intellectually honest debate is what counts.

  8. comment number 8 by: SteveinCH

    Brooks,

    Thanks for pulling on the reins a bit. I think A and B were a bit over the top and it isn’t my intent to impugn anyone. All I can say is it was early and the baby was screaming.

    Having said that, if you read the posted quiz from yesterday, you will see that the only major changes (e.g., greater than $200 billion over 10 years) are all on the tax side. In a country that will probably spend some $40 trillion over that period of time, that doesn’t make sense to me. Said differently, Concord cannot come up with a single option to put in its quiz that would reduce the federal budget from baseline by more than .5%. I don’t mean to impugn anyone but that is not a serious set of choices on the spending side. In fact, the largest single spending line items are $89 billion for reducing the size of the standing army and $100 billion for an alternative SS COLA formula.

    To go one step further, you could take every single spending reduction opportunity (or avoid every spending increase opportunity) and the move from baseline is tiny (e.g., aggregate deficit still above $8 trillion).

    I do believe that Concord and Diane both have a bias toward tax increases carrying the bulk of the load in balancing the budget. I further believe that this is driven by a view of the need for the government to “do more”. That is certainly their choice; however, to argue there are not other options (implicitly at least within the game), doesn’t make sense when you look at the figures in play.

  9. comment number 9 by: SteveinCH

    By the way, the most disturbing thing in the Orzag quote was his assertion that we are going to need to start working on deficits sometime between 2011 and 2013 or perhaps sometime after the current President has been reelected or is now the former President.

    Add to that another repetition of the big hole line and you get something that doesn’t give me a lot of confidence in anything happening any time soon

  10. comment number 10 by: Brooks

    Steve,

    I haven’t tallied up and compared total potential deficit-reduction on the spending side vs. on the revenue side in the game, but one thing I think you should note if you go through the exercise and test one side vs. another is that some tax breaks are “tax expenditures” — they are really (or at least arguably) subsidies more akin to spending. Someone getting health insurance from their employer is receiving tax-free compensation. Is that really different from having their insurance subsidized by taxpayers (i.e., spending)? Ditto for mortgage interest deductibility. Also, higher taxation of Social Security benefits (or higher Medicare premiums) are really reductions in subsidies (lower net spending). I would consider reductions in these tax breaks closer to reductions in spending than to tax increases, so in a scenario in the game in which one indicates no tax increases and all spending cuts (i.e., “all spending side” deficit reductions), I think one should opt for reducing/eliminating those tax deductions (which would increase taxes, but really would resemble spending reductions by reducing subsidies from other taxpayers). You’ll see it amounts to significant numbers.

    Diane has written some excellent stuff (on this blog and in paper(s)) about this issue/problem of tax expenditures.

    I look forward to Diane’s follow-up post, which I hope will address both the composition and the total magnitude of potential deficit-reduction in the exercise.

  11. comment number 11 by: SteveinCH

    Brooks,

    You can consider them what they want but calling them reductions in spending is to me a bit of a fallacy. Spending is when you use money to buy a good or service or give that money to someone else. Taxing is when you take money from someone. Clearly anyone can classify how they want to but this seems the simplest approach to me. The government doesn’t spend anything on mortgage interest deductibility; instead, it chooses to take less in taxes. If you genuinely think of that is spending, the words cease to have meaning or alternatively, anything can be classified either way which, to me, amounts to the same thing

  12. comment number 12 by: Brooks

    Steve,

    Give it a bit more thought, and think conceptually rather than semantically.

    1) If we send someone a Social Security check, but tax back some of that benefit, have we really increased taxes or just reduced spending by reducing the net benefit we provided.

    2) Is there really much/any difference between Scenario A in which health benefits compensation is tax free vs. Scenario B in which health benefits compensation is taxed just like cash compensation and the government sends those people a refund check to cover a percentage of the dollar value of those benefits?

  13. comment number 13 by: Jim Glass

    “The government doesn’t spend anything on mortgage interest deductibility; instead, it chooses to take less in taxes.”

