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Steadfast Steny

March 1st, 2010 . by economistmom

steny-hoyer

House Majority Leader Steny Hoyer gave a speech on fiscal responsibility at the Brookings Institution today. He reaffirmed his strong faith in PAYGO (pay-as-you-go) budget rules as “so valuable” to the cause–although he acknowledged the large exemptions for current policy and at the same time brushed that qualification aside a little too easily (for my tastes).

But my favorite part was when he talked about how the politically easy choices are the economically devastating ones:

The most important lesson we can draw from the years of recklessness is this: when it comes to budgeting, what is politically easy is often fiscally deadly. It is easier to pay for tax cuts with borrowed money than with lower spending; easier to hide the true costs of war than to lay those costs before the people; easier to promise special cost-of-living adjustments than explain why an increase is not justified under the formula in law; easier to promise 95% of Americans that we won’t consider raising their taxes than to ask all Americans to contribute for the common good. Those kinds of easy choices are so often selfish choices—because they leave the chore of cleaning up to someone else. Easy choices may be popular—but the popularity is bought on credit.

Washington’s behavior will only change when the incentives change: when voters demand more responsibility, and when the political price for easy choices rises sharply. As I said, I’m hopeful that just that is happening. But the public has a responsibility, too: to educate itself about the sources of the deficit and the range of realistic solutions—not to demand that government continue to escalate entitlement payments and lower the deficit at the same time.

We can’t meet this challenge unless the public is ready to confront tough choices, and unless leaders in both parties are ready to be honest about tough choices. When deficit solutions meet resistance, which they will, and when they are painful, which they will be, it’s our job to explain why they are also correct—and essential.

“Steadfast Steny” can talk like this without being a hypocrite, as he’s taken a lot of courageous positions and votes, even in his role as Majority Leader where he’s supposed to be worried about the politics.

UPDATE Tuesday morning: The NYTimes’ Jackie Calmes points out that Steny bravely “challenged the sacred cows in his own party” by suggesting some fairly specific options to damp down spending on Social Security and Medicare. My observation is that for most in Steny’s “own party”–including the President himself–the (Bush) tax cuts for that very-broadly-defined middle class of households with incomes under $250,000 have (bizarrely) become another “sacred cow” of theirs (the Democratic Party). And that’s the problem. How can the Democrats work in a bipartisan manner with Republicans if what they would otherwise negotiate on–in terms of “I’ll give up this (entitlement spending) if you give up that (tax cuts)”–is not really bargaining for anything they really want?

46 Responses to “Steadfast Steny”

  1. comment number 1 by: Brooks

    Sure wish something could make that partisanbot Pelosi suddenly feel like “spending more time with her familiy” so Hoyer could (hopefully) take over as Speaker. He’d still have partisanbot Republican leaders (Boehner and McConnell) to contend with, but who knows — maybe one side moving toward more honesty and responsibility will encourage the other side to do so. He’s right that a shift to/toward fiscal responsibility will only happen when the political calculus is conducive to it, but leaders can influence the public opinion that factors into that calculus.

  2. comment number 2 by: Brooks

    Of course, it’s also possible that any sudden inclination by one side toward reasonable compromise to solve the fiscal imbalance problem would just embolden the jerks on the other side. Reminds me of the joke after Liggett Group was the first cigarette maker to admit that cigarettes cause cancer. The joke was that the other cigarette companies responded by acknowledging that “Yes, Liggett cigarettes do cause cancer.”

  3. comment number 3 by: Jim Glass

    “Washington’s behavior will only change when the incentives change”

    Speaking truth from power.

  4. comment number 4 by: Brooks

    Jim,

    What’s your point? Are you saying he isn’t putting his money where his mouth is? That he’s making an excuse for not doing something he has the power to do?

  5. comment number 5 by: SteveinCH

    I’d take Rep. Hoyer as speaker or Rep. Pelosi any day. That said, the speech was still more partisan than it needed to be and had the standard partisan boilerplate about leaving seniors alone.

    Someday the taxpayers of this country are going to realize that the only potential solutions are to take money away from seniors or raise taxes on everyone else. Once they realize that, I suspect seniors are going to be very unhappy.

  6. comment number 6 by: AMTbuff

    Washington’s behavior will only change when the incentives change: when voters demand more responsibility, and when the political price for easy choices rises sharply.

    If I’m not mistaken, the Tea Party movement is the beginning of this change. Sure, they prefer to cut spending first, but I believe they are ready for higher taxes once the spending cuts are well underway and it’s clear that the extra money will not be wasted.

    Their big advantage the Tea Party people have over every other organized political force except Concord is that they assign top priority to the fiscal problem. Lack of priority has been the problem since Day One.

  7. comment number 7 by: Brooks

    AMT,

    I think you give the Tea Party crowd way too much credit. They think taxes are way too high already, are outraged by the bailout of the financial system that prevented a total meltdown, think Obama is a communist (or is it “fascist” — I’m having trouble keeping track), etc., but I rather doubt that they have much of a clue about anything really in terms of the drivers of our long-term fiscal imbalance, the impact that particular policy changes would have on it, the actual combinations of types and scales of policy changes that could solve the problem, and the actual trade-offs among those alternative sets of policy changes, let alone any sense of what is politically feasible or will be at any point in the foreseeable future or ever.

    What is their plan — what set(s) of policy changes do they advocate as the solution to our long-term fiscal imbalance problem (for example, what do they [or even some large portion of them] want to do to reduce spending on entitlements, by how much and on what basis?), and if they have any such plan(s), do they show any understanding at all of how it would play out in terms of impact on people?

