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Taxes Need to Come Up, But That Doesn’t Mean Tax Rates Have To

July 7th, 2010 . by economistmom

growing-tax-revenues2-taxvox-from-cbo-numbers(Chart taken from TaxVox blog (post by D. Marron), 7/7/10.)

Today’s blog post by Donald Marron and column by the Washington Post’s Ruth Marcus give me occasion to say “here, here” as well as an excuse to trot out yet again a really old point (or maybe three points) I’ve made over and over again on this blog (but which I personally never tire of as long as it’s clear most Americans and our policymakers still don’t get it):

  1. We need more tax revenue;
  2. the current-law baseline is a good “role model” for the right level of revenue; but…
  3. sticking to current-law baseline revenue levels doesn’t require sticking to current tax law, and doesn’t even require seeing marginal tax rates go up.

Donald explains “why taxes are [inevitably] going up” (it’s going to be impossible to flat-line health spending or otherwise reform entitlements fast enough), and he points out that the CBO baseline shows us that taxes are already scheduled to go up according to what’s already in current tax law:

Revenues are already on track to rise substantially in coming years. And not just because of an economic rebound and expiring tax cuts. There are structural reasons why tax revenues will grow faster than the economy. The Congressional Budget Office estimates that tax revenues will rise from 14.9% of GDP in 2010 to 20.7% in 2020 and 23.3% in 2035 if current law remains in place…

That rapid growth reflects six factors. First, the economy will recover, lifting revenues from currently depressed levels. Second, the 2001 and 2003 tax cuts will expire, as will tax cuts enacted in the 2009 stimulus. Third, the Alternative Minimum Tax, which is not indexed for inflation, will boost taxes for millions more taxpayers. Fourth, the new taxes that helped pay for the recent health legislation will go into effect. Fifth, retiring baby boomers will make more taxable withdrawals from tax-deferred retirement accounts. Finally, in a phenomenon known as bracket creep, growing incomes will push taxpayers into higher brackets and reduce their eligibility for various credits.

So one way to achieve a more sustainable outlook as far as the revenue side of the budget goes is to just let current tax law happen–and avoid passing any new tax legislation, including any extension of any of the Bush tax cuts.  But that’s not the only way…

Ruth discusses an alternative tax policy strategy made popular by President Obama:  raise taxes only on the rich.  (You see, the trouble with currently scheduled revenue increases is that much of that revenue would come from the middle class.)  It sounds like a great idea, until you realize that relying on such a small fraction of the population for most of the needed tax revenue sets up a really tiny tax base that requires really high marginal tax rates in order to raise the required level of revenue–precisely the economist’s definition of a highly inefficient tax system.  It gets all economists, even those not considered “supply-side” economists, nervous.  And it sets up a bad political dynamic where people will be encouraged to clamor for more government spending without regard for its cost, when they think that it’ll always be someone else (those ultra-rich people and those evil corporations) who will pay for it.

But we also probably don’t want to let current tax law totally play out because some of those tax increases Donald lists we really don’t want to see–such as an alternative minimum tax that would extend its reach down to those considered truly “middle class.”  And even those tax increases that don’t seem quite so objectionable–such as letting the entirety of the Bush tax cuts expire (at least eventually) and going back to Clinton-era income tax rates across the board–still raise marginal tax rates in ways that would increase the inefficiency of the federal tax system and could at least partially offset the positive economic effects of deficit reduction.

The CBO long-term budget outlook shows us that sticking to current-law baseline revenue levels is a good and fairly immediate strategy for fiscal sustainability (where debt/GDP is relatively stable, staying below 80 percent over the next 25 years).  In contrast, CBO’s “alternative fiscal scenario” assumes the bulk of the Bush tax cuts, the ones President Obama wants to keep, are extended, which leads to debt reaching 185 percent of GDP in 25 years (and continuing to grow exponentially thereafter). Donald Marron labels this scenario as “Temptation” in his graph above but I think it should be more accurately labeled “Done Deed”, those being the tax cuts exempted from the statutory pay-as-you-go rule.