    Yet the economic effect is the exactly same as the govt spending money on a mortgage interest subsidy.

    Time #1: no subsidy/deduction.

    Time #2a: Congress enacts a subsidy of $X paid to those who incur mortgage interest.

    Time #2b: Congress enacts a mortgage interest deduction worth $X to those who incur mortgage interest.

    At both Times #2a and #2b, compared to Time #1, the government’s net revenue is reduced by $X as payors of mortgage interest gain a cash benefit of $X from the government. The same thing.

    The difference between the two cases is overwhelmingly political: In #2a the govt is “paying taxpayers’ money to” someone — while in case #2b the govt is “letting taxpayers keep their own money” … even though in substance the two cases are identical.

    For example: Imagine trying to get Congress to enact a cash transfer subsidy *to the rich* who own their homes — with the *richer* a homeowner the *bigger* the cash subsidy! Most people not being rich enough to get any payment at all (mere renters need not even apply). You’d *never* get such an outright regressive subsidy through Congress.

    But produce the exact same effect by using deductions for mortgage interest and property taxes paid on a home — renters need not apply, owners cannot claim a deduction unless their income is high enough to itemize deductions (which leaves out most), but if they do have enough income then the higher it is, and higher their tax bracket, the more cash the deduction saves them — and the result is hugely popular as letting people keep and invest more of their own money in the American dream of home ownership!

    Thus we have a “tax expenditures budget” for deductions, tax credits, income exclusions, and other such, totaling circa $900 billion.

    If every tax expenditure was converted to an equivalent subsidy, visible to all, that number would be a heck of a lot smaller.
    ~~~~~~

    1) If we send someone a Social Security check, but tax back some of that benefit, have we really increased taxes or just reduced spending by reducing the net benefit we provided.

    Social Security is a special case. The Greenspan Commission made it “subject to income tax” for the first time as a disguised means test.

    That is, regular income tax is remitted to the Treasury for use as general revenue, then spent on buying paper clips or bombs or paying salaries or whatever.

    But the “income tax” on Social Security benefits is sent back not to the Treasury but to the Social Security Administration. It goes back not to general revenue, but to pay somebody else’s Social Security benefits (or be “lent” though the SS Surplus to the rest of the govt and so be credited to the SS Trust Fund balance).

    That is, it is not merely “conceptually” or “philosophically” a reduction of benefits, it is a real reduction of the net benefit that the SSA pays to one, means tested by one’s income, the higher one’s income the greater the reduction, as determined by a formula that just happens to be the same one used for income tax purposes, with the SSA keeping the difference. (Because back in 1983 voters were politically a lot more open to “OK, we’ll make benefits subject to income tax for the first time” than to “we’ll means-test benefits for the first time”.)

    BTW, the effect of this means test has grown hugely over the years, reducing benefits by more and more for persons at lower and lower income levels, and it will continue this course in the future, because (just as with the AMT) the income threshold at which it applies is not indexed to inflation.

  14. comment number 14 by: Jim Glass

    “Peter Orszag on the Tough Specifics”

    Misleading advertising!

    I was hoping to hear Orszag on some sort of tough specific, but the only thing I heard in six minutes was, when the interviewer pushed a bit for something specific, the familiar line: “You have to remember it’s not our fault, we inherited this…”

    OK, I understand that he’s in a tough spot where he can’t really say anything else for political reasons, so I instead follow the old Washington adage, “watch what we do, not what we say” — and it is even more disheartening.

    Specifically, back when he was elected Obama appointed a Tax Reform Commission with the likes of Volcker, Feldstien, Goolsbee, and from the private sector side, Immelt, Doerr, etc.

    And now the thing has been totally eviscerated. It’s not being allowed to recommend anything — nothing at all.

    Bush appointed a tax reform commission that operated under tough political constraints too (no personal tax increases of any kind, etc.) yet it delivered serious recommendations for business tax reform that now at least are on the shelf for reference should the day finally come again when politicians take the need for tax reform seriously.