  8. comment number 8 by: SteveinCH

    Brooks and AMT,

    I’m somewhere between the two of you. I think the Tea Party folks genuinely believe that spending is too high and needs to be cut. I think their how to cut plan is inchoate and/or unrealistic.

    Having said that, I think they would more likely endorse a plan that was 2/3 spending cuts and 1/3 tax increases than would Andy Stern and of course, only one of them is represented on the budget commission.

    I also agree that prioritization is key. I mean look at the Bunning situation. Sure the guy’s a bit of a nut but it now looks like we’re going to have $100 billion of new spending that’s exempt from PAYGO even though it doesn’t fit the statutory requirements for exemption.

    Clearly restraint is not a priority.

  9. comment number 9 by: Brooks

    Steve,

    I see Obama is announcing a “Cash for Caulkers” subsidy program http://www.reuters.com/article/idUSTRE6211C320100302 (I don’t know if he uses that label for it). Let me know if you’d rather not revisit this topic by answering this question, but let’s say this subsidy could take the form of either (1) a voucher or rebate check sent by the government, or (2) a tax deduction of the same amount. Would you view #1 less favorably / more unfavorably because it is incremental spending and view it as an expansion of the role of government, while viewing #2 more favorably / less unfavorably because it is a tax cuts and view it as a reduction in the role of government? Or would you consider #1 and #2 substantively equivalent and unrelated to one’s view of the appropriate role of government?

  10. comment number 10 by: Brooks

    Steve,
    And re: the above, just to make it apples-to-apples, assume that in #2, even those with no tax liability (or less tax liability than the amount of the subsidy) would get the full subsidy via refundable tax credit.

  11. comment number 11 by: Brooks

    Oh, and when I said “unrelated to one’s view of the appropriate role of government”, I meant that there is no basis for preferring one over the other in terms of substance based on one’s view of the appropriate role of government.

  12. comment number 12 by: SteveinCH

    Strangely enough I’m sure Brooks, I see them as largely similar. I think I’ve tried to maintain that I see the two concepts as similar starting from any given baseline. In other words, any new program could be set up as an tax expenditure or an actual expenditure and it makes no difference.

    Where I have tried to object, perhaps inchoately, is in the discussion about working back from the current state and defining them as equivalent in the rear view mirror.

    The reason I take this point of view if my belief is that the tax code is there to deliver X revenue dollars and can do this through an infinite combination of tax rates and tax expenditures. By definition therefore, a change in tax expenditures should be offset by a decline in the tax rate structure or it is, de facto a tax increase.

    By equating historically derived tax expenditures with current actual expenditures, you take a different view of the goal of taxation and assert that the rate table is designed to produce X+Y revenue, tax expenditures cost Y and X is left of actual expenditures. I think that view is simply incorrect despite the mathematical equivalence we have discussed before. As I say, to calculate “tax expenditures” today as a static view (Y) in the equation above, you need to postulate the existence of a tax code that was designed to generate X+Y. Since such a code never existed, you’re making up the baseline to get the answer you want. I maintain the appropriate counterfactual is an entirely different tax code that still generates X but with lower rates and fewer tax expenditures. If you think about it this way, you can never define Y conclusively in dollars and therefore, you can never compare it as a matter or dollars and cents as opposed to concepts with actual spending.

    I won’t go back into a back and forth but I figured it was worth one post since you asked : ).

    It will be interesting to see if “Cash for Caulkers” is paid for. Somehow I think not.

  13. comment number 13 by: Brooks

    Steve,

    Thanks for indulging me on this topic a bit more. No need to continue if you’d prefer not to, but…

    Here’s the thing:

    Re:a change in tax expenditures should be offset by a decline in the tax rate structure or it is, de facto a tax increase.

    Saying that about a tax expenditure subsidy is the same as saying that “a reduction in an (explicit) spending subsidy that is not offset by a decline in the tax rate structure is, de facto, a tax increase.”

    Leaving aside whether or not the assertion is valid, the two statements above are substantively exactly the same because they are referring to two things that, despite different labels, are substantively exactly the same in every way (incentives, role of government, financial impact on every individual, segment and entity involved, the basis for that financial impact, etc.).

    The only difference is an inconsequential cash flow difference, like the difference between you handing me $2 while I simultaneously hand you $1 if you insulate your home vs. you just handing me $1 rather than $2 if you insulate your home (and in either case I take another $1 from someone else if you insulate your home). If I cancel that subsidy (in either form), the direct effect is that I (representing the government) have $1 more (leaving aside dynamic effects and also taxability of subsidy income), and my options are the same: use that $1 (or part of it) to pay down my debt, use it for other subsidies or other types of spending, or lower the percentage of your income that I take such that you will pay me $1 less (either at the same income or net of changes in your income that results from this change in the tax rate applied to your income — i.e., dynamic effects). Regardless of which I choose to do with that incremental dollar I have, no one is affected any differently if that subsidy had been in tax expenditure form rather than explicit “spending” form, just as no one was affected any differently by the subsidy in the first place due to its taking one form or the other.

    So I’d suggest focusing less on the semantics and concepts of a baseline and instead just looking at what is happening, on what basis, with what results for each individual/segment/entity involved, and I think you’ll see the equivalence I’ve been pointing out, as well as the fundamental difference (in all the ways noted above — incentives, financial impact on each individual/entity, basis, etc.) between tax expenditures and tax rate cuts.

    What matters is that we should choose whether or not we want some taxpayers to pay more so that some others can get subsidies for doing X or Y. Whether the subsidy is in the form of a check from the government or a tax deduction is irrelevant (other than any timing differences) in terms of substance*.