But the funny thing is that current tax law is probably not the best way to raise the current-law level of revenues.  Put this challenge to any tax economist:  how can we raise that given level of revenue most efficiently? –and you will get the answer that we need to find the marginal (new) sources of revenue from the broadest, most neutral/efficient tax bases available to us.  There are two main possibilities here, and I think we ought to seize both possibilities:

  1. reform the existing federal income tax system to clean up and broaden the income tax base–e.g., close up inefficient tax expenditures that “poke holes” in the income tax base (the many exclusions/exemptions, deductions, and credits); or
  2. add on “cleaner” (broader, purer, or externality-correcting) new tax bases–e.g., an add-on value-added tax (VAT) or environmentally-motivated taxes such as a carbon tax.

With these sorts of base-broadening strategies to achieve current-law revenue levels, marginal tax rates on productive economic activities don’t have to come up.  Thus there doesn’t have to be a tradeoff between the positive economic growth effects of deficit reduction and the negative economic growth effects of higher marginal tax rates on income.  There doesn’t have to be a tradeoff at all.

79 Responses to “Taxes Need to Come Up, But That Doesn’t Mean Tax Rates Have To”

  1. comment number 1 by: Len Burman

    The most telling of the CBO estimates is the alternative fiscal scenario with crowding out effects. Higher interest rates suppress GDP and tax revenues, causing debt/GDP to rise to 188% by 2027–17 years from now. Though not calculated, the debt/GDP ratio seems to head due north after that.

  2. comment number 2 by: Jack Maloney

    Where, where? The lead sentence is an especially bad place for a mistake!

  3. comment number 3 by: Tom Watkins

    The VAT is not a ‘cleaner’ tax. The taxation levels for each level of value added are going to be hotly debated in Congress. The company that modified widget A before sending it to company B will want to pay lower taxes than B. That’s the nature of the game and having Congress decide these rates will result in our representatives further debasing themselves by arguing for better tax rates for whichever company pays them the most. That’s an incredibly bad idea. For more information look into how Germany has handled its Cap and Trade legislation. It’s a close parallel, considering the German Congress sets the acceptable pollution quotas.

  4. comment number 4 by: VAT Brat

    “Show me yours before I show you mine.”

    Again, we’ve got another blogpost on tax revenue enhancement. When will we get the blogpost with ideas for non-defense spending, entitlement program spending cuts? Hell may freeze over first.

    Republicans aren’t going to agree to raising any more revenue until Democrats agree to spending cuts that permanently change the costs of entitlement programs.

    Republicans can see where multiple streams of tax revenues (VAT, income tax, etc.) placed the European nations. Do the EU Nations with nationalized health care and a fully-developed welfare state, and bulging deficits have a revenue problem or a spending problem?

  5. comment number 5 by: Dave Thomas

    I like what VAT Brat said, “when will we get the blogpost with ideas for non-defense spending, entitlement program spending cuts.

    Let’s start with doing away with the tens of thousands of inefficient, useless government eimployees at the Department of Education. It’s redundant and inefficient to go beyond the individual state’s for education oversight.

    Instead of talking about tax revenue enhancement let’s talk about simplifying the tax system so we can do away with the tens of thousands of federal government employees at the Internal Revenue Service.

    I wonder how much I just saved over a four-decade period in eliminated salary, benefits, and pensions, not to mention the day-to day operating expenses.

    You aren’t going to get my support for any kind of tax revenue enhancement until you make some real strides for diminishing the size of the federal governments bureaucracy.

    Government isn’t the solution it’s the problem.

  6. comment number 6 by: tiger

    Not at all Econo Mom. Tax revenues should necessarily go down. All the better to starve the political class of their spending money. The size (financially) of government should be cut by 2/3rd’s That’s the direction we should be headed and not shoring up the billion dollar GAO and other wasteful government departments.

  7. comment number 7 by: AMTbuff

    >Republicans aren’t going to agree to raising any more revenue until Democrats agree to spending cuts that permanently change the costs of entitlement programs.

    … the key word being PERMANENTLY.

    Here’s part of what I posted on Donald Marron’s blog, which somehow lost track of my login:

    In logic, there’s a method called Proof by Contradiction. You assume X and show after a number of logical steps that it leads to a contradiction of X. This proves that X cannot be true in the first place.

    I submit that the same technique can be applied to fiscal baselines. If the baseline is not sustainable, it is not valid. Period. It must change, so it cannot be called a baseline. Until a sustainable baseline exists, we are better off forgetting about the entire concept of baselines.

