Is the Obama Budget Half Full or Half Empty?
February 2nd, 2010 . by economistmom
Readers may be confused: is my (still developing) assessment of the Obama budget a net positive one, or not? Well, YES. Being the optimist I am, my “view” is that this budget glass is “half full.” But it’s only (at best) half full. That’s because from my perspective as a fiscal hawk, while the Obama budget qualitatively calls for a set of good fiscal discipline tools (statutory PAYGO, discretionary spending constraints, some decrease in inefficient tax expenditures, a fiscal commission, and health care reform) that have some potential to make a difference, it still fails to go far enough quantitatively with specific plans that would actually fill in–versus open up–the fiscal gap. The failure to “follow through” in filling at least the ten-year budget glass, has mostly to do with the Administration’s unwillingness to make the necessary changes in tax policy–or even to talk about the possibility of such changes with the American public.
When I first look at the President’s budget, I avoid reading press stories on it and even the introductory words in the budget itself and instead go straight to the summary tables. I figure sticking to the plain numbers and the few descriptive explanatory words in the rows of the tables will help me take in my first view of the budget without seeing it through either the clouded lenses of other budget analysts or the rose-colored lenses of the Administration. But in this year’s budget, even the summary tables have a lot of art and spin to them. In fact, there are so many ways of labeling and spinning the numbers–and the Administration demonstrates this well just in their tables–that it makes one dizzy and confused.
So here are some of my quick and fascinating details from the Obama budget, obtained from my perusal of just the summary tables alone.
In my mind, the place to start is Table S-7, the “bridge from budget enforcement act baseline to baseline projection of current policy”–because if you don’t start there, you won’t understand where the Obama Administration is starting from in proposing their budget policies. Some of what you learn from that table:
- The ten-year (FY2011-20) budget deficit under current law (i.e., if Congress and the Administration passed no new tax or spending policies over the next ten years) is $5.472 trillion.
- Yet the Administration claims it is starting from a ten-year deficit that’s nearly double that: $10.640 trillion. That’s because the Administration first adds in the cost of permanently extending (and fully deficit-financing) the following: permanent relief from the alternative minimum tax ($659 billion), permanent extension of all of the 2001 and 2003 tax cuts ($3.097 trillion), and the “doc fix” to override scheduled reductions in Medicare physician payments ($371 billion). Note: that’s $3.8 trillion worth of added deficits due to the assumed permanent extension of the tax cuts (AMT and Bush tax cuts) alone.
Then you can go to Tables S-1 (budget totals) and S-2 (effect of budget proposals on projected deficits) to understand how the policies proposed by the Obama Administration affect the deficit outlook.
- Table S-2 suggests that a substantial amount of deficit reduction is achieved through increased revenues, because it shows $749 billion in additional revenue from “other revenue changes” (various tax increases on businesses I’ll detail further below) and $678 billion from letting the upper-income tax provisions in the Bush tax cuts expire. Relative to the policy-extended starting point chosen by the Administration, this implies that tax policy provides around $1.5 trillion in deficit reduction out of the $2.1 trillion total deficit reduction shown. (And yet interestingly, nowhere in this table does the phrase “tax increase” or even “revenue increase” appear; tax increases are labeled “changes” or “provisions”, while tax decreases are (more clearly) labeled as “cuts.”)
- But the starting point for Table S-2 is the $10.6 trillion ten-year deficit under the policy extended baseline. If you keep track from the current-law baseline (and its $5.5 trillion, ten-year deficit), the tax increases proposed in the Obama budget merely bring the net tax cuts in the Obama budget down from $3.8 trillion to around $2.6 trillion. That’s a net tax cut relative to current law, of $2.6 trillion.
- So Table S-1 shows that the Obama budget brings the ten-year deficit “down” to $8.5 trillion relative to the $10.6 trillion policy-extended baseline–a decrease of more than $2 trillion–while it actually brings the deficit “up” by more than $3 trillion relative to current law.
Confused? Of course. That’s exactly what these different baselines and poor labels are designed to encourage. But let’s go on…
- That opening table (Table S-1) in the summary tables section has an unusual amount of words in it, because it contains a box describing the fiscal commission, designed to reassure us that ultimately the Administration’s policies will get deficits down to a truly sustainable level–below the 3.9 percent of GDP shown in 2015 under the budget “without fiscal commission.” It’s not exactly a glossary to help you identify the tax increases versus decreases, because the Administration sticks to its self-imposed rule of never uttering the words “higher” or “increase” next to the word “taxes.” We can read of the goals of “balancing the budget” and “stabiliz[ing] the debt-to-GDP ratio” and “examin[ing] policies to meaningfully improve the long-run fiscal outlook”. And we can even be warned of necessary “changes to address the growth of entitlement spending and the gap between the projected revenues and expenditures.” But to explicitly suggest that “tax increases” might be part of the strategy to reduce that gap? Never!
- The Obama budget does not in fact propose any overall increase in taxes. If you look at the levels of revenue and spending in Table S-1 and compare with the CBO current-law baseline, you’ll see revenues in 2015 that are 0.8 percent of GDP lower than under current law, and spending that’s 0.6 percent of GDP higher–producing deficits under the Obama proposals in 2015 that are 1.3 percent of GDP higher than CBO shows for current law.
Next, make your way down to Table S-8, showing “mandatory and receipt proposals.” Again, with few words in these tables, the Administration manages to speak volumes about their fiscal policy and public relations strategies. I’ve looked at the way they sort out and label their tax policies and notice the following: First, any tax increases are never labeled such, and they always hit those who fall under one (or more) of these three categories: (i) bad corporations, (ii) tax cheats (or those who otherwise engage in tax waste, fraud and abuse), and (iii) rich people. Second, any tax decreases are clearly (and proudly) labeled “tax cuts” and are for good things and people–such as for “recovery” and “families and individuals” and “small businesses.”
Using such labels, here’s how the bulk of the Administration’s proposed tax policies (apart from extension of the Bush tax cuts and AMT relief) break down–all relative to the Administration’s current-policy-extended baseline. First, under the “happy tax cuts” category:
- “Tax Cuts” that are part of the “Temporary Recovery Measures”: $47.3 billion;
- (Permanent) “Tax Cuts for Families and Individuals”: $143.4 billion;
- (Permanent) “Tax Cuts for [small, main-street-type] Businesses”: $93.5 billion; and
- “Continue certain expiring provisions through calendar year 2011″ [too diverse a group of provisions to come up with one happy label for or otherwise justify]: $46.7 billion.
Then, under the “tax the evil ones” (but, shhhh… don’t call them “tax increases”) category:
- the “financial crisis responsibility fee” (aka tax on “bad Wall Street firms”): $90.0 billion;
- other tax increases that “reform treatment of financial institutions”: $3.3 billion;
- “Reinstate Superfund taxes” (aka tax on polluters): $18.9 billion;
- “Reform U.S. international tax system” (aka tax on multinational corps): $122.2 billion;
- “Eliminate fossil fuel tax preferences” (aka tax on big oil polluters): $38.8 billion;
- “Tax carried interest as ordinary income” (another tax on Wall Street): $24.0 billion;
- “Reduce the tax gap” (aka get rid of “waste, fraud, and abuse” in the tax system and go after “tax cheats”): $49.4 billion;
- “Reform treatment of insurance institutions” (aka tax on evil insurance companies);
- “Upper-income provisions devoted to deficit reduction” - Bush tax cuts portion (aka, taxes on the rich–but the irony of the “deficit reduction” label being it can’t be counted as reducing the deficit for PAYGO purposes because these tax increases are already counted in current law): $678.3 billion; and
- Limit on itemized deductions to 28 percent (another tax on the rich–quickly and soundly rejected by Congress when proposed last year as a way to fund health reform): $291.2 billion.
So the reason I think the Obama budget only fills the glass (or the bill) halfway at most is because there’s a lot left to be desired in terms of tax policy, which I continue to insist has got to be most of the strategy to get deficits down to sustainable levels within the ten-year budget window. Still don’t believe me? Just read Len Burman’s column in today’s Washington Post, where he explains how much further we would get if we froze tax expenditures instead of discretionary spending. Or read Joann Weiner’s column over on Politics Daily (Joann being another tax policy expert) where she explains how the Obama budget really only tinkers around with tax policy and seems to contain many “self-inflicted wounds.”
The Administration’s fiscal commission will have a chance to recommend how to follow through on good intentions and more adequately “fill up” the budget, and we can expect that more fundamental tax reform and increased revenue (yes, “higher taxes”!) will have to “come out” as a big part of the solution.
Diane,
I think it would be great if you did a very simple, layperson-oriented, Paul Solman-style video showing why tax expenditures are equivalent to spending subsidies – starting with the tax liability someone would have based on his income and applicable tax rates, then walking through a tax expenditure scenario and a direct spending subsidy scenario (e.g., a voucher, rebate or tax credit), showing all the financial pluses, minuses, and net effects on the individual, the government, and by extension of the latter, all other taxpayers, present and future (technically, even that individual could be paying more in other taxes with unknown net effect for him).
You could show that there is no difference between the two scenarios in terms of the effects on anyone’s balance sheet or (after-tax) income statement, so to speak. Either way, that individual ends up with that additional money and taxpayers today and/or tomorrow will have to pay that much more.
Then maybe more people will get it; maybe they will see that just because a provision in the tax code reduces some individuals’ (or businesses’) tax liability doesn’t mean that the provision really resembles a “tax cuts” more than a “spending increase” in terms of how one views the optimal level and nature of the role of government in the economy and in our lives through taxation and spending.
If a lot more people could gain that understanding, it would be somewhat easier politically to reduce tax expenditures.
(Not to be presumptuous about suggesting work for you; I just think you’d do it well and could draw some attention to it.)
Diane,
Fair enough and interesting. I still think you are being too kind by half to the Obama budget but only time will tell.
I’ll continue to insist that your “obsession” with tax policy is over the top. Remember that the CBO baseline gets receipts to somewhere in the 20 to 21 percent range (I don’t recall the exact number off the top of my head) while expenditures are well into the 23 to 24 percent range as of 2020 with less receipts and roughly the same expenditures in the build to get to 2020.
Said differently, what the CBO figures argue is that even allowing all current tax reduction provisions to expire on schedule only gets you to roughly 20 percent of GDP in receipts. How exactly do you achieve balance when the administration plans to spend 23 to 25 percent of GDP for the eternal future. Ending all the Bush and Obama revenue negative tax changes won’t solve the problem unless spending were to be in that same 20 to 21 percent range.
What’s even worse and has gone relatively unremarked is that the administration plans to spend $500 billion MORE in 2020 than the CBO current policy baseline (roughly 2 percent of GDP) and, instead of simply allowing current law to end on the revenue side, they propose a dog’s breakfast of tax provisions, many of which have not a hope in heck of passing Congress. Joann’s point is right in terms of policy but not in terms of impact. The CBO baseline gets to the same place (actually a bit lower in dollar terms) on revenue. It’s spending that’s going crazy under both CBO and OMB forecasts.
As a thought experiment, assume that all the Bush and Obama tax policies expire on schedule and that all of the crazy tax the bad ideas that Obama proposes actually were to pass. The budget still isn’t balanced by 2020.
How is this half full again?
And my snarky side can’t resist pointing out how quickly Mr. Transparency on the Budget has become the biggest game player of all, creating whole new baselines to try to justify what is, in effect, a political argument about who is more to blame for deficits. The short answer there is Obama is. It’s his budget. Don’t like Medicare Part D, then cancel it. Ditto the wars. Ditto the tax cuts. Sorry but this whole thing is making me tear my hair out (what little of it remains)
On top of this, the OMB gooses its growth forecast (relative to CBO) to help soften the blow, and assumes a decade of inflation at the 2 percent level (which has actually never happened back to 1920).
One more thing, you can easily balance the budget with little more revenue than the current law would suggest if you are willing to take on entitlements in the short term.
I take it that you are not Diane but that doesn’t mean it isn’t an option. Means testing can be done quickly and can dramatically reduce the deficit.
On the issue of tax subsidies, I continue to disagree and I think I’m having a hard time communicating why.
Let’s take the mortgage interest deduction, one of the larger tax expenditures in the code. To call it a tax expenditure is to say that the rate is the governing and correct metric. In other words, anything that deducts from the rate is a tax expenditure. It’s equally valid to say the income from any given taxpayer or group of taxpayers is the objective function and any combination of rates and exclusions can get you there.
It’s a definitional point. It’s only a tax expenditure because you define the rate as opposed to the dollars as the controlling element of policy.
The other difference, which I have tried to convey previously is that I personally would rather give the government $3 than give it $5 and have it give me $2 back. The latter case makes it too easy to give the money to someone else tomorrow. For whatever reason, I feel more control over what I’ve earned than what someone has given me.
Steve,
Yes, the starting point — whether we are talking about spending subsidies or tax expenditures — is that everyone has a particular tax liability based on his income and applicable tax rates, considering what we, through our political process, have decided should be our basic, income-related tax structure (e.g., degree of progressivity based on income). From there, both tax expenditures and spending subsidies do exactly the same thing: transfer money from other current and future taxpayers to the individual in question because of his situation (e.g., number of kids he has) or behavior (e.g., buying a home via mortgage). There is a categorical difference between reducing everyone’s tax rate(s) for given types and levels of income vs. providing these subsidies either via direct spending or special tax breaks.
Re: your last paragraph, I don’t see that as a very substantive objection (and I know you’ve said there’s some emotional element for you), and it doesn’t make sense to me, either. For one thing, the fear that a tax refund that is due you would end up being spent elsewhere instead doesn’t seem like something serious enough to drive this policy choice. But moreover, the preference you express would generally lead you to prefer direct spending over tax expenditures. I don’t think tax expenditures generally work in the way you describe: you paying more than your actual tax liability and then getting a refund. One direct spending scenario could be vouchers or advance tax credits you’d receive first and then use to purchase something, or for that matter (just to illustrate for maximum clarity) it could be the government purchasing and providing you with something at no charge to you. Compare those scenarios with the tax expenditure scenario in which you have to lay out the cash for the purchase, then wait until tax time (perhaps next year’s April 15) for you to experience the reduced tax liability. The cash flow and savings for you would be better both in terms of timing and certainty with the direct spending scenarios.
But Brooks, I think the starting point is wrong. Today everyone has a tax liability based on the entirety of the tax code, not merely their income and the rate table. Would I happily sign up for a simpler code and a lower rate table? Sure. But that’s quite different than saying that anything that reduces AGI or adjusts the rate table is an expenditure. Simply speaking, its not.
Nothing was expended. Nothing was transferred from one party to another. Tax expenditure is an attempt to define the debate in a particular way, a way that drifts toward higher tax liabilities for the citizens of this country.
If that’s what people want to do, it’s fine by me. But definition isn’t a debate. As I’ve said many times, the more appropriate discussion is how you want the tax code to be structured to deliver a certain amount of income. It’s the same rhetorical approach that allows the Bush tax cuts to be common rhetoric when, largely speaking the Bush tax cuts simply undid the Clinton tax increases. Where does the circle start?
I’m not arguing the math, the math is clear but labeling something an expenditure to me means that Peter gave Paul something, not that Paul refrained from taking more from Peter. I don’t know how to make it any clearer.
Think of the implications of applying your tax expenditure logic to tax rates pre-Reagan or pre-Kennedy. The top marginal rate was 91%. Reagan lowered rates AND changed the rules so that total receipts were relatively unchanged. By your logic, he reduced taxes and reduced tax expenditures. To me that logic is too cute by half.
By the way, I agree that direct transfers are better and more transparent than tax expenditures as you define them. But, I don’t agree that the government is “entitled” to receive the total revenue pre-tax expenditures which is what proponents of this particular point of view typically assert to a greater or lesser degree.
Just to conclude. I’m for a flat tax (no exemptions or deductions of any type) largely because it results in far lower waste (tax prep and lobbying) than the current code. I do not agree that the government is entitled to take more of my money because it has set the rules to allow exemptions and deductions.
Steve,
Re: But Brooks, I think the starting point is wrong. Today everyone has a tax liability based on the entirety of the tax code, not merely their income and the rate table.
True, but that is an observation, not an argument as to the nature of tax expenditures. You are basically saying that tax expenditures exist. Yes, the do.
At least at the moment I don’t think I can explain any more clearly why I see tax expenditures as much more like direct spending subsidies in nature than a reduction in tax rates that apply to all who have given levels and types of income.
Re: I don’t agree that the government is “entitled” to receive the total revenue pre-tax expenditures which is what proponents of this particular point of view typically assert to a greater or lesser degree.
The point I’m making is simply that tax expenditures have exactly the same effect as spending subsidies on the balance sheet and (after-tax) income statements of the government and of every current and future taxpayer. I don’t see any real difference to be derived from changing the semantics. Saying we should eliminate/reduce a tax expenditure is, in terms of all effects, equal to saying we should eliminate/reduce a spending subsidy. Saying the government shouldn’t get the incremental revenue from elimination of a tax expenditure is, in terms of all effect, equal to saying that individuals receiving a subsidy shouldn’t be denied it. It’s all the same thing regardless of semantics. No matter what you call it, it’s a transfer of income from current and future taxpayers as a whole to those who qualify for the subsidy. A rose by any other name would screw other taxpayers just as much.