    * As I’ve said previously, they aren’t different in terms of the politics due to the misconception that they are different substantively, as our discussion demonstrates: substantively equivalent subsidies are viewed more favorably if in tax expenditure form than in explicit “spending” form, and are therefore more likely to be created/increased/maintained, which I think is generally undesirable because, with some exceptions, I don’t want government having that expansive role of interfering with market-based incentives, given the general inefficiency generated by such interference. In other words, someone who wants a smaller role of government should generally oppose subsidies, and regardless of one’s ideology he should view a given subsidy as no more/less desirable if in tax expenditure form or explicit “spending” form (again, other than the politics arising from misconceptions).

  14. comment number 14 by: Brooks

    oops, I meant to say:

    “…they are different in terms of the politics due to the misconception that they are different substantively…

  15. comment number 15 by: SteveinCH

    But Brooks, what you fail to see is the argument proceeds immediately from a theoretical discussion of tax expenditures to a very practical discussion that we should be indifferent as a matter or going forward policy between reducing tax expenditures and reducing actual expenditures. For that conversation to be true, there must be some counterfactual scenario that allows us to define a dollar amount of tax expenditures today.

    I know that doesn’t make sense to you and we shouldn’t rehash but that is my bottom line.

  16. comment number 16 by: Brooks

    Steve,

    We don’t need to engage in any such conceptual exploration of baselines, counterfactuals, etc., etc., to see that the substantive equivalence of a subsidy in tax expenditure form with a subsidy in explicit “spending” form that does exactly the same thing on exactly the same basis with exactly the same effects on every individual, segment and entity, and to see that there is no difference in the desirability of each on the basis of form per se (the politics is another matter, and should lead someone with your view of the proper/optimal role of government to object even more strongly to the tax expenditure form of subsidies for reasons I’ve provided). I think you are getting so caught up in the question of what aspects of the tax code should be labeled “tax expenditures” (for some purpose that isn’t quite clear to me) that you are failing to see that equivalence and erroneously thinking you see a substantive difference and difference in desirability between the two based on ideology, economics, etc., even though in actuality there is none.

    It’s like I’m pointing out that there is no substantive difference between your handing me $3 vs. your handing me $4 and my simultaneously handing you back $1, and you’re responding by saying:

    “Well, you can’t say that because you would have to first establish that I owe you $4 (or $3) in the first place?”

    And I respond:
    “No, I don’t. They are substantively the same because they are substantively the same, regardless of how much I owe you or should owe you. Either way you are giving me $3 (net) on whatever basis we have and doing so rather than giving me $4 (net) on whatever basis we have (some subsidy for a purchase you made).”

    And you reply:
    “Well, you can’t call that $1 difference between $3 and $4 a ‘tax expenditure’ because maybe one could call the difference between my paying you $3 and my entire $10 income a $7 ‘tax expenditure’”

    And I reply:
    “First, there’s a difference between a subsidy and a tax based on income, but more importantly, how does that make it any less clear that the two ways of you giving me (net) $3 rather than $4 because you made that purchase is no different regardless of which way you end up giving me that net $3, and that policy of the $1 difference on the basis of that purchase is no more/less desirable based on which way it happens?”

  17. comment number 17 by: SteveinCH

    Brooks, I’m at a loss of words. Let me try one more time. Let’s say that I believe that a graduated rate structure has an impact on behavior. I think that’s a fairly safe argument. Now, by that logic and yours above, I think it would be fair to call the money that is foregone by not having a flat tax rate of say 15% a tax expenditure since that’s money that the government arguably could capture if we didn’t have a graduated rate structure and many people pay more as a consequence of not having that flat rate structure.

    If I made that argument to the tax expenditure crowd, most would reject it out of hand because they take as the base the existing rate table and nothing else. It costs me just as much to lower the effective income tax rate to zero as it does anything else.

    My point to you is that tax expenditures are a normative, not an analytical construct once you quantify them at any moment in time and the perspective of less money than we could have received without the tax expenditure is infinitely elastic.

    You say there’s no difference between the $4/$1 scenario and the $10/$7 scenario. I think , as a matter of economics, there is a difference. Pre-Reagan was the $10/$7 scenario and post was the $4/$1 (not exactly but you get the point). I don’t think anyone believes these two scenarios are the same. As a matter of politics, Reagan reduced tax expenditures and tax rates but he is only demonized for one, including by some of those like Bruce B who make the tax expenditure argument.

  18. comment number 18 by: Brooks

    Steve,

    I, too, am at a loss for words, but it won’t stop me from speaking further ;)

    You are still misunderstanding what I’m saying. First, although I’m not sure what you are asserting re: the $4/$1 vs. $10/$7 scenarios, it’s pretty clear that I wasn’t saying anything at all like what you seem to think I’m saying. In fact, one of the points I’m making is the opposite of what you seem to think I’m saying. There most certainly is a difference between a tax expenditure subsidy and a cut in tax rates, as I’ve pointed out numerous times in our discussions.

    As for your continued focus on whether or not a progressive tax structure should (or could) be called a “tax expenditure”, I can only repeat what I’ve been saying: (1) there’s a fundamental, substantive difference (in terms of incentives, behavioral effects, respective financial effects on different individuals/segments/entities, the basis for those effects, etc.) between a subsidy for some choice (e.g., insulating your home; getting a mortgage; sending a kid to college) and a cut in tax rates, and (2) even more to my central point, nothing you’ve said demonstrates in the slightest why there is a substantive difference (in any of the aforementioned terms or any other) between the same subsidy provided in tax expenditure form vs. provided in explicit “spending” form, let alone demonstrates why one would be any more/less desirable than the other (other than the differences in politics and process that I’ve discussed, which result from the fundamental misconception I’m pointing out to you) or why the difference in form has anything to do with one’s preferences in terms of the size and role of government. Again, you seem to be so focused on this question of what to include in the category labeled “tax expenditures” that (even leaving aside your apparent overlooking the differences between a subsidy and a cut in tax rates) you for some reason do not see the equivalence I’m pointing out to you.