  8. comment number 8 by: Paul Hield

    It is taken as an article of faith that higher taxation tends to damage growth. This is just an assertion and is not borne out by a consistent set of empirical data or concensus amongst theoretical economists.
    In fact the prima facia evidence points in the opposite direction. If you were to just plot government spending against per capita GDP for the OECD countries then there is a modest indication that higher government spending correlates with higher GDP. I make no claim about the direction of causation, or indeed whether some clever statistician could tease out some other underlying effects which over turn the principle evidence and support the currently held dogma against government spending.
    A much stronger correlation is between government spending and GINI coefficient, with low spending countries being much less fair societies.
    High spending countries in Europe would be Belgium, Denmark, Norway, Sweden with government spending of up to almost 50% of GDP.
    It is clear why there is a prevailing presumption against taxes, it simply stems from human selfishness in the Anglo-Saxon economies. Any analysis is done after the presumtion and is selected to support the preconceived notions of the selfish.

  9. comment number 9 by: SteveinCH

    Paul,

    Selfishness is generally defined as a refusal to share. Sharing implies that the action is voluntary. That doesn’t have much to do with taxes now does it.

    Where in the US Constitution does it give the Federal government the power to manage income distribution or GINI coefficient? Your argument would have much more merit if you could point to such a grant of power.

  10. comment number 10 by: AMTbuff

    Many people of all political persuasions have difficultly appreciating the moral difference between charity with one’s own resources and charity using resources forcibly removed from others. The former is an unqualified good; the latter requires a complex judgment.

  11. comment number 11 by: Brooks

    VAT,

    Re: Again, we’ve got another blogpost on tax revenue enhancement. When will we get the blogpost with ideas for non-defense spending, entitlement program spending cuts? Hell may freeze over first.

    Republicans aren’t going to agree to raising any more revenue until Democrats agree to spending cuts that permanently change the costs of entitlement programs.

    It makes no sense for Republicans or anyone to view Diane’s #1 — “close up inefficient tax expenditures that “poke holes” in the income tax base (the many exclusions/exemptions, deductions, and credits)” — as objectionable “revenue enhancement” as opposed to desirable “spending cuts”. She is talking about reducing/eliminating subsidies that taxpayers are forced to fund, just as they would if those subsidies took the form of explicit expenditures (”spending”).

    If taxpayers pay $X more because you bought product Y and get a subsidy, there’s no difference per se between your getting that subsidy as a voucher check in the mail (”spending”) vs. getting it as a tax deduction (”tax expenditure”).

    I won’t go over this yet again, and I didn’t find links to the loooong threads here in which I made this point clear, but here are a couple of links I dug up:

    http://dmarron.com/2010/02/08/the-problem-with-tax-expenditures/#comment-1841

    http://keithhennessey.com/2010/03/03/budget-bubble-graphs/#IDComment59653317

    http://economistmom.com/2010/02/the-wyden-gregg-bipartisan-tax-reform-plan-a-familiar-pattern/

  12. comment number 12 by: VAT Brat

    Brooks,

    I don’t object to revenue enhancement suggestions made by EconMom. I object to her one-sided fixation with revenue enhancement to the exclusion of non-defense spending cuts. Without corresponding spending cut recommendations, her blog and the Concord Coalition are simply Democrat talking point tools.
    History and the experience of the EU nations has shown that deficits arise from a lack of spending restraint more than a lack of tax revenue. So why the lack of commentary on spending cuts? Could it be that EconMom and the Concord Coalition aren’t really that non-partisan? I do have my suspicions.

  13. comment number 13 by: brooks

    VAT,

    You’re not listening. I’m telling you that when it comes to reductions in tax expenditures as Diane is advocating, your categorization of such a change as “revenue enhancement” (increasing taxation to fund bigger government, in the same category as a tax rate increase) is invalid. In fact, reducing tax expenditures is not different from cutting explicit expenditure subsidies that you would call “spending”, and quite different from tax rate increases.

  14. comment number 14 by: AMTbuff

    brooks, that depends on whether the specific tax expenditure is analogous to a government spending program. Some items that show up on lists of tax expenditures (e.g. hybrid tax credit) are essentially equivalent to writing a benefit check, and others (non-taxation of imputed rental value of owned assets) require mental contortions to view as equivalent to writing benefit checks.