Steve,
By the way, I guess you’ll disagree with my updated interpretation, but I refined my translated Obama SOTU speech excerpt to reflect the true nature of tax expenditures. See http://economistmom.com/2010/02/the-obama-budget-a-delicate-balancing-act/#comment-6667
How about we agree that money is fungible and leave it at that?
I agree that the term “tax expenditure” implies a judgment that the provision is not justifiable simply as part of a fair measurement of taxable income. That judgment is certainly correct for some items and incorrect for others, with many items falling in a gray area.
I also agree that people who use the term “tax expenditure” typically favor higher taxes. That in itself is not a bad thing in my opinion, especially considering the dire fiscal situation.
Steve,
Just to add to my 8:22 comment:
The main reason I’m raising the point of the equivalence in all but name of tax expenditures and spending subsidies is because folks on the right are generally much more favorably inclined toward the former than the latter, which is irrational, because they have the same exact effects on everyone.
Whether or not people want current and future taxpayers as a whole to pay more in taxes (net of dynamic effects — any incremental GDP and revenue feedback) to provide subsidies to encourage or compensate for home buying, for example, is a choice that should be made without any regard for whether the label is “tax deduction” or “spending subsidy”.
Brooks,
I think this is just one of those times that reasonable people will have to disagree. The mortgage interest deduction is not a spending subsidy. Noone provided me with anything to help me pay for my home. Yes they avoided taking even more of my money and for both me and the government the accounting is the same.
The difference is, it’s my money to start with and not the government’s. If you accept that premise, they are not the same. To argue that the government’s failure to take more of my money is equivalent to them giving me money in effect starts from the premise that the money is theirs to begin with. If the money is mine to begin with, they aren’t the same thing.
AMT, I’m not arguing that higher taxes will not need to be part of the solution. I am saying that making a failure to take equivalent to provision of a benefit starts from the logical supposition that the individual doesn’t control his property to begin with.
Brooks, think about it this way. Imagine there were no income tax. By your logic, I could (although it would be silly) argue that the government has tax expenditures of trillions of dollars because they have chosen not to take anyone’s money. You’ll argue that it’s different because tax expenditures are exceptions to the tax code but what is the tax code? You are making a normative judgment that the tax code should exclude exceptions to the rate table. You can make that judgment but you need to realize that it is normative and not logical. That doesn’t mean that you can’t do it but you can’t actually make a logical argument for a baseline tax code since any point you choose on the curve is simply your personal reference point.
Personally I believe and I think the history of the code suggests that policy makers are focused on dollar outcomes, that is, how much money will be raised by a particular tax or change in the code. That’s a question therefore of both rates and rules. If you say all the rules other than the rates are tax expenditures, you ignore the reality of managing dollars not percentages.
I could invent a new term, call it tax forgone and define it as any income that would not be made by increasing the top marginal rate to 50 percent while not changing any of the rules. Such a concept would be equally valid as the concept of a tax expenditure since the government could in fact raise rates in this way. I could equally calculate the “progressivity tax loss” which would be the difference between what actual receipts are and what they would be if we had only one rate and it was the highest marginal rate. My point clearly is not to argue for these concepts but to say they are no less conceptually valid than tax expenditures.
Whether or not people want current and future taxpayers as a whole to pay more in taxes (net of dynamic effects — any incremental GDP and revenue feedback) to provide subsidies to encourage or compensate for home buying, for example, is a choice that should be made without any regard for whether the label is “tax deduction” or “spending subsidy”.
Agreed. This example is also a good illustration of how it’s easy to overlook unintended consequences. The tax benefits of owner-occupied homes are capitalized into the prices of those homes. Withdraw the benefits and the prices will decrease. Provoking a further decline in real estate prices would be economically stupid and political suicide.
Steve, I agree with your explanation that the debate over what should or should not be called a tax expenditure is essentially a debate over what is the correct baseline, namely what the normative, fair, ideal income tax would look like. As you say, that debate is not resolvable by logical argument.
Steve,
The key thing here is: Do you agree with me (or not) that there is no reason to have any preference between a tax expenditure vs. a spending subsidy that has the same effects on everyone’s balance sheet and (after-tax) income statements for everyone (you and other current and future taxpayers), as well as equivalence of any related incentives (if applicable) for everyone? See my 8:45 upthread. If you agree with me that there is no reason to have any preference, our work on this question is done. If not, please tell me why it makes sense to prefer one over the other.
Re: what’s yours vs. what’s “the government’s” let’s forget “the government” per se. I think we can agree for our purpose here (and in general) that “the government’s” finances are essentially really part of “the people’s” finances. So let’s talk about you and other taxpayers. To simplify, let’s assume that:
(1) A new tax expenditure is created for which you qualify (by having X number of children or buying a house or whatever).
(2) We cannot borrow incrementally to make up for the lost revenue.
(3) Total spending is held constant, since it’s extraneous to our question.
(4) #2 and #3 mean that more must be raised via other taxes to replace the lost revenue from you and others who qualify for this new tax entitlement. To keep things simple (and roughly accurate), and let’s leave out the possibility that even you will end up fully offsetting your tax savings by being taxed that much more via other taxes.
We are left with this simple result: Other taxpayers must pay more to replace the amount of taxes that you and others who qualify will not be paying in order to keep the deficit from increasing, holding spending constant (as we should for this purpose). So as for your assertion “No one provided me with anything to help me pay for my home”, well the result of that tax expenditure is the same as it would be if you received a spending subsidy: Others must pay more to make up the lost revenue so that you can end up with more cash in your pocket because you bought that home. Whether you want to call that someone “providing you” with anything is just a matter of semantics (perhaps reflecting ideology), but my point is that the deal is that if you buy that house, you’ll pay less in taxes and other taxpayers will have to pay more to make up the difference.
If you didn’t get the tax expenditure, but instead got your subsidy in the form of some (spending) check from the government (let’s say with the same timing), all the effects on everyone would be exactly the same if we still had the constraint of not allowing the subsidy to increase the deficit and if we hold other spending constant. In fact, if it helps, think of it this way: You get a check from the government because you have kids or own a home with a mortgage. You don’t know if it’s called a “tax credit check” or a “subsidy check”. Does it make any practical difference to you or anybody else which it is called or how it is categorized for the government’s accounting purposes?
So our question isn’t whether it’s “your money” vs. “the government’s” money, or even whether it’s your money vs. “other taxpayers’” money, and one’s ideology or economic assumptions have absolutely nothing to do with our question. Our question is simply, if we have the same exact cash flow for all involved for the same exact reason, aren’t they the same in everything but name, and isn’t it irrational to prefer one over the other?
Just to repeat, one’s ideology, philosophy, view of “whose money it is”, etc., are completely irrelevant to our question.
Brooks,
I hear your argument but I still would assert it’s not the same thing. The argument that others pay more so that I can pay less falls in my view to the argument “less than what?” or “more than what?” The answer to both is less than they would have paid under a different tax code. So in that sense I agree; however to single out one type of counterfactual and give it a name is where I disagree.
For example, I could call it a tax subsidy that you currently don’t pay all of your money in taxes. After all, I pay more than I would have to if you were to pay all of your money in taxes. That’s the problem with the argument. In order for more than/less than to be relevant, there has to be a normative view of the baseline.
To summarize, we agree that the effect of a preferential tax treatment is financially the same as as providing a subsidy.
However, I continue to disagree that they are philosophically the same since in the one case, I ask the government to appropriate money on my behalf directly and in the other case I do not. I understand it’s an emotional not a logical argument but I may never get past the point that in a system with a large number of taxpayers, the give and receive is more diffuse than in the examples you use. I’d rather everyone kept more of what was theirs than have the government take and redistribute.
We also disagree on the appropriateness of tax expenditure as a classification. In my view, it’s a relativist concept, valid on its face but no more or no less valid than a host of other concepts that could be created.
Further, it has been created with a specific purpose in mind, to come up with another lexicon to justify taking more of what people have earned. I think if you want to take more of people’s money, call it a tax and be done with it. Anything else is semantics. So I guess we’re 1 out of 3 on agreement *grins*
So our question isn’t whether it’s “your money” vs. “the government’s” money, or even whether it’s your money vs. “other taxpayers’” money, and one’s ideology or economic assumptions have absolutely nothing to do with our question.
Actually it does. Because without assuming a baseline one cannot compute the amount of “tax expenditure”. If your baseline is confiscation of 100% of income, then the tax expenditure is the amount of after-tax income. If your baseline is zero tax, then the tax expenditure is negative, equal in magnitude to tax collections.
Your scenario compares a government payment program with a tax break program granting the same dollar benefits to the same people. Mathematically, that’s equivalent. Therefore you suggest that it should be scored the same. However this cannot be done without assuming a baseline, and that assumption will be a hotly debated political decision. I think it’s this last step that you are overlooking.
Steve,
Re: we agree that the effect of a preferential tax treatment is financially the same as as providing a subsidy. However, I continue to disagree that they are philosophically the same since in the one case, I ask the government to appropriate money on my behalf directly and in the other case I do not. I understand it’s an emotional not a logical argument…”
Indeed, it does not seem logical to me, nor do I see how philosophy has anything to do with it. In both cases other taxpayers will have to pay more so you can pay less if you buy that house. That’s the bottom line. Why would semantics – the official label the provision gets – make a philosophical difference when the same exact thing is happening for the same exact reason?
…but I may never get past the point that in a system with a large number of taxpayers, the give and receive is more diffuse than in the examples you use…
My illustration is not oversimplified for the purpose of addressing our question. I just extracted the extraneous to focus on what was relevant.
… I’d rather everyone kept more of what was theirs than have the government take and redistribute.
Again, with all due respect, that is irrelevant to our question.
And again, I see no reason why you would prefer one over the other. There is no practical difference and there is no philosophical difference. The same things happen for the same reason. The only difference is the label.
I’m not trying to be disagreeable; it’s just that I’m still not seeing any argument from you (that makes sense to me) as to why anyone would prefer one over the other.
AMT,
No, it doesn’t, as long as we are talking about the same exact cash flows for everyone for the same exact reasons.
Not sure if it’s the point you were making or related to it, but one thing that occurred to me is that often tax expenditures are partly a function of the tax liability one would have without the tax expenditure and thus the amount varies from beneficiary to beneficiary, whereas we usually think of the amount of a subsidy that one receives as unrelated to that tax liability. But that difference is irrelevant to our main question of whether or not there is any practical or philosophical/ideological difference between a tax expenditure and a spending subsidy with the same cash flows for the same reason. And there are some cases in which the tax expenditure amount is the same for everyone (or at least for income tax payers), such as a “child tax credit” of $X per child.
The baseline taxation that is set – the amount of revenues that will be collected and its basis per the tax rates, given some particular level and distribution of national income (and other bits of taxation) – is of course a matter of ideology/philosophy as well of economics, and of course is “a hotly debated political decision”. I don’t see how that is relevant to our question.
Steve,
As follow-up to my prior reply (and forgive the repetitiveness), let’s put aside all labels for now (”spending”, “subsidy”, “tax expenditure” and focus just on this question: Does it makes sense to prefer one over the other from a practical, philosophical, or any other perspective, assuming that everyone is affected the same way to the same degree (same dollar amounts) with the same timing for the same reason regardless of which label is applied?
And again (going back to the irrelevance of labels) if you got a check from the government because you had a child, would there be any reason to prefer the check be called a “tax credit check” rather than a “spending subsidy check”?
Brooks,
I think I can come around to the point there’s no difference as you are saying. However, I hope you agree that for a “tax expenditure” to be calculated, there must be a baseline against which it is calculated. That’s my fundamental problem with it because that important step is normative and a framing exercise as opposed to logical and an analytical exercise.
Thus, while I can agree I’m neutral between the two systems, once you calculate the amount of tax expenditures, I’m no longer neutral because, in making the calculation, you have to postulate a tax system that doesn’t exist as the baseline from which you base the calculation.
To make the point, I could argue that all taxes on dividends and interest should be offset against what you and others call tax expenditures since, as I see it, they are not income since they have already been taxed. It’s a normative view designed to drive and outcome not a logically provable solution.
And Brooks, the baseline is relevant to the discussion because, in politics, you’ve always got to look not only at the conceptual but the practical. If you want to defend a concept, you need to look at the purpose for which it exists and caveat your approval for the concept.
As an example, I prefer a flat tax as a conceptual matter; however, I do not approve the use to which many proponents would use it, driving down government receipts.
As an example, I prefer a flat tax as a conceptual matter; however, I do not approve the use to which many proponents would use it, driving down government receipts.
Ditto the Fair Tax, which has the additional attraction to proponents that it would be easier to avoid and evade than an income tax.
Steve,
Re: I think I can come around to the point there’s no difference as you are saying.
Ok, so we agree that for what I described – the same cash flow for everyone involved for the same reason – there is no reason to prefer one over the other (tax expenditure vs. spending subsidy).
This is important, because it is quite different from the perspective and inclination of many on the right who do view tax expenditures much more favorably than they do spending subsidies simply by virtue of the former being called a “tax cut” or “tax deduction”. I think you are agreeing with me that such a view is irrational.
So it seems to me the next two questions are:
1) Do some/all tax expenditures meet that description?
2) If the answer to #1 is at least “some” (and for those tax expenditures we have no reason to prefer them over a spending subsidy), does that mean that we should say that those tax expenditures are essentially like spending, or at least more like spending than like tax cuts as we would normally think of tax cuts from the perspective of economics (incentives, impacts on GDP, fiscal imbalance, income distribution and its basis, etc.) and philosophy/ideology (the degree to which one thinks people should be able to keep their money [and spend as they choose individually] rather than the government confiscating it via taxation)?
I think the answer to #1 is yes, or at least some are at least close enough that we can ask #2. For example a child tax credit of a fixed dollar amount per child.
Re: #2, I would say “yes” because tax expenditures are subsidizing people for a particular status (e.g., having X number of children), purchasing something in particular (e.g., a home), whereas tax rates based on income level and type reflect the aforementioned, core economic and ideological concepts. I realize there is some subjectivity in defining this starting point and measuring matters of degree – for example, if the progressive tax structure is based on the philosophy of ability to pay, someone incurring the cost of children is relevant, not just income level; and if some type of income (e.g., capital gains) is taxed at a lower rate because we want to have a greater incentive for behavior with positive externalities, then the same could be said about incentivizing home buying. But note that as long as the dollar amount or basis for the dollar amount is the same in either case and cash flows would be the same, the tax expenditures should NOT be thought of as MORE like “lower taxes” than like “higher spending”, and since there is no difference in what happens between the tax expenditure and the same process as a spending subsidy, the two should be viewed as equivalent, whereas I do see a functional and consequential difference between those tax expenditures and a reduction in tax rates that apply to everyone who makes particular levels of particular, broad types of income.
But in any case, the point on which you’ve agreed is what is most important: There is no difference between the tax expenditure and the spending subsidy, and there should be no preference – no more favorable view and inclination – between a tax expenditure and a spending subsidy that has the same effects on everyone on the same basis.
Re: Thus, while I can agree I’m neutral between the two systems, once you calculate the amount of tax expenditures, I’m no longer neutral because, in making the calculation, you have to postulate a tax system that doesn’t exist as the baseline from which you base the calculation.
I’m not sure I follow you as to why you would not be neutral between something that has the same effects on everyone on the same basis simply because of what its called or because of your paragraph above. I can see the relevance of that paragraph to the semantics (the question of whether or not we should say it’s essentially “spending” rather than / more than “lower taxes”), but I don’t see why you would have any preference (be “no longer neutral”) from a policy choice perspective based only on the label (and I’m confused now as to your belief, since earlier in your comment you acknowledged that “there’s no difference”.)
Re: And Brooks, the baseline is relevant to the discussion because, in politics, you’ve always got to look not only at the conceptual but the practical. If you want to defend a concept, you need to look at the purpose for which it exists and caveat your approval for the concept. As an example, I prefer a flat tax as a conceptual matter; however, I do not approve the use to which many proponents would use it, driving down government receipts.
Again, all I’m talking about is whether or not it makes any sense to prefer a “tax expenditure” over a “spending subsidy” that is exactly the same in all effects and is different in name only. I’m saying the answer is “No, it does not make sense to have such a preference.” Please clarify whether or not you agree.
Brooks,
What I’m saying is that a spending subsidy is physical. You gave someone money. It’s easy to track and does not require a complex baseline discussion. You either cut the check or you didn’t.
A “tax expenditure” requires a baseline to measure. To calculate “tax expenditures” you must posit a tax system that doesn’t exist agains which to measure the expenditure. Thus, while they are conceptually similar, you can’t use them comparably in reality because the calculation of the value of tax expenditures (static) is based on what counterfactual you choose to set.
As a matter of dynamic analysis (e.g., scoring from an agreed starting point), I am very comfortable they are comparable and I have no preference between the two. So, if we were to say that as a going forward matter with today as the baseline, we should express no preference, then I agree. However, that is not what the quoted articles are trying to do. They are positing a baseline and then calculating current “tax expenditures” and current spending subsidies. In my mind, that is a flawed analysis because it rests on a normative rather than a logical assumption.