    I also don’t know how you square your apparent dispute of this equivalence with your apparent view that there would be no substantive difference between a “cash for caulkers” via government check vs. via tax deduction (assuming all the net cash flows for everyone were the same either way). Why aren’t you saying that the government check form of the subsidy represents undesirable “spending” and expanded role of government, but that if it were in tax expenditure form it would represent a desirable reduction in taxation and reduced role of government?

  19. comment number 19 by: Brooks

    I meant to say:
    “your continued focus on whether or not a flat tax rather than a progressive tax structure should (or could) be called a “tax expenditure”…”

  20. comment number 20 by: Brooks

    Steve,

    Is you whole point just that, from a particular conceptual perspective, some provisions that are labeled by some as “tax expenditures” are not (or may not be) as different from the absence of a flatter tax structure as some seem to be claiming?

    If so, ok, but again, I’m referring to tax expenditure subsidies and pointing out that they are (1) different from tax rate cuts, and (2) substantively the same as the same subsidies provided via explicit “spending”, and therefore no more/less desirable based on ideology, economics, or any other perspective (other than the politics and process differences due the misconceptions on the above).

  21. comment number 21 by: SteveinCH

    And substantially the same as the subsidies provided by a graduated rate structure. You can’t have one without the other.

  22. comment number 22 by: Brooks

    Right, a progressive tax structure would mean lower taxes for some, higher for others.

    But I don’t see why that point your making would get in the way of your seeing the validity of my points #1 and #2 in my prior comment (and throughout our discussion)

  23. comment number 23 by: SteveinCH

    Brooks,

    I’m not going to plow through this again as much fun as it might be. Suffice it to say that I think most of the advocates of the term tax expenditures have an agenda and that agenda involves taking more money from taxpayers of all stripes. They have no intention of giving the money saved by the elimination of tax expenditures back to anyone (as Reagan did) through lower rates. Rather, by creating the equivalence you describe, they want to make it OK to spend the money directly. I don’t think that’s OK because I don’t think the government is entitled to the money it would have received in a world without any tax expenditures.

    There’s a lot more I could say but I won’t. The last time we did this it was highly frustrating to both of us and I don’t suspect it will be any less so (or any more enlightening to anyone else) if we do it again.

  24. comment number 24 by: Brooks

    Steve,

    ok, but I’m a bit disappointed. I thought perhaps I had gotten the point across to you.

    I’ll just address your last argument, just as I have similar ones, by pointing out that your saying that “most advocates of the term ‘tax expenditures’” want to reduce them and “spend the money directly” is exactly the same (other than the politics borne of the misconception you have) as saying that “most advocates of the term ‘tax expenditure’ want to eliminate explicit ’spending’ subsidies for other types of spending.” You are still missing this equivalence. Additionally, (1) your assertion is very debatable and I’d say at least invalid with regard to a large portion of those using that term (including yours truly) who want at least much of the reduction in tax expenditure subsidies to go toward reduction in projected deficits, and (2) even if your assertion were valid it would still be irrelevant to the two points I made in my 6:32pm comment (and that I’ve been trying to get across all along), and (3) you didn’t answer my question as to how your answer to my question regarding “cash for caulkers” is consistent with your lack of acceptance of the equivalence I’ve been asserting.

    But ok, if you don’t want to continue, no problem.

  25. comment number 25 by: Brooks

    Meant to write:
    “…want to eliminate explicit ’spending’ subsidies to use the resulting incremental government funds for other types of spending.”

  26. comment number 26 by: SteveinCH

    OK Brooks, I”m going to try one more time and only one more time. Lets define three terms, tax expenditures, tax revenue (net of tax expenditures) and spending.

    In a balanced budget, TR-TE=SP.

    So far so good?

    Now, to the degree we lower TE, we have the potential to increase SP or decrease TR and maintain balance.

    If we reduce TE and increase balance, we will either increase SP or lower TR.

    You argue that TE is different because it’s behavior dependent (e.g., buy a house) and creates distortions. But everything creates distortions relative to the absence of that thing.

    I’m simply saying that if the argument is money is money and any form of raising more money is equivalent to any other form of raising money or spending less money, I agree. Where I disagree is calling out some ways of raising more money or spending less money and claiming that they and only they are equivalent.

    I know you want me to debate the topic using your logic and your analogies but I cannot do that because I start from the premise above.

    If that’s clearer, great. If not, it proves that we are both people who believe that reasonable people should agree on things.

  27. comment number 27 by: Brooks

    Steve,

    There can be reasonable disagreement between reasonable people on plenty of things, but as much I’d like to say that there can be reasonable disagreement regarding the validity of the two assertions I’ve been making, unfortunately it’s just not the case. Believe me when I say I’m not saying this to be snarky and I mean no disrespect, but you are simply wrong if you reject those two assertions.

    1. Subsidies such as those for purchasing some particular item are fundamentally different from cuts in tax rates applied to income in terms of incentives, behavioral effects, economic effects, financial effects on various parties, the basis for those effects, the role and intrusiveness of government in the economy and in people’s lives, interference with market signals and resulting economic inefficiencies, etc.

    2. Such subsidies in the form of tax expenditures are not at all substantively different in any of those ways or in any other way from the same thing done via explicit “spending” subsidies. Thus, there is no reason (other than the differences in political treatment borne of the conceptual misunderstanding we are discussing) to prefer one over the other (by virtue of one being a tax deduction and the other being explicit spending) on the basis of ideology, economics, or anything else, because there is simply no substantive difference (assuming no timing differences), period.