    But the Obama Tax Reform Commission — zip. Again, I understand that with an election coming and all the issues in play, politically they don’t want such a commission saying or recommending anything controversial at all, and real tax *reform* can’t help but be controversial.

    But still, in another two years there will be another election (Obama’s own) with issues in play, and the same thing will be true … and then in another two years another election …

    As TaxVox asks: “So why did the White House even bother with a commission such as this? … Volcker, Goolsbee et al have better things to do… ”

    “It sounds like by 2011-13 we ought to be considering a fundamental reform of the tax system.”

    Yes … but too bad about that, by their actions.

  15. comment number 15 by: SteveinCH

    Brooks,

    In A, I agree there isn’t much of a difference but it’s a question of net impact because the person in A didn’t earn the money to begin with.

    B however, is an entirely different issue. The money/benefit in B was earned by the worker in question. If the government decides to tax that benefit, then it’s a tax. Even if they refund the money to make the worker equally well off it’s still a tax. Remember of course that making the worker equally well off is impossible because of administrative costs but even were it possible, it is still a different case.

    The distinction I draw is one of ownership. The worker owns his wages and benefits. When the government takes them, even if it later refunds them, it’s a tax. If you do away with that distinction, the implication is truly frightening. By your logic, a tax rate of 100 percent on everyone where money was then redistributed is equivalent to letting people keep most of their money. Not saying you’d ever suggest it but it’s the same line of thinking.

    My broader point is your line of thinking is only about outcome. I think means matter a lot as well.

  16. comment number 16 by: SteveinCH

    Sorry Jim,

    My response to you is the same as my response to Brooks. The government in your example on mortgage interest does not pay the homeowner anything. It allows the homeowner to keep something that he owns in the first place. I fully agree that it has the same economic effect but it does not have the same affect.

    You may dismiss the distinction as political. I think of it as philosophical. What’s mine is mine until or unless somebody takes it. If they take it and give it back to me, it doesn’t mean they never took it in the first place. What it does mean is I’m reliant on them giving it back to me. I’d rather they never took it in the first place because I’m a lot more certain of the outcome in that scenario.

    Your point on the tax expenditures bucket is I’m sorry to say another semantic debate. We don’t have one, somebody created one. It’s all back to the same point. Whose money is it really? If you think it’s the government’s, then the notion of a tax expenditures bucket makes sense. If you think it belongs to the people, it doesn’t make any sense at all.

    I do agree that the SS tax on benefits is a reduction in benefits but I’m OK with that. It’s a crude form of a means test. I’d favor a much clearer and more direct one.

  17. comment number 17 by: AMTbuff

    In other words, Steve, a tax break is mathematically equivalent to a cash benefit, but you shouldn’t call attention to that equivalence by calling it a tax expenditure. Call it a banana if you like, but the mathematical equivalence is real.

    The only problem with the term “tax expenditure” is the implication that a purely fair tax system would not allow the benefit. This is why it’s not reasonable IMHO to label a deduction for cost of goods sold as a tax expenditure. We expect any fair income tax to tax only net income, not the gross. Although economists can tell you that taxing the gross would also work, once you allow the price levels to adjust to compensate for the tax.

    Can we return to the original topic now? Does anyone want to dispute my assertion that “Until the crisis arrives, nothing major will be enacted”?

  18. comment number 18 by: Jim Glass

    I fully agree that it has the same economic effect but it does not have the same affect.

    Exactly so. The two situations are identical to the penny — but they give you different feelings.

    That’s the power of “political framing”. It is very powerful in politics indeed. Winners in politics know how to use it.

    You may dismiss the distinction as political. I think of it as philosophical. What’s mine is mine until or unless somebody takes it. If they take it and give it back to me, it doesn’t mean they never took it in the first place. What it does mean is I’m reliant on them giving it back to me. I’d rather they never took it in the first place.

    Then you should hate the mortgage interest deduction. Because when they enacted the income tax, they *took your money*. Then when they later created that deduction in it, they *gave it back to you*. And you say that’s what you don’t like.