Guys, let’s try a simple example. Suppose my house is destroyed by a major hurricane. I have a casualty loss. That reduces my taxes to zero, based on the reasonable premise that my net economic income is negative for the year.
Now suppose that instead of allowing casualty losses to be deducted from income, the government wrote checks to all victims in the exact amount of their income tax. You pay the tax, you get a check. Mathematically, it’s the same.
Now comes the subjective part: Which way is better? It’s certainly true that a casualty loss represents a real negative income, and it’s reasonable to allow for that in the income tax. The taxpayer is not in the same position to pay as someone who did not have a casualty loss.
On the other hand, if you are handing out checks, you tend to look at things differently, and you’d probably design a system that handed out checks proportional to the loss rather than the loss times the tax bracket.
I don’t believe there is any way to resolve these two points of view. This difference of viewpoint is what the argument is about.
Yes, the two methods are mathematically equivalent. However, they are not conceptually equivalent, and that makes all the difference.
Baselines are crucial to political arguments. The debate over categorizing tax breaks as tax expenditures is a great example of this.
Steve,
Perhaps I’m not following all that you’re saying, but I’d like to get to a simple, clear bottom line, if appropriate for the answer our question (and I think it is).
Let’s say we are starting from today in terms of the budget, tax code, everything. (Not sure why that matters for this purpose, but ok if it moves us along)
I’m not sure, but as of your last couple of comments, you seem to be agreeing that, IF all is equal in terms of effects and basis for those effects, then as a matter of policy from today forward, (1) there is no difference between the two from an economic, philosophical or any other perspective, and (2) that there is no reason to prefer one over the other (from a rational standpoint). Correct?
As for your comment, could you please lay it out differently, because there may be some unstated assumptions or elements of your reasoning that are between the lines. I’m afraid I don’t see what point you are making. So please spell it out step-by-step for me.
I realize that a “tax expenditure” is a usually a reduction of tax liability relative to the baseline per tax rates — although it’s worth noting that sometimes even folks with the relevant tax liability less than the amount of the “tax expenditure” (or even zero tax liability) get the full, fixed (or minimum) amount of the tax expenditure anyway with the difference sent as a government check (e.g., the “Additional Child Tax Credit” http://www.1040.com/site/federaltaxes/taxcredits/additionalchildcredit/tabid/125/default.aspx ).
I’m not sure what else to mention because I’m quite unclear on what point you are making. Is your point the point I think AMT is making — that the difference is that the amount of a tax expenditure often varies from person to person because it is function of the tax liability he’d otherwise have based on his income, whereas a spending subsidy is often a fixed, equal amount for everyone or based on something else? In other words, is your point that in practice the cash flows and the basis for them would NOT be equal in either case? (AMT, let me know if I’m misrepresenting your point at all)
Brooks,
On point 1 yes I agree.
On my comment, let me try it with a question. How do you quantify the current amount of tax expenditure? Any attempt at quantification must presuppose a tax structure that isn’t the current one. The most common one is to assume that the rate structure should apply to everything but this is just the judgment that some people choose to make.
To take a different example, is the potential payroll tax available from SS by lifting the income cap a tax expenditure or not? Some would say yes because you could apply that tax to all income. Some would say no because the structure was set up initially with a cap. To AMT’s point, you could actually argue that the current SS tax structure represents a negative tax expenditure because the cap has been increased dramatically over time.
Thus, back to my point. Starting from any point in time, you can define tax expenditure and should be indifferent between dollars spent in either way. However, I do not think you can analytically arrive at the current amount of tax expenditures because your calculation must presuppose an alternative tax structure.
If this is true, then you also cannot derive the savings from a freeze on tax expenditures because you cannot derive the baseline amount of money and a judgment about whether something should or shouldn’t increase with inflation (thus increasing tax expenditure by one definition) is normative not analytical.
Re: On point 1 yes I agree.
Cool. That is the most important point. Do you agree that many/most conservatives have an irrational preference of “tax expenditures” over spending subsidies?
On my comment, let me try it with a question. How do you quantify the current amount of tax expenditure? Any attempt at quantification must presuppose a tax structure that isn’t the current one. The most common one is to assume that the rate structure should apply to everything but this is just the judgment that some people choose to make.
Yes, of course the amount of a tax expenditure is the amount of foregone revenue as a direct result relative to what the beneficiaries would have paid otherwise. If we are speaking of all tax expenditures together, that reference point (that baseline) would be the total revenue (total taxes paid) based on tax rates and applicable income, and the “cost” of the tax expenditures (the foregone revenue or post-tax payment tax rebates). If we are speaking of particular tax expenditures, the reference point could be lower, but so would the taxes paid by the same amount (assuming no interaction among tax expenditures), yielding the same amount of foregone revenue in dollar terms due to the tax expenditure (the “cost” of the tax expenditure). And if the same if tax rates were higher or lower, except insofar as the dollar amount of the tax expenditure is a function of each person’s tax bracket, etc.
Yes, as I’ve said and for which I’ve provided examples, I recognize there is some subjectivity as to the appropriateness or purity of using tax rates in general (or at a particular time) as a starting point and then labeling tax expenditures as “higher spending” and NOT “lower taxes”, but we agree at least that it is no different from higher spending, whether or not you agree with me that it is substantively different from “lower taxes” as we would normally think of them from the perspectives I’ve mentioned, which would relate more to reductions in tax rates.
As for particular potential policies for achieving a particular dollar amount of reduction in tax expenditures, yes, I would think the calculations would likely be more complicated (than reducing spending subsidies that are entitlements, as are tax expenditures) insofar as tax expenditures are more often tied to each individual’s tax bracket, etc. And yes, choosing to distinguish between a reduction in tax expenditures vs. an increase in tax rates reflects the view (one I consider sensible) that the two are substantively different in terms of economics, ideology, and the other stuff I mentioned previously. (And again, the same cannot be said regarding a reduction in tax expenditures and a reduction in spending subsidies.)
So again, (1) there is NO difference (practical, ideological/philosophical, whatever) between tax expenditures and spending subsidies that have the all the same effects (on both aggregate and individual levels) on the same basis, but (2) there IS a difference (practical and ideological/philosophical) between tax expenditures and a change in tax rates that have the same aggregate budgetary effect.
But the most important take-away from our discussion is that (1) there is no rational reason to prefer the tax expenditure over a spending subsidy that would have the same effects on the same basis, and (2) many/most conservatives/Republicans don’t realize #1 and it would be beneficial if more realized they were making this error (insofar as making policy choices/preferences more rationally is beneficial).
Brooks, I regard refundable tax credits and government handouts as fully equivalent. You are correct that conservatives tend to irrationally prefer the former.
Other types of tax breaks, e.g. exemptions, deductions, and non-refundable credits, are more difficult to agree on. Some deductions and exemptions are arguably crucial to a fair measurement of taxable income. An income tax that did not allow some deductions and exemptions would, I believe, violate horizontal equity.
The hardest items to defend as legitimate tax breaks are the non-refundable credits. Here the government is willing in effect to hand you money, but only up to the amount of your income tax liability. This limit typically bears no principled relationship with the rationale for the break or with its policy objectives.
Why do people use the term tax expenditure? Because they want to change policy! They want to change deductions to credits, they want to make all credits refundable, and perhaps they want to count them all as spending. In other words, the term tax expenditure has many strings attached to it. That’s why people who oppose the changes I mentioned resist using the term.
Brooks,
AMT is right. To be honest, in this entire discussion, I’ve felt a bit like an engineer arguing with a physicist. As a practical matter, the definition of the baseline is the entirety of the policy argument. Thus, even though your point is conceptually right, it does not advance the dialogue because the first step in the practical application is a definitional question on which reasonable people can drastically disagree.
Brooks,
I also (and parenthetically) think you are wrong about Republicans not realizing the cost of tax expenditures. They prefer expense reduction rather than tax expenditure reduction because, largely speaking, they oppose raising the tax burden as an approach to raise the debt. It’s not ignorance but a policy perspective.
Steve,
Actually, it’s like you and AMT are trying to force concepts of “fairness” or ideology or economics upon the point I’ve been making which involves none of the above, I suppose because half the time you guys making counterarguments to the arguments/implications of advocates of reducing/eliminating tax expenditures and it’s not completely clear when you intend your arguments to be addressing my point (which is not advocacy) vs. taking on advocacy arguments.
Again, my points are simply that:
(1) tax expenditures that have the same effects on all involved (in aggregate and for each affected individual) on the same basis as would a spending subsidy are NO different from that spending subsidy from any perspective (economics, ideology, incentives, results, distribution of effects across different individuals or segments, etc.) and therefore there is no rational basis for preferring one over the other.
(2) Many/most conservatives do not seem to realize the above, and have an irrational preference for the tax expenditure over an equivalent spending subsidy simply by virtue of it being a tax deduction or credit, and it would be beneficial if they realized this error.
(3) Tax expenditures ARE different in the aforementioned respects from a change in tax rates that has the same aggregate budgetary and/or aggregate economic effects.
Whether one thinks it is fairer or better economics or preferable for whatever reason to eliminate, reduce, keep unchanged or increase a tax expenditure has nothing to do with any of the above. Each should be judged on its merits (exactly the same way and with the same results as they would appropriately be judged if they were equivalent spending subsidies of the same amounts and basis instead of tax credits/rebates/deductions).
I happen to think that, very generally speaking and considering all effects, given the choice between reducing/eliminating much of tax expenditures vs. increasing tax rates that much more to achieve the same direct budgetary effect, I’d prefer the former. I don’t have a high opinion of the ability of the political process in Washington to produce subsidies that are efficient in terms of economics or even fairness, and I’d rather keep the tax code simple, let markets set prices, let people generally pay the true cost for things (whether it’s a home or raising children) rather than having others subsidize their choices, and everyone respond accordingly. It’s not that I don’t appreciate the concept of positive externalities of individual behavior and the potential for “win-wins”, I just don’t have much confidence in government to make those choices wisely.
To clarify Steve’s last point, Republicans prefer to close the gap by reducing government spending rather then by taking more money out of the private economy. In theory, it shouldn’t matter whether you accomplish this while reducing tax rates and reducing tax expenditures. In practice, those changes only rarely happen together.
Steve,
Re: your comment that I’m “wrong about Republicans not realizing the cost of tax expenditures”, I’m saying that many/most Republicans/conservatives have a generally more favorable view of a tax expenditure than they would of a spending subsidy that was no different in any way but the label (and some irrelevant accounting particulars), simply by virtue of the label “tax cut” or “tax deduction” (or better yet, “tax relief”). Are you disagreeing?
AMT,
From a policy choices standpoint, the basic question is “Which is a better way to generate a given level of revenues, with higher tax rates and higher tax expenditures, or both lower (and of course, which of each, since it’s not all or none)?”
Do we prefer that the government try to engineer economic behavior to incentivize behavior with positive externalities, and extensively micro-manage the “fairness” of the tax code to account for different consumer choices (e.g., buying a house; sending a kid to college) or life choices (e.g., having X number of children), or do we prefer to keep things simpler, based essentially on income level, and let markets and individuals take it from there?
I’d rather keep the tax code simple, let markets set prices, let people generally pay the true cost for things (whether it’s a home or raising children) rather than having others subsidize their choices, and everyone respond accordingly.
Most advocates of tax reform feel this way. So do most economists. There is no ideological objection on any side to comprehensive tax reform, during which many items that can be called tax expenditures are eliminated.
It’s just that given today’s huge deficits the practical barriers to comprehensive tax reform are insurmountable until the crisis hits. This cannot effectively be dealt with piecemeal, for instance by labeling this or that item a tax expenditure and eliminating it without providing any significant rate cut.
AMT,
And just to add a bit: If we must raise revenues via changes in the tax code, would we rather reduce the degree to which government subsidizes particular behavior (either some particular subsidy with large budgetary effect or subsidies in aggregate)
OR
would we rather government raise income tax rates and/or raise other taxes and/or create a new tax (e.g., VAT)?
AMT,
I don’t know which would be tougher: raising tax rates on the “middle class” or taking away the big subsidies (tax expenditures) from which those who qualify benefit greatly (e.g., mortgage interest deduction, employer-provided health insurance, child tax credit, etc.) at least in a direct, “tragedy of the commons” sense, and perhaps even benefit on balance in many cases.
in my opinion, advocates of comprehensive tax reform have insufficient appreciation for the complexity of the economic system in which the tax laws exists. First, abrupt change causes economic dislocation. I believe the 1986 Tax Reform precipitated the very expensive S&L crisis. The 1988 tax rates proved to be quite temporary, with rates snapping more than halfway back by 1993. More breaks crept in, to the point where one wonders whether the whole exercise was more than a way for Congress to sell the same tax code twice, at the cost of $100B or so for the S&L bailout.
Second, incidence of tax is complex. For instance, if we were to increase income tax rates on automobile mechanics, how much of that increase would simply be passed on to customers? Advocates of reform tend to ignore the natural reactions of the economy to changes in tax law. These reactions may mean that the result is less fair than now, even though it was supposed to be more fair.
We need to have a great deal of respect for any complex system that has evolved over a long time. Just as we would not clear-cut a forest ecosystem, we need to be careful about clear-cutting the tax code. Yes, it can be done, but it’s not simple. Not at all.
Steve,
Just as a note to provide another example to show I understand (I think) a point you were making regarding the baseline, if one’s preference (based on ideology and/or economics) or one’s basic starting point for whatever reason is that everyone should pay the same tax rate on every dollar earned no matter how little or how much they earn — i.e., a flat tax with no exceptions or subsidies — than from that perspective, if lower income-earners are taxed at a lower rate than what that single flat tax rate would be, one could say they are being “subsidized” by those paying a higher rate than that hypothetical single flat tax rate.
But all that I’ve said still applies.
AMT,
That seems to me a very sensible note of caution regarding the pace of change in tax expenditures and spending subsidies.
Brooks, you do understand the conceptual point but maybe not the practical one.
I still ask the question, “how do you define the current level of tax expenditures?” and the related, “how do you defend that definition versus other potential definitions?”
In my view, as a practical matter it is easier and safer in practice to raise rates than to address subsidies. Safer because we have reasonable empirical evidence (e.g., eliminating the Bush and Obama tax cuts is unlikely to drive major disruptions in economic behavior because we have operated under that system without disruptive effects.). The alternative approach (eliminating the mortgage interest or charitable contribution deduction) is unplowed territory where we have no good understanding of behavioral response.
Steve,
Maybe I’m still missing something you’re saying, but I don’t know what “practical” point you have been making if you are referring to our discussion throughout most of this thread regarding the nature of tax expenditures (in terms of effects, economics, ideology, etc.) relative to the nature of a spending subsidy with the same effects and basis (we agree there is NO difference) and relative to the nature of a change in tax rates with the same budgetary impact over some period (there IS a difference). Perhaps that’s not to what you are referring regarding some “practical” point; perhaps you are just referring to this new assertion that it’s “easier and safer” to raise rates than to reduce subsidies, which seems probably valid to me, but is not the only consideration (and is unrelated to the other question).
Re: the definition of “tax expenditure”, for what purpose are we defining it?
If the purpose of defining it is to have a shared understanding of what someone means by the term, that’s not much of a problem if at all. I think it’s understood to mean any reduction in one’s tax liability vs. what it would be if the tax bracket tax rates were simply applied to one’s income. (As a note, in some cases, such as the Additional Child Tax Credit, the so-called “tax credit” exceeds one’s tax liability and one receives a check from Uncle Sam [a.k.a. other taxpayers], which must really confuse and irritate those who think the label creates some difference vs. a spending subsidy). So defining it for the purposes of communication (so everyone knows what is meant by the term) is not problematic.
Now, one can make the conceptual argument that such a definition leaves out some tax expenditure subsidies – e.g., my example of a progressive tax structure vs. a flat tax (or for that matter, a constant rate vs. everyone paying the same dollar amount) being viewed as a subsidy for those with lower income, but that gets away from the nature of a tax expenditure, which is to subsidize some economic or life choices and related situations (buying a home; sending a kid to college; getting more of one’s compensation in the form of health insurance; having more kids; etc.), as opposed to taxing someone based on his income regardless of such choices/situations. (I suppose one could argue that choices and related situations pertain to having lower income, but that is a weaker association.)
And one could argue that all a particular tax expenditure (or spending subsidy) does is correct some “unfairness” that would exist if taxation were based just on the tax rate(s) applied to income, or argue that the positive externalities (e.g., supporting the housing market and related jobs) warrant/justify the related tax expenditure subsidies, but those are just cases one would try to make in our political process, and from a rational perspective the strength of the case is unaffected by whether it’s called a “tax expenditure”/”tax credit”/”tax cut”/etc. or a “(spending) subsidy” / “(spending) voucher”. If someone says “Everyone who sends their kid to college should get a $X check from the government, and other taxpayers should have to pay more to make up the difference”, we can all discuss and debate the desirability of such a policy, but the label is irrelevant.
If the purpose of defining “tax expenditure” is to decide whether or not to eliminate/reduce/increase/create one, well, the label shouldn’t matter. It has no practical (or ideological) relevance. So I don’t see why you see the matter of definition as so important and why you consider it problematic.