    As for your algebra, it’s correct but doesn’t address the validity of the points I’m making. Sure, we can say that in a balanced budget, TR-TE=SP. We can also say that in a balanced budget, TR = SP + TE, and if we call SP spending by one name (“SP1”) and we call TE spending by another name (“SP2”), we can also say TR = SP1 + SP2, which is basically saying Total Revenue = Total Spending.

    Re: “everything creates distortions”, I suppose if you want to have such an expansive view of “distortions” that it includes any incentives that affect behavior (as opposed to what people usually mean when they speak of subsidies creating distortions by interfering with market signals, leading to inefficiencies), then ok, you can say that “everything creates distortions” (including having any taxation at all or any spending at all). But (1) that surely doesn’t mean that subsidies for particular purchases have the same types of incentives, effects, etc. as do tax rate cuts, and (2) that doesn’t address my point about equivalence regardless of whether a subsidy is in tax expenditure form or explicit “spending” form, and all distortions (and other effects) from the subsidy in either form would be identical (except insofar as people reacted differently based on the misconception we are discussing — i.e., unless people reacted differently due to misunderstanding/irrationality).

    Re: if the argument is money is money and any form of raising more money is equivalent to any other form of raising money or spending less money, I agree.

    That is certainly NOT something I’m contending. I’ve asserted the opposite. There are substantial differences among different ways of raising revenue and of spending.

    I think I’ve done the best I can to get these points across to you, so I should probably drop it. I have to say that the fact that I haven’t been able to get these points across to an intelligent guy like you is a troubling sign of how great a challenge it is to overcome this harmful misconception. I knew Obama (and/or Congress) designed all the subsidies he listed in the SOTU as tax expenditures so that he could gain broad approval even among Republicans/conservatives — whereas if he/they had designed the same exact subsidies as explicit “spending” Republicans/conservatives would react negatively as if there were actually some substantive difference (even though there wouldn’t be) — but it’s a bad sign that even a smart guy like you can get suckered by such moves and can’t be shaken from the underlying misconception.

    I would much rather end discussion of a topic on which someone and I disagree by accepting reasonable disagreement, but it just doesn’t apply here.

    I look forward to discussing other stuff, including stuff on which we can reasonably disagree.

    Lastly, again, if you just want to make the point that, from a particular conceptual perspective, some provisions that are labeled by some as “tax expenditures” are not (or may not be) as different from the absence of a different tax rate structure as some seem to be claiming, you can make that point AND accept the validity of the two points I’ve been making. My point regarding equivalence regardless of the form of the subsidy is not a matter of opinion, ideology, economics, etc. — it’s just an observation that there is no substantive difference regardless of what one thinks of such subsidies. And my point that there are substantive differences between subsidies and alternative tax rates is hardly controversial or counterintuitive. If you think some people are overstating the differences between some provisions they are calling “tax expenditures” and the absence of a different tax rate structure, feel free to make that case, but it has no bearing on the validity of the two points I’ve been making.

    ok, now I’m done unless there’s anything regarding the above that you’d like to discuss.

  28. comment number 28 by: Brooks

    Steve,

    If you’re interested, check out http://www.taxfoundation.org/files/sr151.pdf , Page 2, section entitled “Spending Today Matters More than Ever”.

  29. comment number 29 by: SteveinCH

    For what it’s worth Brooks, read Keith H’s latest post, it encapsulates exactly my perspective. You will undoubtedly disagree with at least parts of it but it shows that a reduction in tax expenditures and a reduction in actual expenditures are not equivalent in aggregate.

  30. comment number 30 by: Brooks

    Steve,

    First, Keith’s post clearly does NOT support your lack of acceptance of my two points (i.e, Keith’s post does not diminish the validity of my two points one bit in any way). I don’t know how I can possibly get this through to you, but there is no rational reason (other than considering the difference in politics and budget process treatment that are born of the misconception you and many others have) to think that a subsidy fits more/less with one’s view of the proper size, scope and role of government simply because the subsidy takes the form of a tax expenditure rather than an explicit “spending” subsidy. There simply is no substantive difference, and therefore it makes no sense to prefer one over the other by virtue of that difference in form (again, aside from the effects of the misconception I’d pointing out), for ideological reasons, economic reasons, etc.

    Second, consistent with Keith’s post and more generally from the ideological or economic perspective of one’s desire to reduce the size of government and reduce the degree of government’s interference with market signals as guides for our individual choices (e.g., what to purchase and how much we are willing to pay for it), one should have a general disposition against government subsidies (whether in tax expenditure form or explicit “spending” form, since there is no substantive difference between the two). Also, per the politics of it, one should oppose an undesirable subsidy in tax expenditure form even more vigorously than if it were in explicit “spending” form, since the former is more likely to be created/increased/maintained than the latter (due to the misconception I’m discussing). For elaboration, see http://dmarron.com/2010/02/08/the-problem-with-tax-expenditures/#comment-1841

    If you don’t wish to continue, no problem. But if you are up for continuing a bit, perhaps you can answer my question about “cash for caulkers”. Let me put it this way: suppose we are looking at two options:

    1) If you add insulation to your home, you will get a $200 check from the government. But the value of the check can’t exceed your tax liability.

    2) If you add insulation to your home, you will get a tax credit of $200. But you can’t end up with a negative tax liability (i.e., it’s not a “refundable tax credit”).

    So either way, if you insulate your home, you will end up with $200 (or the amount of the tax liability you would otherwise have) more than you would have had without this subsidy, and other taxpayers will have to pay that much more (eventually). The incentive is the same either way, the impact on you and on others is the same either way, the role of government is the same either way — everything is the same either way (leaving aside any timing differences) except that in one case it’s like you giving someone $10 while he simultaneously gives you $1 and in the other case you just give someone $9 — i.e., the difference is inconsequential, not substantive.