  15. comment number 15 by: Brooks

    AMT,

    Generally speaking (at least), when someone ends up with $X more because they received a subsidy for some product they purchased (a mortgage, a “clunker” car, college tuition, etc.) and other taxpayers have to pay that much more as a result, there is no difference per se between that subsidy being provided via tax deduction (tax expenditure) vs. via explicit expenditure (”spending”), assuming no timing difference. So the categorization of one as undesirable (to conservatives/libertarians in particular) “spending” and desirable (to conservatives/libertarians in particular) “tax cuts” is utterly invalid and unfortunately confused and misleading. If one wants less government interference in economic decisions, he should strongly favor reduction/elimination of most tax expenditures, and if such a change enables any reduction in tax rates at all (even if much less than the “revenue increase”), that fits conservative/libertarian ideology even more, just as would “spending cuts” and a bit of tax rate cuts.

  16. comment number 16 by: AMTbuff

    Brooks, I am absolutely with you that hybrid tax credits and college tax credits are functionally equivalent to spending programs. However if you take a look at what the experts include in their lists of tax expenditures, you will find many items that are not at all functionally equivalent to spending programs. For a discussion of that issue, see http://www.house.gov/jec/fiscal/tax/expend.htm

  17. comment number 17 by: Brooks

    AMT,

    Thanks. I don’t have time to read it, and also it looks from the abstract like it is probably confused and/or partisan hackery.

    But it seems like we agree that if someone gets a tax credit for purchasing a particular product, that’s no different from explicit spending that provides the same financial benefit to that person (at the same expense to other taxpayers), and it IS fundamentally different from a tax rate cut. I would also add the exemption from taxation of compensation provided by employers in the form of health insurance. I think that covers the bulk of tax expenditure spending, although I don’t recall for sure.

    IIRC, there is some stuff that some categorize as tax expenditures that is at least arguably not equivalent to spending, and more broadly, one could make the conceptual argument that as long as some people are paying less in taxes than anyone else (or less on particular types of income), then some taxpayers are, in effect, subsidizing others and, by a very broad conceptual view, one could say that that is equivalent to spending and thus try to make the whole argument of equivalence look silly or useless, but that really misses the point.

  18. comment number 18 by: AMTbuff

    I agree with your first paragraph. As to the second, agreement on what is or is not a tax expenditure requires agreement on a baseline tax system, namely one free of tax expenditures. That agreement is impossible. Therefore the concept is fatally flawed for general use. Only a handful of items like special purpose tax credits can be definitively classified as tax expenditures.

    As you probably realize by now, I am not a fan of any use of baselines. They are always manipulated for partisan or ideological advantage. Given the total absence of a sound and sustainable baseline in any area of government policy, it’s folly to claim that any baseline is valid.

  19. comment number 19 by: Brooks

    AMT,

    People shouldn’t get so lost in the details that they end up missing the key point, which is not whether or not some label (”tax expenditures”) is applied too broadly, but the fact that a huge amount of revenue could be raised to reduce deficits by reducing/eliminating tax deductions — tax expenditure subsidies — and doing so would NOT be any different from reducing explicit “spending”, and WOULD be categorically different from raising tax rates despite the fact that it would mean higher tax revenue. The fact that a relatively small portion of what some people label “tax expenditures” may not fit that category shouldn’t distract people from the main point, because the prevalent misunderstanding of this matter among conservatives is obstructing good, important policy changes.

  20. comment number 20 by: SteveinCH

    Brooks, it’s not categorically different from raising tax rates. It’s simply takes money from different people than would occur if you raised tax revenues. If you want to say that makes it categorically different, you can but that’s not enough of a different in my mind.

    Remember, the money is all ours to start with. It’s back to AMTs point about the baseline. You have to make an assumption that there is a baseline tax code without expenditures for your argument to be valid. Suppose my baseline assumption was that the government was going to collect X percent of the economy come hell or high water (like Erskine Bowles recent 21 percent argument). Once you agree on the 21 percent it’s only a question of how you get it. In such a system, there’s no such thing as a tax expenditure, just the tax code you design to get to 21 percent. An alternative tax code that would get you more than 21 percent is not categorically similar, it’s categorically different.