Again, this is about deciding whether we want (1) more of government subsidies for various individual choices and related situations – whether to incentivize or for the sake of “fairness” or whatever + higher tax rates or (2) less subsidizing and lower tax rates. The latter has some significant advantages (generally conducive to greater economic efficiency; greater transparency of subsidies, which may lead to less abuse of taxpayers as a whole to benefit particular constituencies, and less waste and less of a “tragedy of the commons dynamic”; less individual spending on tax accountants; etc.), but there are also arguments for making taxpayers subsidize the choices and related situations of others, whatever the label. But the labels are indeed irrelevant to the policy choices.
The alternative approach (eliminating the mortgage interest or charitable contribution deduction) is unplowed territory where we have no good understanding of behavioral response.
Oh, sure we do.
The 1986 Tax Reform Act bipartisanly dropped the top tax rate to 28% on a completely revenue neutral basis exactly by deeply slashing tax expenditures.
That was immediately from a top 50% rate, and a top 70% rate in 1981.
So we have all the experience that comes from actually having done it, plus a plethora of academic studies conducted in preparation and ever since following up the results.
We know all about the economics of getting rid of preferences. It’s good! It was a great success. Getting rid of economic distortions is always a good thing.
It’s the politics of it that is tough. Ever since the politicians have steadily been putting the tax preferences back in.
We all know how politicians work.
I believe the 1986 Tax Reform precipitated the very expensive S&L crisis.
Oh, I very much don’t believe that. I lived through that professionally working in the field, and while Donald Trump led the screaming, “I want my tax shelters and if I don’t get them it will Destroy the World!!!”‘ … you know.
The S&L industry actually put together a list of the 15 major causes of the crisis — here’s a copy — and tax reform didn’t even get a mention.
Yes, I knew a lot of tax shelter people who got put out of business by that law, out of the business of peddling intentionally manufactured losses on uneconomic “investments”.
They bought me a lot of lunches — back in the days when alcohol was still served! And for all I liked some of them personally, from the point of view of the greater good it was “good riddance!” to ‘em all.
Unfortunately, as tax rates started creeping up again they started creeping back. And the higher rates go the more of them they’ll be. It’ll be the power of the deadweight cost of taxes, which rises by the square of the rise of the tax rate, drawing them back irresistably.
We should do all in our power to keep top rates as low as possible. Stomp on the tax expenditures like in ‘86 again — they are govt spending just like any other, and should be treated as such.
Nothing that couldn’t politically get a visible cash subsidy handed over on TV should get a tax expenditure. Nothing.
(And considering the things that do get cash subsidies, less than that.)
If people are proposing general ideas for fundamental budget reform, here is a proposed model for a left-right “Grand Bargain“, by Scott Sumner, who is an economist with “small-government” leanings, but realistic about it.
FWIW. Constructive ideas are needed!
I think it’s understood to mean any reduction in one’s tax liability vs. what it would be if the tax bracket tax rates were simply applied to one’s income.
I don’t agree that this is the only definition of “tax expenditure”, and I don’t think it would even be popular with people who frequently use the term. However, let me accept it for the moment to illustrate the point that choosing a baseline is crucial.
You say “if the tax bracket tax rates were simply applied to one’s income.” Which rates? Married or single or head of household? Which income? Separate or combined? Allocated according to community property laws or not?
Furthermore, what constitutes income? Is it cash income or accrual income? Do we include unrealized capital gains? What about net capital losses? How about non-cash yet real economic income like fair rental value of owner-occupied homes, cars, and other property? How do we count inheritances and gifts?
All these decisions are required before one can compute the baseline tax according to the specification that you thought was so simple and that in my opinion was TOO simple.
Defining “tax expenditure” requires defining an ENTIRE BASELINE TAX CODE, with all the complexity that entails. As you may know, most of the complexity of any income tax code is the specification of how to compute income. Deductions are credits are far simpler to specify.
Getting back to my earlier point, some tax provisions have a clear relationship to fair measurement of taxable income. Business expenses are an example, yet employees are not allowed to deduct their actual expenses such as commuting and education. (I would call the last two items negative tax expenditures.)
My point is that some adjustments are necessary to measure income correctly, and other adjustments are merely handouts, for example the tax credit for buying a hybrid vehicle or a first home. The handouts are clearly tax expenditures by any reasonable definition. However many, many items are in the gray area in between these two extremes.
The S&L industry actually put together a list of the 15 major causes of the crisis — here’s a copy — and tax reform didn’t even get a mention.
Your link didn’t work. Maybe I should save my time and just take your word for it!
Jim,
I’ve posted in another thread a potential approach which I greatly prefer to your modest proposal. The author of that proposal must be a truly bizarre individual. He starts by saying he prefers a small government and then proposes to increase the size of government by a whopping 6 to 7 percent of GDP. I can’t imaging holding those perspectives simultaneously.
His perspective is basically that Republicans should abandon any pretense of small government and accept large government but with a less distortionary tax code. Well, at the risk of repeating myself.
1. Allow Bush and Obama tax cuts to expire.
2. Reduce the military budget by half of the cost of Iraq/Afghanistan wars.
3. End corporate subsidies in the tax code
4. Means test all transfer payments such that noone who is in the top quartile of either income or wealth receives government transfer payments.
5. Freeze the rest of the budget until balance is achieved.
Balance would be achieved in 4 years and far closer to the historical averages for receipts and spending as a percentage of GDP
AMT,
Re: the definition of “tax expenditures”, I think you are missing my point and mixing up the objective(s) of defining the term with concepts related to one’s view of desirability of a given tax expenditure or of tax expenditures generally.
I think there is a working definition for the purpose of communication (i.e., everyone knowing what is meant by the term when it is used), even if one can reasonably argue that the tax rate structure itself already reflects (in a conceptual sense) some tax expenditures by applying different rates based on income level, marital status, etc. In other words, when people use the term (other than in a conceptual discussion), others familiar with the issue and its discussion/debate generally have a good sense of what it includes and excludes.
As for what definition would be “popular with people who frequently use the term”, if you mean “popular” in the sense of what tax expenditures they like or dislike to whatever degree, or even in the sense of thinking the technical definition best reflects all such provisions in a conceptual sense, that is irrelevant to the question of whether or not there is a commonly understood working definition. If you mean “popular” in the sense of the degree to which there is agreement on the definition for communication (i.e., reference) purposes, I think there is sufficient agreement.
Re: let me accept it for the moment to illustrate the point that choosing a baseline is crucial.
As I asked in my prior comment, crucial to what? Crucial for definition for what purpose? If it’s so people have a common definition for communication purposes, see above. If it’s for making policy choices, the label is irrelevant. I don’t want to be even more repetitive than I’ve already been on this thread, so I’ll just refer you back to my prior comment for elaboration.
As for deducting business expenses from revenue and being taxed on profit rather than revenue, the technical definition is in line with what is generally sensible conceptually. It wouldn’t make sense to tax businesses on revenue rather than profit.
The question you raise of deductibility of an individual’s job-related expenses is interesting from a conceptual standpoint (should we view the individual the same way we view a business?), but I don’t think is too problematic as far as having an understood, working, technical definition of the term. And if someone is a sole proprietor or freelancer he can put his expenses on a Schedule C to calculate his income, and deducting those expenses would not be a “tax expenditure”. If someone with just W2 income could deduct his commuting expenses, I think that would be called a “tax expenditure”, just as it would probably be called a “spending” (expenditure) subsidy if the government sent him a reimbursement check, whether or not that technical distinction between the individual and the business (including a freelancing individual) makes as much conceptual sense as the technical categorization may be seen as implying — i.e., whether or not it is in that gray conceptual area.
Brooks,
We’re just not going to agree here.
In my view (and I think AMT shares this), the definition you have chosen, which you simultaneously claim is common and is misunderstood, maximizes the dollar amount of what you want to label tax expenditures.
In a discussion about policy choices, the dollar value of the concept in question is, I suspect you would agree, relevant. Thus, the definition of the baseline is relevant and, sad to say, I must disagree with your definition of the baseline.
For it to be true, there must have been a thought that this would be a relevant counter tax policy (rates and rules). I assert this was never the case, at least in my lifetime and thus, your quantification of tax expenditures depends on a fictional tax structure that you and others invented.
We can all invent concepts but that doesn’t make them relevant for policy.
There’s no need to argue about what “tax expenditures” are, the gov’t publishes an official tax expenditure budget.
Here’s an overview … and the budget numbers.
For those who may not be old enough to remember what happens when bipartisan reform actually takes a real whack out of the special interests and their tax preference items — it happens so seldom — this is from a news report on the advancement of the Tax Reform Act of ‘86 through the Senate:
For Packwood, like our leaders of both parties today, had a long history of liking the status quo, taking a lot of money from the lobbyists, and apparently being “their man”.
Yet it was possible for him to turn around and make the difference going the other way, not particularly due to any “courage” on his part, but to the political pressures applied to him by the reformers in the appropriate, effective way. Maybe there’s a lesson here for today’s would-be budget reformers? Read the story.
(And ain’t Google wonderful that we all can read the story in a 23-year old newspaper like this?)
May we all live long enough to see such a scene again.
~~
Your link didn’t work. Maybe I should save my time and just take your word for it!
Well, of course. You should take my word for everything!
But I’ll try the link again anyhow.
Steve,
I’m afraid this seems to me to be a misunderstanding between us rather than a difference of opinion or perspective. I don’t think you’re getting my point, and I can’t rule out the possibility that I’m not getting your point. Unfortunately, I’ve already been repetitive in my explanations and I probably can’t be much clearer.
Re: the definition you have chosen, which you simultaneously claim is common and is misunderstood
There is no inconsistency between the claim that there is a commonly understood definition of “tax expenditures” among those familiar with it who discuss it, and the claim that many people fail to realize the equivalence to spending subsidies — i.e., fail to realize that there is no practical, ideological/philosophical, or any other difference simply by virtue of the provision being a “tax cut/deduction/credit” rather than an “expenditure”/”(spending) subsidy”. So your apparent implication that my claims are contradictory is invalid.
Re: the definition and the dollar amount that falls into that category, again, from a rational decision-making standpoint (i.e., leaving aside political spin), it’s a great big “so what?” Whether or not a given provision in the tax code that leaves someone with less tax liability and everyone else with more as a result is called a “tax expenditure” is irrelevant to deciding whether or not we should eliminate/reduce/increase/create that tax expenditure. So what is the big deal? Are you just talking about how it can be used in political rhetoric in ways that may draw more of a distinction than is conceptually appropriate? Kind of like, oh, calling something a “tax cut” makes it much more attractive to many on the right than if the same thing were called a “(spending) subsidy”?
Re: the definition of the baseline is relevant and, sad to say, I must disagree with your definition of the baseline.
It’s really unclear to me what it is you are disagreeing with that you think I’ve said. Are you referring to what I’ve said I think is the commonly understood (technical) definition among those discussing it (i.e., what people generally think one is referring to when using the term)? Are you referring to some conceptual or ideological perspective you are attributing to me on this matter?
As you can see, I don’t think you’re getting my points, and I’m pretty unclear on what you are asserting, why, and via what reasoning. I’d be interested in your responses to my points and questions above (and in my prior comment).
I’ll keep trying then.
The big deal to me Brooks is that this is politics and spin is all there is. If you define something called tax expenditure and in that definition, you assume the baseline is rate times income (leaving aside AMT’s points about multiple rates), you create the perceptions that but for these horrible tax expenditures, the government would have (should have) received a much larger sum of money. Whether you intend to create that perception or not is irrelevant. Furthermore, that perception is false. The government never intended receipts to hit that number; had it done so, it would have either eliminated the exceptions or raised the rates or some combination of the two.
I am disagreeing with your “commonly accepted” definition of the baseline as being rate times income. The reason I disagree is stated above. It was never the intent of the government to receive the amount of money you perceive as the baseline. Thus, nothing was expended (no expenditures) from that baseline to the actual level of receipts.
In the end, all I can keep saying is your “commonly accepted” baseline is merely one among a large number of counterfactuals that could have been proposed.
All of this brings me back to the difference between the conceptual equivalence (on which we all agree) and the issues with static measurement (how much do we spend in tax expenditures). If you’re happy with conceptual equivalence, we can be done. If you’re looking for me to get behind a process where we try to define and reduce tax expenditures, I doubt I can come along.
Jim,
Thanks for that link to the Tax Policy Center. Speaking of links, I’m going to check here if I’ve got the right html tag: Hyperlink html tag
Steve,
Just to modify part of a sentence in my comment, let me add the part in italics below:
Whether or not a given provision in the tax code that leaves someone with less tax liability and everyone else with more as a result — based on some behavior he chooses (buying a home, having a child, sending a kid to college, getting more of his compensation in the form of health insurance, etc.) — is called a “tax expenditure” is irrelevant to deciding whether or not we should eliminate/reduce/increase/create that tax expenditure.
Brooks,
I understand the statement but do not agree with it. If not to create focus on it, what is the point of creating the concept in the first place?
As you know I think we need to distinguish government’s take of the economy from the best way to accomplish that take.
I rather suspect that if we could see into the hearts of the major proponents of the “tax expenditure” label, their motives would not be so neutral as the ones you describe above.
Whether or not a given provision in the tax code that leaves someone with less tax liability and everyone else with more as a result — based on some behavior he chooses (buying a home, having a child, sending a kid to college, getting more of his compensation in the form of health insurance, etc.) — is called a “tax expenditure” is irrelevant to deciding whether or not we should eliminate/reduce/increase/create that tax expenditure.
It should be irrelevant, but it’s not. Use of the term “tax expenditure” implies a judgment that the tax break is an unjustified handout. Different people will make that judgment differently.
Let me try a better analogy. California has domestic partnership laws which confer to registered gay couples precisely the same rights and responsibilities as married couples, to the full extent of the state’s authority to grant them. (Federal rights and responsibilities are out of the reach of state law.) Yet advocates of gay marriage are working as hard as they can to get the state of California to allow gay couples to marry, even though no new rights would accompany that change. Legally speaking, there would be no change at all.
Suppose you were to tell an advocate of gay marriage that it makes no difference whether you call it marriage or domestic partnerships, because the rights and responsibilities are the same either way. Do you think your argument would be accepted?
The point is that the terms we used are loaded with judgment. Conveying that judgment is the whole point of using a term. Mathematical or legal equivalence is beside the point, completely irrelevant.
Steve,
First, I was distinguishing neutral points about the nature, definition, etc. of tax expenditures from preferences and advocacy, not claiming that some others who discuss the issue and use the term aren’t advocating. Clearly some are, as am I in other comments. Just because someone is advocating something doesn’t mean a term he is using a term that has no understood definition or that the term itself is not neutral from the standpoint of rational decision-making. It doesn’t even mean the term is chosen because it contains a particular connotation — implying X is desirable or undesirable — although of course often that is the case (and by the way, for rhetorical purposes “tax expenditure” is probably not the best term possible; perhaps “tax-code spending” or “tax-based subsidy spending”, or something like that).
Yes, we are faced with the question of what are optimal tax and spending policies. And the point of those of us who think we should reduce/eliminate much of tax expenditures and adjust tax rates accordingly isn’t that there is something inherently wrong with subsidizing X or Y via tax expenditures (and making taxpayers who don’t qualify pay more), but because, for the most part, we think reducing/eliminating much of the current tax expenditures would result in better fiscal policy, all things considered (economics, “fairness”, etc.). Referring to tax expenditures is short-hand for referring to a category of provisions that, in many/most cases, we think provide too much to those who qualify at too great an expense to those who do not, as well causing broadly/universally-shared harm by causing economic ineffiencies, “tragedy of the commons” politics in shaping fiscal policy, etc.
I don’t see what you see as problematic. Is it that you think the term paints with too broad a brush, and its use in political rhetoric and thinking will lead to the throwing out of provisions you consider babies with provisions you consider bathwater?
Jim, thanks for S&L crisis link. Yes, the biggest problem was borrowing short and lending long (as opposed to today’s federal borrowing short and buying votes with the money). However several of the top 15 causes would have been much smaller had the 1986 Tax Reform not pulled the rug out from under real estate and other tax shelters. That triggered huge declines in market value of projects in which the S&L’s had invested.
Of course, the S&L’s would not have been allowed to make those investments had regulation remained tight. Loosening the regulations was an unwise response to the long vs. short interest rate squeeze. It’s all connected, and Tax Reform did play an important part by crashing the market for tax shelter investments. That’s not to say that Tax Reform was bad, only that these costs should have been anticipated.
AMT,
See my reply to Steve above (written and submitted prior to see your comment).
Sure, advocates can be selective in their choices of neutral terms for rhetorical effect, and they can also create labels themselves designed with particular positive/negative connotations. Perhaps advocates of reducing tax expenditures are doing the former (or perhaps just using an established technical term that refers to the provisions they are discussing), and as I’ve said, one could raise conceptual arguments about the distinction from a conceptual standpoint, particularly in gray areas.
But big deal. They are what they are: if you do or have X (buy a home and have a mortgage, have another child, send a kid to college, get more of your compensation in the form of health insurance, etc.), the government will ensure that you end up with $Y because of it and other taxpayers will pay more to make up the difference so you can have that $Y. That happens to be categorized per an understood definition (even with some debate re: gray areas of what to include) as “tax expenditures”. But what will and should be debated is whether or not others should pay more so that Tom can buy and own that house or so Dick can have another child (no pun intended) or so Harry can send his kid to college or gets more of his compensation in the form of health insurance. The term “tax expenditures” refers to such things.