    Now, are you really saying that you view #2 as a reduction in the size and role of government, and view #1 as an expansion of the size and role of government, and that you therefore see #2 as desirable (or less undesirable) vs. #1 from an ideological and/or economic perspective?

    If not, why not, and how does that square with your rejection of the equivalence of the two and given your (mistaken) view that they are substantively different from those perspectives?

    And I could ask more broadly, suppose we were considering a policy in which anyone who bought a car this year would have their tax liability entirely wiped out — zero tax liability. Of course, unless we reduce other spending, that means that other taxpayers have to pay more to fund that subsidy (the amount of incremental money that ends up in the pockets of the car buyers). Would you view that policy as desirable because it reduces taxation or because it reduces the size and role of government? Would you view it on that basis as at least less undesirable than the same subsidy in the form of a government check that would be called (explicit) “spending”?

    As a note, in my earlier version of this “cash for caulkers” question I made the two forms apples-to-apples by going the other way re: refundable tax credit. It doesn’t matter which approach we take for purposes of this discussion.

  31. comment number 31 by: Brooks

    Steve,
    Also see Bruce’s #7 at http://capitalgainsandgames.com/blog/bruce-bartlett/1540/dopey-budget-idea-jeb-hensarling-and-mike-pence

  32. comment number 32 by: SteveinCH

    Saw it and wrote a post telling him why I disagree. Then my internet crashed and it didn’t post. More on your other post in a minute

  33. comment number 33 by: SteveinCH

    Brooks,

    I’ll give it a go.

    You want to frame the question as do we send a check or provide a tax break for a particular policy or action. I frame the question as how much money do we collect and then how much money do we spend.

    You claim not to see why Keith’s framing is different than yours but you do understand that a tax expenditure and an actual expenditure would result in the government being plotted in different places on Keith’s grid, albeit with the deficit bubble being the same size. To take it a step further, eliminating 1pp of GDP in tax expenditures would increase revenues and move the bubble north whereas decreasing expenditures by 1pp of GDP would move the bubble west. Therefore, in my view, they are not equivalent despite having equivalent deficit impact.

    So in my framing, the question is not, do we provide the $200 by tax expenditure or by actual expenditure but rather, if we provide it by tax expenditure, how do we increase rates to offset and, if instead, we provide it by actual expenditure, how do we increase total tax receipts to offset.

    When you consider any policy in isolation, you get the equivalence you describe which is why I agreed on cash for caulkers when looked at in isolation. But we don’t consider policies in isolation, we raise money through a combination of rates and exceptions and then we spend the money. To me, it’s simple as that.

    I recognize you neither like nor accept that framing but it is the way I think about it and I think it is more consistent with how policy if formed than a debate about whether benefit X or Y should be provided by a tax expenditure or an actual expenditure.

    To try to answer your question, when looked at as a choice only between those two options, I view them as equally (un)desirable. But I don’t think that’s how we make choices. To my earlier point, we raise money and spend it. Could we raise more by eliminating the exceptions, of course. Does that make the exceptions the same as money actually spent from a system perspective, no it does not as Keith’s graphs prove.

    And if you doubt my point about where mainstream thought goes, go back over to CG&G and read Andy’s latest. He’s all worked up because tax expenditures are going to increase over time, quantifies them based on an artificial baseline and (implicitly at least) starts the argument that we should focus on tax expenditures instead of entitlements.

  34. comment number 34 by: Brooks

    Maybe Stan has created some program that somehow automatically detects disagreement (with him or with Bruce) and crashes the commenter’s Internet connection ;)

  35. comment number 35 by: SteveinCH

    It’s too bad really, I went through his points 1 through 10 and disagreed with every one but it’s too much work to recreate it.

  36. comment number 36 by: Brooks

    I habitually copy and paste to Word my CG&G comments prior to submitting, since I realize some get “lost”.

  37. comment number 37 by: Brooks

    You want to frame the question as do we send a check or provide a tax break for a particular policy or action. I frame the question as how much money do we collect and then how much money do we spend.

    I’d encourage you to get away from semantics and inconsequential transactional details (the latter erroneously implying some substantive difference between you giving me $2 while I hand you $1 vs. you just giving me $1) and focus on what is happening, on what basis, with what results for everyone involved.

    Re: Keith’s framing, as I’ve said all along, obviously there is a difference between (1) higher taxation via tax rates and higher spending vs. (2) lower taxation via tax rates and lower spending, even if they generate the same deficit. But as I’ve pointed out all along, being deficit-neutral is only one of the equivalences between a subsidy in tax expenditure form vs. in explicit “spending” form; a subsidy in either form is substantively the same in every way – incentives, net financial results for everyone involved and the basis for those results, impact on size and role of government, etc., etc., etc. Everything is the same for everyone (those who get the subsidy, other taxpayers, the Treasury, those affected by externalities of the subsidized purchases, etc.) regardless of which form the subsidy takes.

    Would removal of a tax expenditure subsidy differ in how it would be illustrated on Keith’s graph from the removal of an explicit “spending” subsidy? Sure, but that’s just because of the way he (and others, per convention) is classifying one form of subsidy vs. the other. It does NOT have the conceptual significance of the difference that would show up on his graph the same way due to a cut in tax rates and a cut in explicit spending. Bruce’s example illustrates that point, as have all of my illustrations.

    So in my framing, the question is not, do we provide the $200 by tax expenditure or by actual expenditure but rather, if we provide it by tax expenditure, how do we increase rates to offset and, if instead, we provide it by actual expenditure, how do we increase total tax receipts to offset.