    Yet, somehow, you are operating on the feeling that they *didn’t* take that money from you with the tax and then give it back to you with the deduction — with the exact same result, to the penny, as if, after collecting the tax from you, they gave it back to you in a subsidy payment of the same amount.

    It’s hard to explain that feeling, logically. Why do you feel that you are *not* “reliant on them giving it back to me” through the deduction? When the deduction can always be repealed — as has been proposed by many (including a cut-back proposed by Obama).

    Anyhow, that’s the power of political framing.

    And that’s exactly why one special-interest group after another that wants to extract political pork from the system does it through the Tax Code — to the tune of $900 billion — instead of asking for visible subsidy payments. The cash benefit they get is exactly the same to them (and has the exact same cost to taxpayers) … so get it the easy way!

  19. comment number 19 by: Jim Glass

    Can we return to the original topic now? Does anyone want to dispute my assertion that “Until the crisis arrives, nothing major will be enacted”?

    I’d guess nobody’s talking about that because there’s nothing to talk about, we all know it’s true.

  20. comment number 20 by: Brooks

    Steve,

    Whether you think more or less of a given type of tax expenditure is justified doesn’t change it’s degree of resemblance to spending.

    And re: your example, if the government taxed everyone at a flat rate of 20% of labor income, but offered me a tax expenditure (subsidy in the form of a tax break) that lowered my tax rate to 15%, then that would be equivalent to my paying 20% and getting a voucher (subsidy in the form of direct spending) equal to of 5% of my income (aside from any timing differences). It’s the same from the government’s perspective, from my perspective, and from everyone else’s perspective (regarding the latter, in either case, for the deficit to remain unchanged, other taxpayers have to make up for your tax break, just as they would for the voucher).

    It may be helpful for you to think from the starting point of a tax code with no deductions, whether the structure is progressive or flat. If you earn X, you will pay Y% of X. But then government decides it wants you to have more after tax money than you would if taxes per that tax structure (ideally because to incentivize some societally beneficial behavior — behavior with “positive externalities” — but to a large extent in reality just as a result of political pandering based on political calculus, to “buy your vote” with other taxpayer’s money). Government could send you a voucher or give you a deduction. It would make no difference to anyone. Either way, other taxpayers would be subsidizing that behavior of yours. Other things equal in the budget, either way your subsidy increases the deficit or requires higher taxes from others immediately in the amount of the subsidy to avoid an increase in the deficit (leaving aside dynamic effects).

    I think where your thinking goes awry is that you aren’t acknowledging that the starting point is that you owe the government Y% of your income per the starting point tax structure. If you then get a tax break, it’s essentially the same for everyone as if the government sent you a check. A rose by any other name would cost other taxpayers just as much (leaving aside stuff like timing differences and inefficiencies; I’m trying to keep this simple for illustration).

    The distinction is just semantics and politics, and in some cases different treatment in the budget process (tax expenditures act as an entitlement, whereas direct expenditures are part of annual budgeting, so tax expenditures are probably usually harder to get rid of).

  21. comment number 21 by: SteveinCH

    Brooks,

    I don’t think we’ll ever agree here because the problem with your argument is that there really is no “starting point” as you frame it. The starting point if you want to use that argument was no income tax at all followed by a 3% income tax on people with very high incomes (for that time).

    So there is no starting point where I owe the government y% of my income. You are imagining that starting point by imagining a tax code that has no deductions. For what it’s worth, I would be a firm supporter of that tax code but would also point out that y% would be lower than the current marginal tax rates (assuming the tax code raised the same amount of money).

    You and others want to imagine a tax code net of incentives or “tax expenditures”. I agree such a tax code could exist but it doesn’t today. Money the government doesn’t take from me for any reason is mine.

    I’m actually quite surprised that you and others are only focused on the outcome rather than how we get that outcome. By your argument as I posted above, you would be OK with the government taking all of your money as long as they refunded you your current net income after tax. The difference isn’t a feeling, it’s control.