What would you like to call the above, or some subset or superset thereof? Or can we have no language, no term to refer to anything of the sort, or to distinguish any of it from any other “tax cuts” or in particular to distinguish it from cuts in tax rates?
As for your gay marriage question/point, again, I realize terms are often chosen or created by advocates for their connotations (whether valid or misleading), significance, emotional impact, etc. If your point is that one should not assume that a same sex couple would or should be content with a practical situation that was not inferior to another, but with a label that implied inferiority (restricting same-sex couples to “domestic partnership” as implicit categorization of their union as inferior to “marriage”), you’re right.
Brooks,
What I see as wrong is that the term, the way you define it presupposes a baseline tax code (to use your language, one without tax expenditures) that never existed. As a consequence, its effect is entirely rhetorical.
As I said earlier in the thread, I could create a term called the progressivity penalty meaning how much income the government fails to take because the tax code is progressive rather than flat at the highest rate. This term has as much meaning as tax expenditure since the both are the difference between current receipts and what would have been received GIVEN SOME ALTERNATIVE TAX CODE.
Mathematically and as a matter on concept, there’s nothing wrong with it but there’s nothing inherently valuable about it either.
To your policy point, I have no issue with reducing exceptions in the code (I prefer this to the term tax expenditures but it amounts to the same thing) and adjusting rates to arrive at the same takings for the government; however, I do not believe that is the purpose to which the term is being put. Rather, it is a (fairly transparent) attempt to say that one is not raising taxes but reducing tax expenditures, which, to this long thread, amounts to the same thing.
In other words, in a world where the debate is between the government taking more and spending less, it’s an attempt to define a tax increase as a spending reduction, which it is not.
I can’t make it any clearer than that. Even the way it is proposed is “let’s freeze tax expenditures instead of actual expenditures” as if there is some equivalence between the concepts. There is mathematically in terms of the deficit but not in terms of what the government spends versus what it takes in.
If the sole debate were between tax expenditures and tax rates, we would have no issue; however, since the debate that is attempting to be raised is the equivalence of tax expenditures and actual expenditures, I resist the concept as a matter of policy outcome.
And Brooks, to clarify, I would call such things either exceptions or deductions and exemptions, or adjustments to income. Any of those terms is more value neutral and more descriptive than the term tax expenditure.
And to try one more time. The term tax expenditures is an attempt to equate a tax increase with an expenditure reduction. While the deficit impact of the two outcomes can be the same, that does not make them the same.
If, like me, you are concerned with the deficit and with the scope and reach of the Federal government, you are not indifferent between the two concepts.
To take it a step further, I could balance the current budget by reducing tax expenditures to zero (I suspect) but that would amount to a massive tax increase and would not be, as a matter of policy or outcome, equivalent to arriving at the same point by reducing expenditures.
What I see as wrong is that the term, the way you define it presupposes a baseline tax code (to use your language, one without tax expenditures) that never existed. As a consequence, its effect is entirely rhetorical.
It refers to deviations from a baseline based on a basic assumption (tax rates applied to income). Why should it matter that our tax code has never (that I know of) been simply that? It’s a term that is descriptive, and that distinguishes a “tax cut” that is a tax expenditure from a “tax cut” that is a reduction in rates. I really don’t see why you have such a problem with it, unless for some reason you think it paints with far too broad a brush, carrying a negative connotation that often misleadingly implies unfairness or bad economics or some other type of undesirability of the tax expenditure, and as such is far too prone to confusion, misrepresentation and rhetorical abuse to be a useful term in our discussion of fiscal policy. If that’s the problem you have with it, tell me “yes”, that’s the problem you have with it.
As I said earlier in the thread, I could create a term called the progressivity penalty meaning how much income the government fails to take because the tax code is progressive rather than flat at the highest rate.
Yes, you could. I’ve said pretty much the same thing upthread (a couple of times). So what? Why does that mean that a term that refers to a deviation from what individual tax liabilities would be (based on choices and related situations, like buying a home, having a child, etc.) is inappropriate, useless or necessarily harmful? Your term refers to incremental tax liability incurred when one earns more (and above some amount) under a progressive tax structure vs. what his tax liability would have been under a flat tax that (I presume you’re saying) would have raised the same amount of revenue. I think “high income penalty” would describe it better (making more money is what the taxpayer did to trigger the incremental liability), and I could see someone on the left thinking of that way (as a “fairness” issue) and someone on the right thinking of it that way (as “unfairness”). Of course, using the term “penalty” implies a punitive purpose, generally related to deterring some undesirable behavior and/or compensating others for negative externalities if one engages in some undesirable behavior. Progressivity of the tax code can have other effects and arguably be justified on other bases, so using “penalty” is misleadingly narrow and also connected to ideology in that context.
By contrast, it is not nearly as loaded (if at all) to apply the term “tax expenditure” to a subsidy for some type of individual choice (e.g., buying a home with a mortgage) a “tax expenditure” when – as you, AMT and I have all agreed – it is no different from “spending” (a.k.a., an “expenditure”) on the same basis (the government sending you a check each month to pay part of your mortgage payment). As I’ve explained previously, you could say that a lower income earner under a progressive tax structure receives a “tax expenditure” of the amount of his tax liability lower than what he’d pay under a flat tax, but that would be objectively incorrect because it contradicts the understood definition of the term. It would be calling some object “X” when the definition of “X” is “something other than that object”. It’s a term. People use it. People have a definition for it, albeit with some gray areas. And it means something different from tax rates or change of tax rates by definition, and it’s different conceptually, in effects, economics, ideology/philosophy, etc.
This term has as much meaning as tax expenditure since the both are the difference between current receipts and what would have been received GIVEN SOME ALTERNATIVE TAX CODE.
Your term has meaning. So does “tax expenditure”. So what?
Mathematically and as a matter on concept, there’s nothing wrong with it but there’s nothing inherently valuable about it either.
If you are referring to the term, of course it has value. It’s descriptive. It says, “This provision entitles Joe to get money from Bob to help pay his (Joe’s) mortgage if Joe decides to buy a home or if he has done so”. Same with Joe having a child or Joe sending his kid to college or Joe getting more of his compensation in the form of health insurance. All entitle Joe to some of Bob’s money. And we’ve agree that there’s no difference between that happening via some “tax deduction”/”tax credit” vs. the government sending Joe a check after requiring Bob to pay more in taxes specifically for Joe’s subsidy, so it’s also essentially the same as if the government mandated that Joe transfer funds out of his bank account to Bob’s bank account. Having a term to refer to such provisions is certainly useful and “valuable”, because it describes something with important implications for policy choices (all the stuff we’ve discussed upthread about the advantages and disadvantages of such stuff in general and in each particular case of a tax expenditure). Is a tax expenditure inherently bad policy? As I’ve said, no, it’s just a descriptive term. The case for and against a given tax expenditure (or it’s reduction/elimination) is one that would have to be made by advocates/opponents (considering “fairness”, economics, positive externalities, etc.).
exceptions in the code (I prefer this to the term tax expenditures but it amounts to the same thing)
What does “exceptions” mean? That would only seem appropriate to me to refer to types of income to which the normal tax rate does not apply, as in “this tax rate applies to your income, except for this part of your income, which won’t be taxed or will be taxed at a different rate” or “you add up all your income except this type of income to find the applicable marginal tax rate.” Since we are referring to “exceptions” The term “exceptions” doesn’t seem to fit well reductions in one’s taxable income for which one is entitled as a subsidy for some choice (buying a home, having a child, etc.). We’ve agreed that there’s no difference between “spending” – i.e., expenditure – and tax expenditures, so why not call it “tax expenditure”?
it is a (fairly transparent) attempt to say that one is not raising taxes but reducing tax expenditures, which, to this long thread, amounts to the same thing.
Well, presumably we can agree that it’s not like raising tax rates (there are very significant differences in many respects, as we’ve discussed), and we agree that it’s exactly like a reduction in a spending subsidy (i.e., expenditure) that does the same thing as that tax expenditure. I think it’s better described as a reduction in spending (again, you agree there is NO difference) than as a “tax increase”, as if to erroneously equate it with an increase in tax rates or erroneously imply that it is essentially the same in nature. Right now Joe is being forced by the government to send money to Bob to help Bob pay his mortgage. Eliminating that tax expenditure means that Joe no longer has to fork over money to be transferred to Bob for that purpose. Now, as we’ve discussed, one could argue that if anyone pays any less in taxes than anyone else due to the former earning less and having a lower tax rate applied, the higher income earner is being forced to spend (provide a subsidy to) the lower income earner on the basis of their relative incomes, but if we adopt that extremely expansive conceptual view, than any deviation from a system in which everyone pays the same dollar amount of taxes (not just the same tax rate as in a flat tax) would represent “spending”, and we would then be defining “spending” so broadly that it almost ceases to have any meaning at all as distinct from taxation.
In other words, in a world where the debate is between the government taking more and spending less, it’s an attempt to define a tax increase as a spending reduction, which it is not.
Yes it is like reducing spending. See prior paragraph. And since we agree that there is no difference between a tax expenditure and a “spending” expenditure (subsidy), this has absolutely nothing to do with the ideological and economic debate over how much we should increase taxation vs. reducing spending. The only difference is the label, nothing real. I’m surprised to see you return to viewing this semantic distinction as something substantive in terms of ideology or economics.
since the debate that is attempting to be raised is the equivalence of tax expenditures and actual expenditures, I resist the concept as a matter of policy outcome.
What policy outcome? Suppose in Scenario #1, Sally gets a $500 “tax credit” for having a child and in Scenario #2 she gets a check from the government like a voucher (i.e., an “actual” expenditure). Assuming the same timing in each case, how is there any substantive difference in “policy outcome” if we end that provision in Scenario #1 vs. if we end it in Scenario #2? And if you’d characterize the latter as a reduction in spending, and you agree that there is no difference between the two (as you have earlier), why wouldn’t you characterize the former as, substantively speaking, a reduction in spending (and beyond that, why would you object so strongly to such a characterization and insist on lumping it into a broader category with very different “tax cuts”?)?
And to try one more time. The term tax expenditures is an attempt to equate a tax increase with an expenditure reduction. While the deficit impact of the two outcomes can be the same, that does not make them the same. If, like me, you are concerned with the deficit and with the scope and reach of the Federal government, you are not indifferent between the two concepts.
Completely incorrect. You agreed earlier that there is no difference between eliminating a tax expenditure and a “spending” expenditure that does the same thing on the same basis with all the same effects on everyone. How can you NOT be indifferent between the two? It’s NOT at all like the choice (based on ideology and economics) between achieving a deficit of $X with higher spending and higher taxes vs. with lower spending and lower taxes. You seem to be (reverting back to) confusion on this point. Sounds like you are saying that someone who prefers lower spending and lower taxes would prefer my Scenario #1 above ($500 child tax credit) over my Scenario #2 (something like a voucher check – an “actual” expenditure). But I thought you came to realize that there is no rational basis for preferring one over the other, it seems odd to me that you’d be arguing what you’re arguing now.
To take it a step further, I could balance the current budget by reducing tax expenditures to zero (I suspect) but that would amount to a massive tax increase and would not be, as a matter of policy or outcome, equivalent to arriving at the same point by reducing expenditures.
Yes it would. Tell me how changes in anyone’s (including the government’s) cash flow or basis for it would be any different if those tax expenditures had been voucher checks that you would call “actual expenditures”, assuming no timing difference. What would be different? Again, it seems that you’ve reverted back to when you misunderstood this point.
And just to go back to the point of all this (and to relate to your concern about semantics and related rhetoric having an irrational effect on policy preferences and choices), you agreed with me earlier that no one – and the relevant group here is folks on the right who prefer lower taxes and lower spending – should have any preference of a tax expenditure over an “actual” expenditure that does the same thing on the same basis with the same effects on everyone simply because the former is labeled as a “tax cut” or “tax credit” or “tax deduction”. So when Obama says:
we … made health insurance 65 percent cheaper for families who get their coverage through COBRA; and passed 25 different tax cuts.
Now, let me repeat: We cut taxes. We cut taxes for 95 percent of working families. (Applause.) … We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. (Applause.)
[Obama looks at Congressional Republicans and says to them] I thought I’d get some applause on that one. (Laughter and applause.)
Fiscal conservatives should view the above no more favorably than the translation below:
we … spent more to provide subsidies to make health insurance 65 percent cheaper for families who get their coverage through COBRA; and passed [almost] 25 different spending increases in spending subsidies.
Now, let me repeat: We increased spending subsidies. We increased spending subsidies for 95 percent of working families. (Applause.) … We increased spending on subsidies for first-time homebuyers. We increased spending on subsidies for parents trying to care for their children. We increased spending on subsidies for 8 million Americans paying for college. (Applause.)
[Obama looks at Congressional Republicans and says to them] I thought I’d get some applause on that one. (Laughter and applause.)
Again, you agreed earlier that there is no difference between the two and that it is irrational to have a preference between the two simply on the basis of the semantics and how the provisions are treated in governmental bookkeeping.
Sorry for the long post. Just trying again to sort out and correct what I view as confusion and errors on your part (with all due respect and no offense intended, of course).
Brooks,
I give up. We’re not going to agree. To me, reducing the deficit by increasing takings is not the same thing as reducing it by decreasing outlays and reducing “tax expenditures” is increasing takings not reducing outlays. Mathematically both reduce the deficit but they do it in different ways and therefore they are not the same.
Let’s assume for the moment that “tax expenditures” or some similar concept currently total $2 trillion. By your logic, it would be ok to increasing spending by several hundred billion from the current baseline and eliminate the tax expenditures. If you’re like me and believe that the root cause of our deficit is the Federal government involving itself in too many components of our life and expanding its involvement over time, you’ll agree that’s a bad idea. I’d much rather have a smaller base to preserve the budget from the nobler impulses of politicians.
I don’t agree that a tax expenditure reduction is different than an increase in tax rates. In fact, in my opinion, those two concepts are more similar than a tax expenditure reduction and an expenditure reduction. In point of fact a tax expenditure reduction is an increase in receipts as is an increase in tax rates.
My agreement was as a matter of math (in theory), not as a matter of policy (in practice). I think you see this primarily as a math exercise (at least that’s how I read your posts). Yes, it’s true that 26-26 and 20-20 are both zero but they aren’t the same.
Maybe said differently, I prefer a smaller government, all things being equal and I perceive that you have no preference. That accounts, in my mind, for our difference on this point. For you, it’s a mathematical equivalence problem. For me, the the size of the number matters even when the equation balances to zero.
You disagree. That’s all there is to be said.
Steve,
With all due respect, you are just not getting it, and you are fundamentally confusing concepts and completely misunderstanding what I’m saying. (How’s that for a pleasant opening
)
Let’s assume for the moment that “tax expenditures” or some similar concept currently total $2 trillion. By your logic, it would be ok to increasing spending by several hundred billion from the current baseline and eliminate the tax expenditures.
Well, if you’re talking about spending less on those tax expenditure subsidies and spending more on something else, then that obviously would be different in terms of the allocation of spending across different things, although not at all different in terms of total spending, substantively speaking — meaning accepting what I thought you had agreed to earlier: (1) that there is no difference (practically, ideologically, whatever) between a tax expenditure and a “spending” subsidy that does the same thing on the same basis and has the same effects on everybody, and (2) that there is no reason to prefer one over the other. I haven’t looked upthread, but I think if you check, you’ll find that you clearly agreed to those points (obviously I can’t be completely sure of this clarity since I haven’t re-read all your comments)
But perhaps the best way to show the flaw in your reasoning — the difference you are asserting that really isn’t there — is to imagine that, rather than someone getting a “child tax credit” of $500, he gets a “spending” “child subsidy check” instead (with the same timing of cash flows). In other words, nothing has changed in any way except the name and how it is categorized by the government for bookkeeping purposes. Are you actually saying that there is some substantive difference between the two? That there is a reason to prefer one over the other, based on ideology, economics, one’s view of the proper size, scope and role of government, or anything else, even though the same exact thing is happening on exactly the same basis?
Re: If you’re like me and believe that the root cause of our deficit is the Federal government involving itself in too many components of our life and expanding its involvement over time, you’ll agree that’s a bad idea.
First, see my prior paragraph. You are seeing a difference in what happens where there is no difference, and you are seeing an ideological perspective where ideology is not involved at all. Second, the preference you’ve expressed should lead you to be a strong opponent of tax expenditures generally — just as you would be a strong opponent of subsidy “spending” that would be exactly the same — because you’d prefer government not micromanage people’s economic behavior, subsidizing purchases of X or Y, subsidizing having another child, etc.
I don’t agree that a tax expenditure reduction is different than an increase in tax rates. In fact, in my opinion, those two concepts are more similar than a tax expenditure reduction and an expenditure reduction.
Very hard to see how you can have that view. It doesn’t make sense conceptually. Reducing the tax expenditure and reducing an equivalent “spending” (”actual” expenditure) subsidy are the same in every respect in terms of basis, incentives, and results for everyone. By contrast, raising tax rates changes the basis of tax liability, incentives, and results across various individuals and segments (i.e., some would end up with more money, others with less). It just makes no sense to say that tax expenditures more closely resemble an increase in tax rates than a reduction in “actual” expenditures.