    Not sure what your point is. What would be the substantive difference between providing the subsidy via tax expenditure vs. via explicit “spending”? Either way, the subsidy is an offer that if you buy X, you’ll end up with $200 more than you’d have without the subsidy and other taxpayers will end up with $200 less, regardless of how that incremental $200 is collected from those other taxpayers.

    When you consider any policy in isolation, you get the equivalence you describe which is why I agreed on cash for caulkers when looked at in isolation. But we don’t consider policies in isolation, we raise money through a combination of rates and exceptions and then we spend the money. To me, it’s simple as that.

    I don’t know what your point is. Again, the question is whether or not the subsidy would be substantively equivalent – with regard to ideology (size and role of government), economics, effects on everyone involved, etc. – regardless of the form of the subsidy (tax expenditure vs. explicit “spending”). What substantive difference are you asserting, and how are you saying it relates to ideology or any other substantive perspective? There are no substantive differences. The only differences are the label, inconsequential transactional differences — you [the taxpayer] giving me [the government] $2 while I simultaneously give you $1 vs. you just giving me $1, which would show up differently on Keith’s graph, the former as higher taxation and higher spending (see what I mean about the difference being inconsequential, not substantive? Do you really think there is a substantive difference between those two transactions just because they would occupy different spots on Keith’s graph?), and the politics borne of the misconception I am pointing out (which should make you more opposed to subsidies in the tax expenditure form, since in that form they are more likely to be created/increased/maintained, precisely because many share your misconception and erroneously see an ideological difference based on the form).

    And if you doubt my point about where mainstream thought goes, go back over to CG&G and read Andy’s latest. He’s all worked up because tax expenditures are going to increase over time, quantifies them based on an artificial baseline and (implicitly at least) starts the argument that we should focus on tax expenditures instead of entitlements.

    First, what is the relevance of any of that to my main two points (the substantive equivalence regardless of form and the substantive difference between a tax expenditure and a tax rate cut)? I’ve explained a couple of times previously that if you have a beef that some tax expenditures are getting a bad rap from some people (because you think they distinguish them excessively from what one could see as “tax breaks” received by those who pay less under a progressive tax structure than they would under a flat tax), feel free to lay out your case, but I don’t see any relevance to my two points that you still don’t accept.

    Second, Andrew is referring to subsidies – offers by the government to transfer some incremental amount of money from other taxpayers to you if you buy X (home; college tuition; insulation for your home; etc.) or if you get some of your compensation in the form of health insurance or if you have another child, etc. Now, you can argue that it’s wrong to criticize those subsidies without taking into account the degree to which it actually corrects something that’s wrong or “unfair” with the tax rate structure (e.g, being too progressive). But that doesn’t change the fact that it would make no substantive difference if a subsidy that provided any such “correction” or “improvement” took the form of a tax expenditure subsidy or an explicit “spending” subsidy.

    So I can only suggest that you get this beef (with some people who are saying some things you dispute on some conceptual basis) just long enough to consider the two points I’ve been making, and perhaps you’ll see that my points are perfectly valid and also irrelevant to that beef. It seems that you are so focused on that beef that you’re not thinking clearly about the points I’m making. If it helps, your beef is separate and not incompatible with acceptance of my points.

  38. comment number 38 by: Brooks

    Meant to say in last paragraph:
    “I can only suggest that you get this beef (with some people who are saying some things you dispute on some conceptual basis) out of your head just long enough to consider…”

  39. comment number 39 by: Jim Glass

    You want to frame the question as do we send a check or provide a tax break for a particular policy or action. I frame the question as how much money do we collect and then how much money do we spend.

    You guys are still going on about this?

    Look it depends, if one determines the “size of goverment” by:

    1) How much money it spends in dollars, then how much money it spends is all that matters.*

    2) #1 plus the height of tax rates, due to the cost they drop on the economy (which rises exponentially, with the square of the rise in tax rates) and also how many resources are directed by politicians, *then* one must count tax expenditures too. Because an increase in tax expenditures increases tax rates (and/or national debt serviced by taxes) exactly as does an increase in cash expenditures, and is used by politicians to additionally direct use of more resources.

    Them’s the facts, and another fifty posts isn’t going to add to them.

    If you both agree to these facts then you agree in substance and are just disagreeing about nomenclature. Sort of like: “‘They’re both mammals’, No, one’s a cat and the other’s a dog’, ‘No, they’re both mammals’…”

    And if you are disagreeing on these facts I don’t see it (though I haven’t read all the comments). So we all ought to be able to get along. :-)
    ~~

    * note that the amount of taxes has no independent meaning here, since taxes collected must equal spending, either collected immediately or through the present value of debt service on deficit spending. Spending = taxes. Spending decisions determine taxes.

  40. comment number 40 by: Brooks

    Jim,

    Seems that you’ve popped in and have the incorrect impression that Steve and I don’t have a substantive disagreement. I’m still trying to get Steve to accept that there is no substantive difference between a subsidy in tax expenditure form and the same subsidy in explicit “spending” form, and he still (apparently) thinks that the former is more desirable (or less undesirable), that it represents smaller government in a meaningful sense, and that it resembles a tax rate cut more than the same subsidy in explicit “spending” form.

    You wouldn’t call that “agreeing in substance” would you?

  41. comment number 41 by: SteveinCH

    Brooks,

    Oddly enough, I think Jim has it right. I believe both in number 1 and in the equivalence on a marginal basis of tax expenditures and regular expenditures. You seem to think that those beliefs are somehow incompatible.

    As a practical matter by the way, the major tax expenditures are not of the type that Bruce B references — give some contractor tax credits for a piece of equipment. Once you get past mortgage interest, the EITC, the child exemption, charitable deductions, and health care (which is really the only employer tax deduction on the list), how big is this really?