    Once we create a system where I give the government the ability to take x% of my income, I am reliant on the government for any income I have above 1-x%. I ask you and others to consider the point. Would you be in favor of a 50% withholding rate assuming your after tax income remained the same? How about 75%? 100%? Look at what is going on in California right now. They are proposing to raise the withholding rate but arguing they will refund it at the end of the year — it’s just an interest free loan after all.

  22. comment number 22 by: SteveinCH

    Jim,

    First off, I agree we won’t have change without a crisis and have said that here many times.

    Second, it’s not political framing. It’s control. I am opposed to the mortgage interest deduction and all other “tax expenditures” as a matter or complexity and inequity (meaning it makes the effective tax rate a matter or risk taking and effort versus a matter of policy).

    See my response to Brooks for a restatement but I don’t expect any of the rest of you will see it that way. I do pose the same question to you. Would you be OK with 100% withholding as long as your AGI was unchanged? If so, we have a very different reaction to the notion of personal property.

  23. comment number 23 by: Brooks

    Steve,

    I was hesitant to include the part about “you owe the government” because I thought there was a good chance it would feed into your confusion on this topic, and it apparently did.

    There is no philosophical or ideological issue here*. A tax expenditure is essentially the same as spending (at the very least it is closer to spending in nature than to tax cutting in general). If the government decides it wants to incentivize you to buy some fuel-efficient product X, it can either send you a voucher to subsidize that purchase or it can give you a tax break to subsidize that purchase, and there is no essential difference between the two from anyone’s perspective. Sure, there can be a timing difference, with a voucher occurring before your purchase and the deduction having its effect after your purchase, or a refund occurring after your purchase and your taxes paid, so yeah, there can be a bit of a float, but that’s not the essence of it.

    I don’t know how to explain it any better than I have.

    * That is, no ideological/philosophical issue other than that, in practice, the dollar size of the benefit of tax expenditures tends to increase with income, meaning the higher your income tax bracket, the more of a subsidy you get from other taxpayers.

  24. comment number 24 by: Brooks

    Just a couple of notes re: the Concord budget exercise:

    1) I assume it uses static scoring rather than dynamic scoring, so a tax cut of $X translates into a deficit of $X (and related incremental interest expense) rather than factoring in any incremental economic growth, growth of the tax base and reduced tax avoidance that produce revenue feedback effects that could mean, just for illustration, a net deficit increase of only 80% of $X.

    2) I assume it doesn’t factor in the fact that higher deficits and debt mean upward pressure on interest rates, eventual lower economic growth and lower revenues.

    It’s just a simple exercise intended for a mass audience to provide a general feel for trade-offs, so the above are NOT criticisms, just pointing it out for folks here.

  25. comment number 25 by: SteveinCH

    Brooks,

    It’s funny that you think I’m confused and I think you’re confused. There is a philosophical issue. I’m going to take your example…

    “If the government decides it wants to incentivize you to buy some fuel-efficient product X, it can either send you a voucher to subsidize that purchase or it can give you a tax break to subsidize that purchase, and there is no essential difference between the two from anyone’s perspective.”

    Here’s the difference. If the government sends me a voucher, the money came from somewhere. Maybe it came from me and maybe from someone else but the government had to take it in order to send me the voucher in the first place. If the government gives me a tax break, it refrains from taking my money. So in the first case, if the government decides tomorrow that it wants to incent a different behavior, the people who funded the incentive our out their money and I don’t get the voucher. In the second case, the government is required to take my money (or run a higher deficit) in order to provide the incentive somewhere else because it never collected the money in the first place.

    In a static sense, I see your point, but politics is dynamic. If the government takes more, it has more. If it takes less, it has less. Even if the net is the same, over time a world with more takings results in less individual control.

    By the way, would you accept a tax rate of 50% if the government gave you vouchers to bring your after tax income back to it’s current level? I never would but you should be ok with it given the position you have taken here.

  26. comment number 26 by: Brooks

    Steve,

    Re: It’s funny that you think I’m confused and I think you’re confused.