I’ll try again, for whatever it’s worth:
Scenario A: Mike and Sam don’t qualify to be entitled to any tax expenditures and thus have a tax liability per the tax rates applied to their respective incomes. But Mike then has a child and gets a $500 child tax credit, and Sam has to pay $500 more in taxes to make up the difference. (I’m ignoring dynamic effects to keep things simple; they don’t matter for this purpose) It’s essentially the same as if the government mandated Sam to write that check from his bank account and send it to Mike.
Scenario B: Mike has a child and gets a $500 “child subsidy (spending) voucher” (with the same timing as the cash flow effect of the tax expenditure in Scenario A. As in Scenario A, Mike now ends up with $500 more, and Sam has to pay $500 more in taxes to make up the difference. In other words, all effects are the same and all on the same basis. And it’s essentially the same as if the government mandated Sam to write that check from his bank account and send it to Mike. The only difference is that in Scenario B, Mike hands the government $500 while the government simultaneously gives Mike $500, and in Scenario A, there is no such (completely inconsequential) exchange.
Scenario C: Tax rates that apply to Mike and/or to Sam are increased, perhaps just Mike’s, perhaps just Sam’s, perhaps both, or perhaps Mike’s tax rate being lowered and Sam’s increased to make the two changes revenue-neutral.
I have no idea how you could say that Scenario A is more similar to Scenario C than to Scenario B, particularly since (I thought) you had realized and acknowledged earlier that A and B are identical.
My agreement was as a matter of math (in theory), not as a matter of policy (in practice). I think you see this primarily as a math exercise (at least that’s how I read your posts). Yes, it’s true that 26-26 and 20-20 are both zero but they aren’t the same.
I think you are confusing the equation of tax expenditures with equivalent “spending subsidies” with an equation of higher spending & higher taxation with lower spending & lower revenues (with equal deficits in either case) in a substantive sense. There is no substantive difference. Tax expenditures are no different from the equivalent thing in the form of “spending” subsidies, as my scenarios above show, and therefore reducing one is the same as reducing the other in everything but name. Reducing a tax expenditure and using the incremental revenue to spend more on something else is equivalent to reducing one kind of spending to increase another kidn of spending. It is totally different from deciding to increase tax revenues by increasing tax rates and using the incremental revenue for incremental (i.e., higher overall) spending.
Maybe said differently, I prefer a smaller government, all things being equal and I perceive that you have no preference. That accounts, in my mind, for our difference on this point.
Again, you are confusing this stuff. In making the point about the equivalence of tax expenditures to the same effects and basis as “spending”, I’ve said absolutely nothing to indicate indifference between smaller or larger government, nor does my point have anything to do with smaller or larger government.
I’m willing to give up at this point, too. But if you respond with more of the same confusion, I may correct you again if I think I can say something that has some chance of making this clear to you.
Only a small subset of what the JCT has in the past called tax expenditures are similar in nature to government handouts. Child credits, hybrid vehicle credits, stimulus payments, investment tax credits: all these could be replaced by equivalent spending programs.
For most other tax expenditures (e.g., itemized deductions and most adjustments to income) there is no equivalence to any practically realizable spending program. The structure of the benefit would have to be changed.
As I said, the ENTIRE point of using the term tax expenditure (rather than tax break) is to slant the discussion in favor of structural change. It’s a value judgment against the current system. There is NO OTHER REASON to use the term. It doesn’t clarify anything. It merely introduces a judgmental perspective.
Look at the set of terms we use: tax cut vs. tax increase, spending cut vs. spending increase, tax credit vs. tax penalty, tax expenditure vs. … what exactly?
I used negative tax expenditure (to describe disallowance of ordinary and necessary expenses of earning income) precisely because there is no mirror image term. The term I’m looking for would carry the judgment that the current tax system is too avaricious, whereas tax expenditure carries the judgment that the current system is too generous.
Brooks,
I’m sorry that you finally decided to go ad hominem in your last post. I know you think I’m confused, I’m not.
The logical implication of reducing tax expenditures is increasing taxation. That is different than decreasing actual expenditures even if the impact on the deficit is mathematically the same. If the government eliminated the mortgage deduction tomorrow, it would spend the same and receive more from the citizens. Use any words you want, that is what would actually happen in terms of flows of actual dollars.
Thus while there is no mathematical difference between the tax expenditure and the real expenditure, there is a philosophical difference. It comes back to something you and I have debated and not agreed on before. I believe it is superior (both morally and as a matter of policy) to let people keep what they’ve earned as opposed to redistributing it. Thus, in a world of deficits, it is superior to reduce spending as much as possible before increasing taxes or reducing tax expenditures. This is true despite the potential mathematical equivalence of all three approaches.
It’s much like I said to Diane at one point. I believe government should do only what is must as opposed to doing what it can.
To be honest, I don’t understand how you can refuse to equate reducing a tax expenditure with raising taxes. It has exactly the same impact, that is, government gets more of the people’s money. What could be more equivalent? Your line of logic about equating tax expenditures and actual expenditures and then refusing to see the mathematical equivalence of tax increases is quite confusing.
It is possible to disagree without being wrong or obtuse or confused. I don’t believe you are any of those things. I simply believe that you are focused on the math more than the policy implications. One of the limitations of writing is it is very hard to convince because too much is written before a response can come but such is the price we pay for the internet.
As to your scenarios Brooks, it quite depends on whose books you are looking at. If you are looking at the government’s books, A and C are the most alike.
In both A and C, government receipts are the same whereas in B, government receipts are increased and government spending is increased by $500.
In terms of net deficit impact, all of the scenarios are identical. In terms of the government books, A and C are identical in all respects while B is different on both the receipts and spending lines.
Steve,
My saying you are confused is not an ad hominem argument. An ad hominem argument is saying that the argument Joe is making is invalid because of something about Joe. I am saying you are confused because it’s pretty clear to me that you are confused. I’m not saying the reason what your saying doesn’t make sense is because you are confused, I’m saying that what you are saying is incorrect for reasons I’ve given, and that what you are saying reflects confusion on your part. I have no desire to substitute or even add an ad hominem argument, and I certainly have no desire to insult you. You are thinking X means Y and not X, and I’m saying you are thus showing confusion, that’s all. I’ll try probably just one more time, since you don’t seem to be responding at all to my corrections, illustrations and related questions.
As for your comment, I’m afraid it seems that you just aren’t really listening and thinking about this question, because you continue to show the same confusion.
Here’s what a new “spending” subsidy is like:
1. You have a child.
2. Government creates a $500 “child subsidy voucher”.
3. You and I each pay the government another $1000, and the government sends you $500 (simultaneously, just to simplify for our purpose as is appropriate).
Result: You have $500 more and I have $500 less. You have received a subsidy from me on the basis of your having that child.
Here’s what a new tax expenditure is like:
1. You have a child.
2. Government creates a $500 “child tax credit”.
3. I pay the government $1000 and you pay the government $500 instead of the $1,000 you would have paid if that “child tax credit” did not exist.
Result: You have $500 more and I have $500 less. You have received a subsidy from me on the basis of your having that child.
What’s the difference? Only that in the first case you give the government $500 and the government simultaneously gives you $500, instead of this completely inconsequential transaction simply not happening. I have no idea why you keep thinking (or have reverted to thinking, as I think is the case) that there is an ideological, practical, or any other difference between the two, let alone think that it’s all about preferences regarding the size, scope and role of government.
Now, you would say (at least now, as opposed to the time of some earlier segment of this thread) that the first case is different from the second, and the second (tax expenditure of “child tax credit”) is more like a cut in tax rates than it is like the first case (the spending subsidy of “child subsidy voucher”) because in the case of the tax expenditure you’re giving less to the government ($500 instead of $1000). But as I’ve been explaining, there is no substantive difference (to you, to me, or to the finances and substantive role of the government) between you giving $500 to the government vs. a simultaneous transaction in which you give the government $1000 and the government gives you $500. There is no substantive difference between those two, and there is a substantive difference between either of those and a reduction in tax rates. I don’t know how much clearer it’s possible for me to make it.
Re: It is possible to disagree without being wrong or obtuse or confused.
Of course, but that doesn’t mean that someone saying that A is B and not A is not confused, that he’s just expressing a different preference or opinion.
Believe me, I have no intention or desire to come across as snarky or disrespectful in our exchange. You know I respect you and consider you an excellent commenter. Nor do I have a problem with concluding that someone else just has a different preference based on ideology, or different economic assumptions, or different political analysis, etc. It’s just that sometimes someone says something that just doesn’t make sense and reflects confusion, and at least with you I wish/hope my saying so doesn’t offend and certainly hope it’s not seen as a desire to insult.
Anyway, if you still don’t see what I’m saying as valid, I’m ok with stopping here, but I’m afraid it’s not just some difference of ideology or preferences or opinion. It’s a matter of what makes sense and what doesn’t make sense from a substantive perspective (rather than just mechanical — you give handing over $1000 with your right hand while $500 is placed in your left hand vs. you just handing over $500).
But I hope there are no hard feelings. Absolutely no disrespect intended.
Steve,
I wrote and submitted my comment before seeing your follow-up with a response to my scenarios.
If you are saying that there is an inconsequential bookkeeping difference, yes, I’ve said so already. But I was asking you why you would see any substantive difference, anything different in terms of ideology, economics, the size, scope and role of government, incentives, effects, etc. etc. and why you would think that all of the above are more similar between A and C than between A and B.
Steve,
Re: To be honest, I don’t understand how you can refuse to equate reducing a tax expenditure with raising taxes. It has exactly the same impact, that is, government gets more of the people’s money. What could be more equivalent? Your line of logic about equating tax expenditures and actual expenditures and then refusing to see the mathematical equivalence of tax increases is quite confusing.
If this helps:
If you give me $20 and I give you $5 at the same time, that isn’t substantively different from you just giving me $15, even though obviously there is an inconsequential difference in the amount you gave me ($20 vs. $15), but you apparently (incorrectly) think there is a substantive difference, and a very significant one at that.
I do see either of the above as substantively different from your giving me $10 and my giving $5 to someone else, but apparently you see a greater substantive similarity between this arrangement and your giving me $10 and my giving you back $5 at the same time, than the similarity between the two processes in the prior paragraph. That just doesn’t make sense.
Brooks,
Thanks for your replies. What I’m saying is a reduction in a tax expenditure is equivalent to a tax increase. Leave aside for the moment what happens on the other side of the ledger.
So, if I reduce tax expenditures and reduce the deficit, that is the same mathematically as either reducing expenditures or increasing taxes via tax rates. Depending on how I do all of the above, some individuals may be better or worse off.
However, in the case of reducing expenditures, the government takes in the same and spends less whereas in the case of reducing tax expenditures or increasing tax rates, it spends more.
If we were in a balanced position having a debate about the tax code versus expenditures, we would have much less of a debate. But that is not so. Balance will be achieved by some combination of reducing tax expenditures, increasing tax rates, and reducing actual expenditures. While all three can fulfill the objective as a matter of math, two are, in my opinion, equivalently bad and worse than the third.
You couch all of your examples in the form of balancing the equation. As I said, if I believed we were simply rebalancing an equation, I might react differently. However, we are not doing that. Over the coming years, if we are wise, we will both increase government’s taking from the citizens (via reducing tax expenditures and/or increasing rates) and reducing actual expenditures.
Perhaps unlike you, I am not indifferent between the choices.
And yes, there is a difference between me giving the government $20 and it giving me back $5 and me giving it $15. I see two differences. One, the government now has a base of $20 to grow from rather than $15 and, given that government spending increases faster than inflation and GDP, lowering its base is generally a good idea.
Second, it is more challenging for government to decide next year that it wants to take $20 from me instead of $15 than it is for it to give the $5 to someone else and keep me paying $20.
In both ways, I prefer to keep my $5 in the first instance.
Hope that helps to clarify. My issues with you all the way through are all about policy implications in a world where we will need to increase government’s take and not about the mathematical equivalence of concepts.
As I said, I prefer a world where government takes and spends 20 percent of GDP to one where it takes and spends 26, even though in both cases there is no deficit.
Here’s what a new “spending” subsidy is like:
1. You have a child.
2. Government creates a $500 “child subsidy voucher”.
3. You and I each pay the government another $1000, and the government sends you $500 (simultaneously, just to simplify for our purpose as is appropriate).
Result: You have $500 more and I have $500 less. You have received a subsidy from me on the basis of your having that child.
As I said above, I agree that this particular kind of tax break, a refundable credit, is easy to swap out for a direct spending program. If you want to restrict the use of the term tax expenditure to refundable credits, then I agree 100% and we are done.
However the term tax expenditure is normally used to describe tax breaks that are not directly replaceable with spending programs, at least not without changing the amount and distribution of the benefit. For these tax breaks the termination of the tax break and the institution of some sort of spending program are in fact two separate political negotiations. They are related, but they are not identical as they were in the case of refundable credits. This is where your equivalence concept falls off the track.
For example, the medical expense deduction is typically included in the category of tax expenditure. You contend that this is equivalent to a spending program. Well, yes, it’s equivalent to a hypothetical spending program that never existed and never could exist. In this hypothetical program, a taxpayer would receive a check for a percentage of his unreimbursed medical expenses, with that percentage increasing as a function of his income in a bizarre and complex way. Nobody would design a spending program this way.
Proponents of the term tax expenditure use the term precisely because they favor a different distribution of benefits, or no benefits at all. Opponents of the term tax expenditure see the current law differently, as an attempt to make adjustments to income that reflect genuine ability to pay. The benefits-based view is fundamentally different from the income measurement-based view, and that difference is not reconcilable. The term tax expenditure slants the discussion in favor of the benefits-based view.
In the medical expense example, the measurement-based view sees a taxpayer with $100,000 of income and $50,000 of medical expenses as equivalent in ability to pay to a taxpayer with $50,000 of income. (Personally, I believe the $100,000 earner has even less ability to pay due to the indirect costs of illness, but that’s not how the tax code sees it.) The measurement-based view says these costs are correctly measured an adjustment to income. The benefits-based view says no, this should be counted as government assistance with your medical bills, and presumably delivered at a consistent rate to all who have medical bills regardless of income.
Brooks, do you understand the concept of the income measurement-based view? Do you see how it fundamentally conflicts with the benefits-based view?
If so, perhaps you can see why people who favor certain items as legitimate adjustments to income would resist calling them tax expenditures. Because the term tax expenditures assumes that the benefits-based view is the only correct view.
the medical expense deduction is typically included in the category of tax expenditure. You contend that this is equivalent to a spending program. Well, yes, it’s equivalent to a hypothetical spending program that never existed and never could exist. In this hypothetical program, a taxpayer would receive a check for a percentage of his unreimbursed medical expenses, with that percentage increasing as a function of his income in a bizarre and complex way. Nobody would design a spending program this way.
Now that’s worth thinking about, because…
a) A medical expense deduction claimed on a tax return reducing one’s tax bill, as per today; and
b) A spending program under which one reports medical expenses just as on today’s tax return, sends the form to the Federal Medical Expense Subsidy Program, which compares the form to your tax return to determine your “progressive” rate of subsidy, and sends you a check in corresponding amount (in the same amount you’d get from your deduction)..
…. are identical in every respect.
(Except for a little more paperwork and delay in (b).)
So if people wouldn’t stand for (b), why would they be happy with (a)?
~~~
Proponents of the term tax expenditure use the term precisely because they favor a different distribution of benefits, or no benefits at all.
??? I don’t know who you are talking about here. But tax and budget professionals use the “tax expenditure budget” to measure the cost of tax preference items to the fisc in dollars — and also to measure the amount of resources the use of which the government directs “off budget”, giving a better measure of the size of government.
There’s no a priori “favor this” or “want to kill that” to it. Not ideological at all. It’s accounting.
After one identifies the items of tax expenditure — just as with items of cash expenditure — then one decides how to feel about them.
But one must identify them and their size and cost first to be able to discuss and evaluate them in an informed matter.
Steve,
Re: And yes, there is a difference between me giving the government $20 and it giving me back $5 and me giving it $15. I see two differences. One, the government now has a base of $20 to grow from rather than $15 and, given that government spending increases faster than inflation and GDP, lowering its base is generally a good idea.
Seems to me what you’re saying that IF we assume that what I say in my examples would actually happen, you agree with me that there would be no substantive difference between the tax expenditure and the actual expenditure, and no reason for any preference, and that there WOULD be a substantive difference between either of those and a change in tax rates (whether or not deficit-neutral), BUT you are saying we cannot make the assumption that, if government gets your $20 it will actually follow through on sending the $5 spending subsidy to you, whereas if you just send government $15 there is no such risk. Is that it?
AMT,
As I’ve indicated somewhere upthread, yes, I understand that some tax expenditures vary in amount from beneficiary to beneficiary because they are a function of income rather than a fixed amount for everyone who qualifies. That doesn’t change the nature of the tax expenditure or it’s similarity to a spending subsidy that does the same thing on the same basis — someone ends up with more $ because he chose, say, to buy a home or have a child, and other taxpayers have to pay more than they otherwise would to make up the difference — it just means that the dollar amount of benefit is not uniform and one or the other may be more administratively complex and/or more difficult to implement.