    I encourage you to go through this list http://www.taxpolicycenter.org/UploadedPDF/1001234_tax_expenditures.pdf and relate it to Bruce’s point. Most of the things in “tax expenditures” would simply constitute raising the taxes taken from people were they eliminated and are therefore equivalent in financial impact to raising rates.

    Whether they are equivalent in distortionary impact, the answer is clearly no. Whether they are better or worse is a normative judgement not a fact.

    If you’re willing to admit that the substantive effect of a decrease in tax expenditures is numerically equivalent to an increase in tax rates and that the judgment on distortions is normative, then I’m happy to end the conversation.

    I still maintain to focus on tax and actual expenditures as if they are the distortions but rates are pure as the driven snow is just silly.

  42. comment number 42 by: SteveinCH

    Sorry, let me amend the second to last paragraph. If we can all agree that the substantive effect of an expenditure increase, a tax expenditure decrease or a tax rate increase is numerically the same (assuming the balance of the budget remains unchanged) and that the judgment on distortions is normative, I’m happy. If not, I’m not going to debate it anymore

  43. comment number 43 by: Brooks

    Steve,

    As I said to Jim:
    I’m still trying to get Steve to accept that there is no substantive difference between a subsidy in tax expenditure form and the same subsidy in explicit “spending” form, and he still (apparently) thinks that the former is more desirable (or less undesirable), that it represents smaller government in a meaningful sense, and that it resembles a tax rate cut more than the same subsidy in explicit “spending” form.

    Have I misrepresented your views?

    If not, you can keep shifting to other questions and assertions that have no bearing on the validity/invalidity of those views, but that doesn’t constitute actual support for your views above (or anything that at all refutes what I’ve been pointing out to you). Again, here are the questions, and I think they are very straight-forward:

    1) Do you still think there is a substantive difference (in the nature of the incentives, the effects on everyone involved, the basis for those effects, or any other substantive difference) between a subsidy in tax expenditure form vs. the same subsidy in explicit “spending” form? If so, please explain — and it simply does not suffice to just note inconsequential transactional differences (like the $2 for $1 exchange vs. you just giving $1) or the mere math related to such inconsequential transactional differences (the fact that the $2 for $1 exchange means technically higher taxation and higher spending than just giving $1). What is substantively different?

    2) Do you still think that the former represents a smaller size and role of government, and thus can be viewed more/less favorably depending on one’s ideology (one’s view of the proper/optimal size and role of government)? If so, please explain — and again, mentioning those inconsequential transactional differences and making some vague assertion of relevance to ideology (without actually explaining the connection) does not suffice as an explanation.

    3) Do you still think that a tax expenditure subsidy has greater similarity to a tax rate cut than to the same subsidy in explicit “spending” form? If so, please explain — and again, not just by mentioning inconsequential transactional differences.

    4) You still haven’t explained why, if you have the views I’ve listed, you wouldn’t see “cash for caulkers” in tax expenditure form as substantively different, representative of smaller government, and more desirable (or less undesirable) than if it were in explicit “spending” form. Why, and how does that fit with your aforementioned views.

    5) Yesterday Obama, in promoting his healthcare “reform” plan, said: “my proposal says that if you still can’t afford the insurance in this new marketplace…then we’ll offer you tax credits to do so — tax credits that add up to the largest middle-class tax cut for health care in history.” Does the fact that he is offering this subsidy as a “tax cut” change it substantively? Does it make it representative of smaller government rather than larger government (or smaller than would the same subsidy in explicit “spending” form)? Should it make it any more/less desirable based on ones ideology (view of the proper/optimal role of government? Do you view it favorably (or more favorably or less unfavorably) now that it’s a “tax cut”?

    You may not wish to continue, and that’s fine, but I do want to make it clear that (1) you haven’t really provided actual answers and related explanations to any of the above or other questions along the same lines, and (2) this isn’t a case of “reasonable disagreement”; the views stated in #1 - #3 are simply wrong, and nothing that you’ve said indicates otherwise.

    Lastly, as I’ve said before, it seems that you are so preoccupied with your belief that some people are saying some things that you think go too far — lumping things into the category labeled “tax expenditures”, implying that those provisions are more different than they are vs. a given tax rate structure, and criticizing them excessively — that you just can’t seem to focus on these questions. You are focused on semantics, what others are saying, what you think their agenda is, etc. instead of what questions I’m asking you, and related questions of what happens, to whom, and on what basis as a result of a given subsidy regardless of which form it takes.

    My intention above is not to be snarky and certainly not to offend, just to be frank and clear. Hopefully you won’t be left with the impression that this is just a difference of opinion or “reasonable disagreement”, and hopefully you’ll revisit these questions in some way at some point. If even smart guys like you can’t get this stuff despite all this explanation, we’re all in big trouble. Spending can continue to go through the roof as long as it’s done through the tax code while lots of people think “Oh great. A tax cut. Smaller government. Excellent.”

  44. comment number 44 by: Jim Glass

    Oddly enough, I think Jim has it right.
    ~~

    Why do they always add “oddly enough” to “Jim has it right” ?

  45. comment number 45 by: Brooks

    Jim,

    LOL — I think Steve just meant since you were making the same points that I’ve been making re: his beliefs #1, #2, and #3 in my comment above.

    Unfortunately, I think you may have now given him the impression that there is some validity in those views. Feel free to respond to my question to you in my 1:45am comment and to restate your (correct IIRC) view of those assertions 1 - 3 if you wish.

  46. comment number 46 by: Brooks

    To be clear, when I said “you were making the same points”, I meant on that prior thread (the loooong one).