    Well, at least it’s nice that you and I can think that and still engage constructively and respectfully.

    Let’s continue with that voucher illustration. Start with some assumed level of spending, revenues, deficit, your total of after-tax income + any subsidy in the form of voucher, and total taxes paid by other taxpayers. A voucher or a tax deduction (tax expenditure) would have essentially the same effect on all of the above, right?

    If financed by higher taxes:

    Voucher scenario: Government increases tax rate(s), uses the incremental revenue to send you a voucher. You end up with your after-tax income per tax rates + value of the voucher.

    Tax expenditure scenario:
    Government increases tax rate(s), and uses the incremental revenue to offset the lost revenue from you. You end up with the after tax income you would have had per the tax rates + the value of the voucher.

    Again, there are some qualifiers to the above (e.g., timing); it may not be exact, but I’m talking about the essential similarity between tax expenditures and spending.

    So can you tell me how anyone or anything is affected differently by one scenario vs. another?

    Here’s perhaps the simplest analogy I can think of:
    Scenario D: Per a deal, the government gives Joe $3 and he simultaneously gives the government $10 (I’m just eliminating the timing difference).
    Scenario E: Joe gives the government $7.

    Do you see any conceptual, practical or philosophical/ideological difference between those two scenarios? Would you say “Scenario E is better because that let’s Joe keep more of his own money, whereas Scenario D has higher government spending”?

    Re: would you accept a tax rate of 50% if the government gave you vouchers to bring your after tax income back to it’s current level?

    Vouchers would only increase after-tax income if you are counting subsidies as income; I’ll assume your categorization of subsidies as part of after-tax income in my answer: If the vouchers left me with the same after-tax income (including voucher value) as I would have had with the prior (lower) tax rate and no voucher, and there were no timing differences nor any significant differences in related costs to me (e.g., added tax preparation cost vs. “cost” of obtaining and using the voucher), I would be at least close to indifferent, for the same reason “Joe” would be indifferent above.

  27. comment number 27 by: SteveinCH

    Brooks,

    I do see a difference between scenarios D and E.

    Let me modify both by assuming Joe makes $50 in each.

    So in D, Joe has net after tax income of $40 and a benefit of $3 and in E he has net after tax income of $43. If that were the end of the game, they’d be equivalent. But what happens next year if instead of giving $3 to Joe, the government decides to give the $3 to Jack instead. Now Joe only has $40 instead of $43.

    Yes I understand that the government could also decide to increase Joe’s taxes at any point in time but since, in my view, Joe has no claim on the $3 but he does have some claim on his own income, his position in stronger in scenario E than in scenario D.

    Maybe for some it’s too fine a point but for me, it’s quite an important one.

  28. comment number 28 by: brooks

    Steve,

    Unfortunately the last few comments on this thread (prior to your 11/14 8:08pm) disappeared, apparently due to some website glitch. Too bad, because I think one of those comments was my explanation of why an argument of yours would lead you to favor “spending” over tax expenditures. Did you see it? (I jokingly called you a “big-spending liberal”)

    Anyway, re: what happens next year if instead of giving $3 to Joe, the government decides to give the $3 to Jack instead.

    That would be the equivalent of the government requiring Joe to give $10 instead of $7 (and sending $3 to Jack). Again, the form doesn’t change what happens from anyone’s perspective.

  29. comment number 29 by: brooks

    Steve,

    Oh, and re: your last point, remember that Joe just keeping that $3 vs. Joe paying $10 and instantly getting that $3 back is simply the same, and from what I think is your perspective, either way Joe is getting special treatment worth $3 and other taxpayers have to make up the difference.

  30. comment number 30 by: SteveinCH

    Brooks,

    Too bad I missed it. I’ve never been called a big spending liberal except by my grandfather when I was in college and this was a man who didn’t believe in borrowing money for any purpose.

    On the substance above, let me revert to feasibility. We all know that raising taxes is politically harder than shifting spending. As long as this is the case, Joe is better off keeping more of his money.