Jim Glass
Check out http://economistmom.com/2010/02/why-paygo-isnt-enough-but-why-well-take-it/#comment-6741 You deserve first shot at destroying Krugman again.
Brooks,
I’d say I agree there would be no deficit difference between the two. That is not the same thing as saying there would be no substantive difference between the two. As I said before, expenditures tend to expand more rapidly than tax expenditures (since many of the latter aren’t even indexed to inflation, never mind growing at some higher number).
You call out one of my substantive issues which is over time, there is no guarantee the government will continue to give me my $5. The other issue is that, in my opinion and based on history, a higher spending number is bad for the deficit as actual spending tends to increase more rapidly on autopilot than tax expenditures (note I am not speaking here of changes to current law but rather increases in the cost of existing programs).
Jim,
I think you need to distinguish between accountants and politicians/pundits. While accountants may use the term as you describe it, politicians and pundits are attempting to equate tax expenditures to actual expenditures as a matter of policy. As I have stated to Brooks, only in their mathematical impact are they the same and it is my belief that there are many impacts beyond the math.
Steve,
Re: I’d say I agree there would be no deficit difference between the two. That is not the same thing as saying there would be no substantive difference between the two.
If I still can’t convince you that there would be no substantive difference — not in from the perspective of ideology, economics, size/scope/role of government, incentives, or results/effects on everyone — between you giving someone (whether it’s “government” or me) $20 and getting $5 back at the same time vs. you just giving me $15, I just don’t know what to say (perhaps a relief to everyone else at this point
) I have no idea how you could see a substantive difference, let alone some very significant substantive difference from any of the aforementioned perspectives, and I have no idea why you would consider the latter more like a reduction in your tax rate than like the simultaneous exchange of $20 for $15. I hate to say it again, but what you’re saying just doesn’t make sense.
Steve,
I meant to say “the simultaneous exchange of $20 for $5″
Brooks,
I’m sorry it doesn’t make sense to you to say that unless and until the government signs a contract with me to return my $5 each and every year, I won’t trust it to do so. And since such a contract cannot exist outside of theoretical examples, I am forced to conclude they are not the same. If that doesn’t make sense to you, there’s nothing I can say on the matter. Maybe the issue is, it’s not a one time simultaneous transaction once we get into the real world.
It’s a multiyear game where there is a nonzero probability that I will not receive by $5 and where the $5 that I and all the other members of society receive will grow faster than receipts and therefore create larger deficits than in the case of the government taking $15 and giving me $0.
I also note that you ignore the argument about the relative growth rate of government spending versus tax expenditures. But, in my opinion, you’ve made up your mind that the things are the same and have from the beginning of the thread.
I’ve admitted the mathematical equivalence but I’m afraid I cannot be swayed on the other areas and we’re just trading assertions and hypotheticals at this point.
Steve,
Please listen to what I’m saying. I did NOT say anything about the validity of your point that there is a risk that the transaction won’t play out as I’ve described (you giving the government $20 and the government giving you $5). I’ve asked you why you see a substantive difference even IF you were to assume the transaction would occur per that description. And I ask you again, why in the world would you see a substantive difference (let alone a very significant one) — from the perspective of ideology, economics, or any other — between that simultaneous exchange IF we assume it will indeed occur as described (You give $20 and simultaneously get $5 back) vs. you just giving $15?
I also note that you ignore the argument about the relative growth rate of government spending versus tax expenditures. But, in my opinion, you’ve made up your mind that the things are the same and have from the beginning of the thread.
I have no idea why you get that impression from anything I’ve said.
I’ve admitted the mathematical equivalence but I’m afraid I cannot be swayed on the other areas and we’re just trading assertions and hypotheticals at this point.
Just please answer that question above.
Sure Brooks, if I assumed that it would happen consistently over time and if I assumed that the rate of growth of government spending would be equivalent to the rate of growth of tax expenditures and if I believed that the people pushing this theory were not typically motivated to drive up taxes by using the term expenditure to describe something that when you reduce it produces a tax increase, then it would be the same.
Sadly, none of those conditional statements are true in my view.
Maybe that helps.
Steve,
And re: growth rates of tax expenditures and spending, I wouldn’t be at all surprised if they have different growth rates. And I’ve never suggested that which way a subsidy is provided (”tax expenditure” vs. “spending”) doesn’t have an impact on the politics surrounding it and, in turn, how much of the subsidy is provided. To the contrary, that was my point at the start of this discussion: subsidies are sometimes provided as tax expenditures because, even though they do the same thing as would equivalent “spending”, offering a “tax cut” is often more politically popular, hence Obama’s bragging — and expectation of applause from Republicans for — “tax cuts” to help parents pay for college, “tax cuts” to help first-time home buyers and to help people buy health insurance, etc. My whole point is that even if the provision would affect everyone the same way and on the same basis, many view one more favorably than the other, and that that view is irrational and can lead to an irrationally higher likelihood of Congress accepting one vs. the other just because of the label and inconsequential bookkeeping.
[The above was follow-up to my earlier reply]
Re: all the assumptions you state that would be necessary for you to agree with me, you are making your answer unnecessarily complicated. I asked you a simple hypothetical. IF you were to assume that the spending subsidy would occur per the transaction I described (you pay $20 and get back $5 simultaneously) would you agree that there is no substantive difference between that vs. you just paying $15. If the answer is “yes”, please just say “yes”.
And if you want to then move to a discussion of the risk that you won’t get that $5 back, we can. But that’s no reason not to give a straight answer to a simple question.
Brooks,
It’s not that simple. The one conditional you pose is not sufficient for me to be indifferent. So if you limit me to the one conditional, I’m forced to say no.
Sorry, but there it is. So, in my view it is sometimes but not always irrational to prefer one solution over the other.
in the case of reducing expenditures, the government takes in the same and spends less whereas in the case of reducing tax expenditures or increasing tax rates, it spends more.
?? In reducing tax expenditures the govt spends more?
The “size of government” is best measured by the amount of resources that politicians direct to their favored uses.
If one’s concern is “size of government” then objectively one should be just as concerned about tax expenditures as cash expenditures because they match dollar-for-dollar as to where they come from and where they go, and they exactly equally are part of the “size of government”, since they exactly equally direct flow of resources.
And politically one should be more concerned about tax expenditures, as they are so much easier for politicians to enact (under the rhetoric of “letting people keep their own money”), as evidenced by the fact they enact so many of them for which they could never get the equivalent cash transfer past.
Example: The lobbyists for the, oh, purple gizmo manufacturers want to get money from the government for it. So Congress proposes for it an PG Investment Subsidy of $X cash.
Net result: PG Makers gain $X. Taxpayers lose $X (fiscal balance worsens by $X), and the size of government grows by $X — since the politicians are allocating that much more of the nation’s resources to their own favored purposes.
But there is a populist outcry! Why gizmo manufacturers, and not all manufacturers? Why only purple gizmo manufacturers, and not us patriotic red, white and blue gizmo manufacturers? Why this hand out of money?
So Congress goes back to the drawing board and instead enacts tax breaks for the purple gizmo manufacturers equaling the exact same $X. Now there is no money seen visibly changing hands, no check from the Treasury (except for the larger tax refund!) no outcry. Hey, we’re only letting the purple gizmo manufacturers keep more of their own money to strengthen American Industry!
Net result: PG Makers gain $X. Taxpayers lose $X (fiscal balance worsens by $X), and the size of government grows by $X — since the politicians are allocating that much more of the nation’s resources to their own favored purposes.
Identical.
The sole difference is that in the second case the resources directed by the politicians don’t flow through a Treasury checking account — which is no difference in substance at all. The same increased resources are being directed by the govt from the same place to the same place, only under the table instead of over it.
Thinking the gov’t somehow is “smaller” in the second case is an error — thinking that just because it collects less tax money is a variation on “money illusion“, confusing money with the substance of what is going on.
Money is just paper — to the Treasury these days just computer entries.
The “size of government” is the reach of the government’s power, it’s ability to direct resources. Money is useful for the gov’t just as for the rest of us, as it is one tool for directing resources, but hardly the only one. What matters is not the amount of money it has but the amount of resources it directs.
Believe me, that’s what the Congressman and the lobbyist and the client care about.
They don’t care a whit whether the money that reaches the client from the taxpayer goes through a Treasury bank account or not. They’d rather it didn’t! It’s all much more obscure that way. Who wants a transparently visible cash
handouttransfer?With the tax break the Congressman expands his reach over the economy (and earns his campaign gifts) just as much, the taxpayer gets touched, and the client gets his take, identically as with a cash transfer. The expansion of government is identical as measured by the additional resources directed by the politician (and the reward to the politician).
But to “small government” people the tax break is more dangerous than the cash transfer because that Congressman will look them right in the face — butter wouldn’t melt! — and declare “Hey, I just reduced the size of government with this tax break that reduces revenue! (And if you all actually buy this, I’ll do it again and again and again!)”
All tax expenditures can be converted into equivalent above-the-table cash transfers producing the the same results. If you wouldn’t support those, kill the tax expenditures.
Cash transfers are transparent and manageable. Tax expenditures are economically and fiscally the same — but politically deceptive and toxic.
Steve,
If you think it’s not irrational to prefer one over the other, tell me what substantive difference there is — in terms of ideology, economics, anything substantive — between you giving $20 and getting $5 back at the same time vs. you just giving $15. I’m all ears.
Jim Glass is exactly right in his last two comments. Very similar points to some of those I’ve made upthread.
…and I should add: very well said, Jim.
Sure Brooks,
Sure, the substantive differences are
1. Expenses grow without statutory changes faster than tax expenditures. Thus, the one time effect of the exchange is identical but, over time, it’s not because of the differences in growth rates.
2. Government is made larger by achieving balance through reducing tax expenditures.
Since this is the thrust of Jim’s point, I’ll discuss below
Jim,
You and Brooks both express the point of view that a tax expenditure is a “worse” intervention in the economy than an actual expenditure.
Let me try to explain why I disagree.
Let’s say that government needs $100 for its actual physical expenditures. It can achieve that through an infinite number of permutations of tax rates and tax expenditures. No matter which path it chooses, the goal is to create $100. So in effect, the impact of tax expenditures and tax rates will net out to create the $100. Are there better and worse ways to get the $100? Sure but there will be a lot of differences over which is better an worse.
Actual expenditures increase the $100 to some larger number. Tax expenditures by contrast are all a discussion about how you get to the $100. Any combination of rates and “tax expenditures” will do as long as you net the $100.
Saying that failing to take money from someone is a form of allocation does not really fly to me. The choice that the government makes is to take more of person A’s resources than person B’s. That’s the point of the tax code and it’s done in innumerable ways.
Both you and Brooks seem to believe that if the government decided to take more of person B’s resources by eliminating the tax expenditure that applies to B that somehow those resources would go back to person A (who had to pay more to cover A’s tax expenditure in the first place). In fact, they would far more likely be used to spend money on something that is unrelated to both person A and person B. And having made that expenditure, it would tend to grow and be harder to reduce in the future.
Sure a tax expenditure is an intervention but so is the whole tax code. You want to debate the best way to generate money, I’m all in but to call out a part of that discussion for special mention seems off to me
Should you doubt the point above, you need look no further than the Senate health bill where the tax expenditure called insurance deductibility was (in part) eliminated. Did the person A’s of the world get the money back in the form of lower taxes? Not at all. Instead the government planned to spend the money not to the benefit of A but to the benefit of a whole different group of people.
Now that’s worth thinking about, because…
a) A medical expense deduction claimed on a tax return reducing one’s tax bill, as per today; and
b) A spending program under which one reports medical expenses just as on today’s tax return, sends the form to the Federal Medical Expense Subsidy Program, which compares the form to your tax return to determine your “progressive” rate of subsidy, and sends you a check in corresponding amount (in the same amount you’d get from your deduction)..
…. are identical in every respect.
(Except for a little more paperwork and delay in (b).)
So if people wouldn’t stand for (b), why would they be happy with (a)?
Because (b) obscures a crucial fact: it’s not fair to charge $19,000 of income tax to a $100,000 earner with $50,000 of medical bills and only $6,000 of income tax to a $50,000 earner. The higher earner with the big medical expenses deserves a break.
Furthermore, structuring the break as an adjustment to income MAKES SENSE, because it ensures that the income tax portion of this person’s picture is reasonably fair. There can be other programs to deal with the needy or other exceptions, but it’s bad policy to couple an inequitable income tax with an equally but oppositely inequitable direct benefit program. The goal should be a fairly structured income tax that attempts to measure ability to pay justly, plus benefit programs that hand out benefits where they are warranted.
People would not stand for (b) because its structure obscures the logic, whereas in the form of (a) the logic is completely clear. And it really does make sense as a part of accurately measuring taxable income.
Steve, I’m not going to try to catch up contributing with you guys in what’s been a 95 post thread (so far!). But if I’m reading you correctly, the gist of our difference of opinion is:
Saying that failing to take money from someone is a form of allocation does not really fly to me.
But money is being taken from somebody exactly equally both ways.
#1) Give special interest M a cash transfer of $X from the Treasury.
Result: M gets $X. It comes from taxpayers. The addition to the debt is $X. This must be carried/serviced with tax payments equal to $X at present value.
#2) Give special interest M a tax deduction worth $X.
Result: M gets $X. It comes from taxpayers. The addition to the debt is $X. This must be carried/serviced with tax payments equal to $X at present value.
The result is identical. M improves its cash position by $X, and that cash comes from taxpayers.
The fact that in #2 no check runs through the Treasury is a distinction without a difference, it is meaningless*. In each case $X is paid by taxpayers to M at the politicians’ direction.
(* Except that politically it makes #2 less transparent, and thus makes it much easier for politicians to hand out taxpayers’ money to special interests this way)
When you say “failing to take somebody’s money…”, who are you referring to, whose money isn’t being taken? In each case the taxpayers’ money is being taken and given to M.
Both you and Brooks seem to believe that if the government decided to take more of person B’s resources by eliminating the tax expenditure that applies to B…
Ah, I see. Your starting point is that the special tax break that the Purple Gizmo Corp. gets, that nobody else gets, let’s it keep “its own money”. But it isn’t — it is the taxpayers’ money. That is the cognitive dissonance between us.
Thinking that it is “its own money” is exactly what enables politicians to dole out masses of taxpayers’ money like this.
Which has the exact same effect on the rest of us as handing out masses of cash transfers — either the national debt goes up, or marginal tax rates have to go way up. Or both! And it’s wasteful, and the politicians expand their reach into the economy.
…somehow those resources would go back to person A … In fact, they would far more likely be used to spend money on something that is unrelated
Well, sure, if the fiscal situation is straightened out Congress could blow it all on waste all over again. But that is no more justification for wasting taxpayers’ money on wasteful pork tax expenditures than on wasteful pork cash expenditures. I mean, we’d never cut any waste of taxpayers’ money if we let that stop us.
I’ll also point out that in actual history when the ‘86 Reform flattened many so many tax expenditures it reduced the top tax rate to 28%. Success! Compared to 70% six years earlier!
Remember that wasteful tax expenditures, just like wasteful cash expenditures, have two bad consequences for the rest of us who pay for them. (1) Of course, we have to pay for them with higher tax rates, either immediately or to service the increased national debt; and. (2) Don’t forget that the deadweight cost of taxes — which is the real cost of taxes on the economy — increases by the square of the increase in the marginal tax rate.
That is: exponentially! That hurts! The only way to avoid that for collecting any amount of revenue is by having the lowest possible tax rates on the broadest possible tax base. That means eliminating all loopholes and special treatment tax exceptions to the greatest degree possible.
The deadweight cost of taxes is what does in economies. Its cost rises exponentially as tax rates go up and falls that way if rates go down. At a 70% marginal rate the deadweight cost of taxes is 625%(!) of what it is at 28%. So we really, really, really want lowest possible tax rates.
And we just can’t have them while politicians are doling out masses of taxpayers’ money to all kinds of interest groups through masses of loopholes and exceptions that riddle the tax base like Swiss cheese.
There, that’s as clear as I can make it. If I am incapable of making myself understood, or incapable of understanding you, well, I’m too old to overcome such failings now. No hard feelings. But I don’t think I can contribute 25 more posts to this thread to keep up with the rest of you!
That’s it from me on this, FWIW.
Jim,
All well said. I would just point out, though, that at least in theory, there could be tax expenditures that increase aggregate well-being (economic or otherwise) if they incentivize behavior with positive externalities efficiently enough. So it’s not that tax expenditures are inherently undesirable even in aggregate economic terms (let alone arguments regarding “equity”/”fairness”)
Jim,
(to add to my comment above) But of course, the same would be said of cash expenditure (”spending”) subsidies that accomplish the same thing. I’m just contrasting it with no subsidies of either sort, and just using tax rates to determine tax liability.
Jim,
FWIW, I think I’ve figured this out. You and Brooks seem to believe that the appropriate baseline is a tax code without preference in which the government could then decide between making a payment or a tax expenditure.
For me the baseline is a government that collects $X through a combination of rates and expenditures.
If the former is true, I understand the argument and the equivalence but not if the latter is true. If the latter is true, the equivalence is between tax rates and tax expenditures as your example of the Reagan tax cuts shows.
My point is simply that there are two concepts that matter, receipts (inflows) and expenditures (outflows). A tax expenditure to use old accounting terms is a countercredit, not a debit. The math is the same but not the concept. A tax expenditure is a reduction in inflows not an expansion of outflows.
I guess to me it’s simple. If the people pushing tax expenditures as a political concept would simply admit that reducing tax expenditures (in aggregate without changing rates) is the same as increasing taxes, I could go home happy. Sadly, they want to argue that decreasing tax expenditures is the same as reducing actual expenditures and not the same as increasing taxes.
This is I suspect my last word on the topic since I don’t want to be over post 100 on something that is, in my view, something of a peripheral (but interesting nonetheless) issue
Steve,
You seem to be throwing together (in a way that makes it hard for this discussion to sort things out and answer questions) an analytical point, a separate second analytical question, and a policy preference (and pro’s/con’s) question.
The analytical point is that there isn’t any inherent, substantive difference between a tax expenditure subsidy (or reduction thereof) and a “spending” subsidy (or reduction thereof), although many people erroneously, irrationally perceive an inherent difference and thus the a subsidy that would be the same either way (substantively speaking) is often treated differently in our political process based on which form it takes, as Jim and I have been saying and illustrating, and as you have indicated as well by saying that one is more prone to growth than the other. But note that this different political treatment doesn’t mean that the two are different in themselves, inherently. They are not substantively different from each other. They are the same. And they both ARE substantively different (in incentives, effects, ideology, economics, etc.) from a tax rate cut. Put differently, if we were to assume that they would be implemented as stated (i.e., if you are supposed to get $5 from the government as you gave it $20, that’s what indeed happens) and that they will not be treated differently politically in any way, we would have no reason to prefer one over the other, since they do the exact same thing on the exact same basis with the exact same effects on everyone (again, like you giving me $20 while I simultaneously give you $5 vs. you giving me $15).
The analytical question to which I refer is one of political analysis. How would each (tax expenditure subsidy vs. “spending” subsidy, or the creation/increase/decrease/elimination thereof) be treated differently politically. Questions such as:
1) Which is more likely to be created/increased or reduced/eliminated or kept unchanged? Related considerations: Which is generally viewed more favorably and/or less unfavorably by the public (tax expenditures generally viewed more favorably, particularly by folks on the right)? Which is more conducive to a “tragedy of the commons” dynamic?
2) Which is more transparent to the public and thus perhaps more likely to reflect the public’s wishes and priorities and which is more likely to have a corrupting influence? (I’d say all these #2 considerations favor “spending” subsidies over tax expenditure subsidies)
Then there is completely separate question of one’s policy preference (meaning a general preference and a preference in individual cases of particular subsidies) between fiscal policy containing subsidies of either form (tax expenditures; “spending subsidies) vs. just determining tax liability via tax rates and not including subsidies among “actual” expenditures, or moving more toward such fiscal policy by reducing subsidies of either form, considering factors such as:
3) Answers to Questions #1 and #2 above and any others related to differences in political treatment.
4) Which increases/decreases economic efficiency rather than distorting economic behavior in a way that reduces aggregate well-being and the well-being of most people?
5) Which is “fairer”?
6) Which is more conducive to incentivizing behavior with positive externalities with a positive net effect (net of any “costs”/drawbacks of that approach)?
Feel free to add factors (considerations) to any I’ve listed, but my point is that we need to properly distinguish among these points and questions if we are to have any chance of sorting out and understanding each others’ assumptions, conclusions, rationales, and preferences.
Oh, and Steve,
This topic is very far from “peripheral”; it is an extremely important topic vis a vis consideration of ways to reduce our fiscal imbalance. Insofar as people view tax expenditure subsidies as substantively different from — and more desirable than — “spending” subsidies, the public and Washington will irrationally approach each differently, thus making fiscal policy choices on an irrational basis, and one major adverse result (among others) is that subsidies will increase, because people tend to like anything that has the words “tax cut” in it even if they would dislike the same exact subsidy if it were called a “spending” subsidy, simply on that basis, which, again, is why Obama expected applause from even Republicans when he listed his new/increased subsidies for having children, sending a kid to college, buying a home and buying health insurance via COBRA — simply because instead of calling them new/increased “(spending) subsidies”, he called them all “tax cuts”.
Steve,
And in addition to the importance of disabusing people of the misperception that there is a substantive difference between a tax expenditure subsidy and a “spending” subsidy, the other reason this topic is far from “peripheral” to the issue of addressing our fiscal imbalance is because of all the pro’s/con’s we’ve been discussing of fiscal policy with more subsidies vs. less (the latter meaning less “spending” subsidies on the “actual” expenditure side, and less tax expenditures in the tax code in favor of tax rates being more determinative of tax liability)
Brooks,
I now really give up on post 101. If I can’t argue that a receipt is different than an outlay and that an action that increases receipts is more similar to a different action that increases receipts than one that reduces outlays, I don’t know what to do.
I am looking at the systemic implications for the government. Reducing tax expenditures increases government receipts period. Despite that, you want to argue it’s different from other actions that do the same thing.
As to your last point, it’s exactly the framing I fear. As I’ve said many times, my view is that tax expenditures belong on the receipts side of the equation as in, if we’d like receipts to increase from 17.5 to 20 percent of GDP, what combination of rate change and tax expenditure change would we like to use to get there?
The difference between us, in my opinion, is you are focused on the deficit and that gives you one view of equivalence. I am focused on receipts and expenditures separately and that gives me a different view.
In any event, this has gone as far as it can. On to the next topic please (and for the sanity of anyone else who reads this blog)
Steve,
For whatever reason, you still think I’m saying things I’m not saying (for example, this idea that my basis for the equivalence is merely that they both have the same effect on the deficit, even though one supposedly means larger government than the other — which it clearly doesn’t), and you still don’t see what I am saying, and you are still fundamentally conceptually confused. I don’t say that to be insulting or snarky, but I’m just speaking frankly to distinguish your actual conceptual confusion from your erroneous characterization of this impasse as some supposed difference between us of ideology or policy preferences or any other substantive perspective related to this topic.
I’m glad to give up at this point, but please don’t make it tough for me to resist commenting further by continuing to mischaracterize my points, perspective, the nature/cause of our impasse, etc.
Brooks,
I’ll end with three questions.
1. Does a decrease in tax expenditures all other things equal increase or decrease government receipts? Does it increase or decrease government outlays?
2. Does an increase in actual expenditures, all other things equal increase or decrease government receipts? Does it increase or decrease government outlays?
3. Given the different answers to the two questions, what is the logic for arguing that it is impossible to see a meaningful difference between the two actions?
You assert, “one supposedly means larger government than the other which it clearly doesn’t”. Recognize that’s your point of view not mine, so to me at least, it isn’t clear. To me, government’s size is well measured by the amount it spends. The amount it fails to tax that it could have taxed is the difference between the GDP and it’s tax receipts and is not a particularly useful concept. As I’ve said many times, the notion of tax receipts is based on, in my view, an arbitrary baseline called income X relevant tax rate. Totally fine but arbitrary.
You find my characterizations erroneous. I have been trying to characterize because you continue to say the same thing over and over regardless of the direction from which I address the potential source of our disagreement.
There’s nothing I can do that would make you see there is a different way to look at it. I understand the way you are looking at it and I’ve agreed many times that through certain lenses it is a valid way of looking at it. You reject any other interpretation. Certainly that is your right but it makes a dialog quite different. In my opinion, an exchange is one where both sides seek to understand.
In your last several posts, you seem to take the line of argument as follows. I don’t understand or agree, therefore you are confused. That is one possibility, but certainly not the only one.
The only possible way I could disagree is “my conceptual confusion as opposed to some supposed difference between of ideology or policy preferences or any other substantive perspective related to this topic.” Let me interpret that sentence for you. The only way you could disagree with me is that you are confused. That’s a pretty close minded point of view.
I understand what you are saying. You are saying that in your view tax expenditures are equivalent to other expenditures because they implicitly impose higher taxes on someone in order to fund the tax expenditure just as an actual expenditure would. Further, you believe that the net impact on all actors is equivalent. As a consequence, we should be indifferent between tax expenditures and other forms of expenditures and policy makers are not and this is bad.
I submit that tax expenditures increase revenue and actual expenditures increase expenditures and that those things are actually conceptually different and I have a preference for one over the other all things being equal. I further submit that tax expenditures cannot be looked at in isolation but should be looked at as part of a larger revenue code that has the express intent of creating $x or y% of gdp through some combination of tax expenditures and tax rates. Through this lens, a decrease in tax expenditures is an increase in taxes which, in turn, is not the same an a decrease in expenditures.
If I’ve mischaracterized again, my apologies in advance. If you want to respond, please feel free. But if your response is another version of “only a confused person could disagree with me”, please don’t bother.
Darn. I missed my chance to be the one to make post number 100!
Steve,
I’ll end with three questions.
It’s not good form to say (if the following is what you mean by “I’ll end with…”) essentially “I won’t answer any more of your questions or respond to any more of your arguments, and I’ll end my involvement in this discussion by asking you to answer these questions of mine.” If I’ve misinterpreted, please let me know.
1. Does a decrease in tax expenditures all other things equal increase or decrease government receipts? Does it increase or decrease government outlays?
Quite obviously (and as I’ve clearly indicated before) it increases receipts and does not change actual (i.e., transactional) outlays.
2. Does an increase in actual expenditures, all other things equal increase or decrease government receipts? Does it increase or decrease government outlays?
Obviously it increases outlays and does not change receipts.
3. Given the different answers to the two questions, what is the logic for arguing that it is impossible to see a meaningful difference between the two actions?
Steve, I really wish you’d stop, listen and think about this, because you’re far too smart to still not get this after all my explanations, illustrations, questions, etc. unless you simply aren’t listening and/or thinking.
Please listen: it’s just like you saying that if you gave me $20 and I simultaneously gave you $5, my receipts and outlays are higher than if you just gave me $15, but there is no substantive difference. Not only are all effects on everyone the same and on the same basis, but it also doesn’t really mean (in any substantive sense) that I’m “spending” more on you or overall, or receiving less from you or overall, or that there is any other difference in the nature and magnitude of my role in your life, your finances, your incentives/economics (or anything else) than if you just gave me $15.
Let me try an even simpler illustration. You and I go to the supermarket and you think I should not spend more than $10 (so I’ll have more money left over for other things). At the supermarket I bring $10 of groceries to the cash register and take out a $10 bill. I notice in my wallet that I have a crumpled dollar that might not work in a vending machine, so I ask the cashier if, while the register is open, I can exchange my dollar bill for a crisp one of his. Per what you seem to be insisting is a substantive difference, you would say “Hey, you will be spending $11. That’s more than you should spend.” I would say “There is no substantive difference between my exchanging $1 for $1 is no different than if I had just left my $1 bill in my wallet, and there is no reason to prefer one option over another. I still end up with the amount of money either way, as does the supermarket, and I still walk away with the same goods. Everything is the same either way, and on exactly the same basis (other than that completely inconsequential $1 for $1 exchange). Does exchanging that dollar for a dollar make me a “bigger spender” or a “bigger spender on groceries”? Does exchanging that dollar for a dollar reflect some difference in the value I attach to groceries vs. other items I could purchase today or vs. saving for future purchases? Please answer.
You reject any other interpretation. Certainly that is your right but it makes a dialog quite different. In my opinion, an exchange is one where both sides seek to understand.
No, it’s not like that at all. It’s not a difference of perspective, opinion, ideology, or anything at all subjective. It’s that you keep saying something that simply does not make sense: essentially the equivalent of saying (per my illustration above) that there is a substantive difference (and a significant ideological one at that) between my giving that cashier $1 and getting $1 back vs. that exchange not occurring, saying that the former represents higher spending on groceries and overall, and reflects different priorities, economics, etc. than the latter. But it just doesn’t. Do you really disagree?
In your last several posts, you seem to take the line of argument as follows. I don’t understand or agree, therefore you are confused. That is one possibility, but certainly not the only one.
Of course it’s possible for someone to disagree with me without that person being confused. But yes, that person being confused is one possibility, and I think I can usually make that distinction correctly, particularly after much back-and-forth in which the person continues to indicate confusion.
The only possible way I could disagree is “my conceptual confusion as opposed to some supposed difference between of ideology or policy preferences or any other substantive perspective related to this topic.” Let me interpret that sentence for you. The only way you could disagree with me is that you are confused. That’s a pretty close minded point of view.
Come on, Steve. That’s just silly. Hopefully you know my commenting behavior than to think I would jump to the conclusion that someone who disagrees with me must be confused. I regret if I’ve offended you by speaking frankly and letting you know that you are simply misunderstanding what I’m saying, thinking A is B and not A, etc. The word for that is “confusion”, but if that is unnecessarily offensive, perhaps I should have avoided it. I do realize it can be irritating to someone to be told repeatedly that his comments reflect confusion. Certainly not my intent; just trying to point out that you were mistaking one thing for another, etc.
And I hope you are ok with my saying this, but this discussion, combined with comments of yours in our exchange over on Hennessey in which you surprisingly misrepresented just about everything I had said, makes me wonder if something over the last couple of days has been getting in the way of your usual outstanding quality of commenting, perhaps not listening (reading) as carefully as you usually do and/or something else. I mean that in the best sense, meaning it’s only notable because you are otherwise consistently an outstanding commenter IMHO.
I understand what you are saying. You are saying that in your view tax expenditures are equivalent to other expenditures because they implicitly impose higher taxes on someone in order to fund the tax expenditure just as an actual expenditure would. Further, you believe that the net impact on all actors is equivalent. As a consequence, we should be indifferent between tax expenditures and other forms of expenditures and policy makers are not and this is bad.
That has some of it, but is missing some elements. I’m saying that a tax expenditure subsidy for some choice or related situation (e.g., for having a child or sending a kid to college) is not substantively different in any respect from a cash expenditure that does the same exact thing on the same exact basis – no difference in terms of ideology, economics, the role of government, effects on anyone or on government, or any other respect other than a completely inconsequential transaction equivalent to my giving that supermarket cashier $1 and him simultaneously giving me back $1. And yes, I’m saying that the ultimate effect of some new tax expenditure subsidy – just like the effect of the equivalent “spending” subsidy – is that the beneficiary ends up with more money and others must make up the difference. And yes, I’m saying that, although it’s irrational to see a substantive difference between the two different forms of what would be (substantively) the same thing, many do have that view (including you, apparently) and thus may (and generally do) view one more favorably (or less unfavorably) than the other, and that is unfortunate insofar as rational decision-making is preferable. It would be best if the public and Congress saw no inherent, substantive difference between (and no more attractiveness/unattractiveness between) Obama proposing a tax expenditure subsidy for those who buy a home (and calling it a “tax cut”) vs. Obama proposing a “spending” subsidy that did exactly the same thing on the same basis. (Again, I said “inherently”, meaning “in itself”; if people have a preference based on differences in political effect due to which label it has and how it is officially reported per the bookkeeping – e.g., my #1 and #2 in my 9:53am comment, than that could be a rational basis for preferring one over the other, but that’s because one expects that others will irrationally, erroneously see an inherent, substantively difference.)
I submit that tax expenditures increase revenue and actual expenditures increase expenditures and that those things are actually conceptually different and I have a preference for one over the other all things being equal.
I still haven’t seen you spell out why you prefer one over the other (beyond just phrases like “bigger government” or inconsequential bookkeeping technicalies that aren’t supported by any argument regarding what would actually be substantively different one way or another), IF we leave aside those assumptions of different political treatment due to the label and bookkeeping/reporting to which I refer parenthetically at the end of my prior paragraph, which are based on the [correct] assumption that many others will irrationally, erroneously seeing an inherent, substantive difference between the two.
AMT,
Stick around for a chance at #200. Maybe Steve and I will post enough “last comments” to get there.
Nope. I’m done
FYI anyone, I just came across and read Fareed Zakaria’s take on solving the long-term fiscal imbalance problem, including reducing/eliminating “subsidies” that are “middle class entitlements” (the tax expenditures we’ve been discussing) http://www.cnn.com/2010/OPINION/02/04/zakaria.budget.deficit/index.html
By the way, Zakaria’s CNN show “GPS” is right up there with PBS NewsHour as exceptionally good TV for people interested in serious discussion of important issues http://www.cnn.com/CNN/Programs/fareed.zakaria.gps/ (Sundays, 10am and 1pm EST)
Just for completeness (so I have it all on one thread), I want to add a #6 to my list of key questions related to policy choices regarding eliminating/reducing/maintaining/increasing/creating tax expenditures upthread at http://economistmom.com/2010/02/is-the-obama-budget-half-full-or-half-empty/#comment-6794
6) Would a particular change in tax expenditures affect our overall fiscal policy adversely in terms of “fairness”, incentives, economics, etc., such that we would want to change some other element(s) of fiscal policy (e.g., tax brackets and rates; spending in some area; etc.)
Follow-up re: Zakaria and his show: He usually/always has a book recommendation each week, and he just recommended David Walker’s Comeback America. Cool.