  21. comment number 21 by: Brooks

    No, Steve & AMT, no discussion of baselines is at all necessary for us to say that a subsidy for buying product X (or getting employer compensation in the form of health insurance) (1) is no different — economically, ideologically, or in any other way — by virtue of coming via tax deduction vs. via explicit “spending”, and (2) IS completely, categorically different — economically, ideologically, etc. — from a tax rate increase. I know you and I have gone back and forth on this point at great length, which I don’t have time for these days and which probably wouldn’t produce a different result. If AMT sees the point, maybe he/she can explain in a way that will be clear to you.

    AMT, if you agree regarding those subsidies — e.g., for buying a clunker or a mortgage or college tuition, or employer health insurance exemption — are no different than if they were provided via explicit “spending”, please try to explain to Steve. I have to run.

  22. comment number 22 by: Brooks

    By the way, instead of saying “if you agree” I should have said “if you get” (although that’s less diplomatic) because this really isn’t a matter of opinion. It’s just algebra in the simplest form and analytical/conceptual soundness.

  23. comment number 23 by: Brooks

    One last point before I split for the day:

    Steve, suppose the government said “If you buy Product X, then the we’ll send you a check (the amount of which will be a function of the price you paid and whatever marginal tax rate applies to you)”. According to your view, if the politicians call that check “reimbursement” or a “voucher”, it is “spending” that is left-of-center economically and ideologically and is bad, but if they call it a “tax rebate” (tax deduction) it is similar to a tax rate cut and is conservative and good.

    Does that make any sense?

  24. comment number 24 by: SteveinCH

    Brooks,

    You continue to use the same line of logic and not understand that it requires a baseline. I won’t keep arguing with you but I also won’t allow the same point to go unanswered.

    FWIW, I’m not passing a value judgement on spending bad, tax expenditure good. You may think I’m doing it but I’m not.

    Let me turn the question around for you. Suppose we had an agreement that the government was going to raise 21 percent of GDP in revenue. Let’s further suppose that a flat tax on income of 25 percent would accomplish that goal. What is the difference, other than who pays the tax between a flat tax rate of 25 percent and a flat tax rate of 27 percent with an exemption for mortgage interest. In my world, they are exactly the same other than who pays. In your world they are somehow qualitatively different. Either way, the government gets its 21 percent.

    We won’t resolve this so you don’t need to reply if you don’t want to but I will continue to point out what I see as a false equivalence that you and many others draw. Interestingly, most who draw it (perhaps not you) want to “cut spending” by reducing tax expenditures. That’s only cutting spending if you assume a baseline where those expenditures were actual expenditures and the tax code didn’t have those exceptions. Since such a world doesn’t exist, it’s all in your imagination.

    Peace…and good to see you back a bit

  25. comment number 25 by: AMTbuff

    For the sake of discussion, suppose the current tax code raises 20% of GDP and that in the absence of the mortgage deduction (with no changes in behavior!) the income tax would raise 21% of GDP.

    The people who like to use the term tax expenditure will tell you that there is no problem taking away the mortgage deduction and spending the extra tax money on something else. They will say that the new situation is precisely equivalent to the old one. This is only partially correct.

    First, the deadweight loss of the tax code may increase (due to higher tax revenue and effective rates) or decrease (due to less bias for the formerly preferred activity). Second, there are transition costs and economic dislocation. Third is the question of whether the new use of the money is better for the economy than leaving the money in the hands of the taxpayers. On this third point, Steve appears to believe that the answer is almost always “No”.

    If one were to eliminate tax expenditures and lower rates, leaving the total revenue unchanged, the third point would disappear. That would leave everyone in agreement, as in the 1986 Tax Reform (which still carried substantial transition costs).

    In summary, the debate about tax expenditures is usually a thinly disguised debate about the size of government.

  26. comment number 26 by: Brooks

    Steve / AMT

    Good to see you, too, Steve, although I’m still frustrated and saddened that even a smart guy like you still doesn’t get this. I think the problem is that you are not really focusing on what I’m saying and asking, and you are fixated on some other point that others are making.

    No, no baseline necessary at all. And no, there is absolutely no ideological or practical difference — involving the “size of government” or anything else — between an explicit “spending” subsidy and that same subsidy provided as a tax deduction. The person making the purchase ends up with $X more because he made that purchase, the Treasury ends up with $X less, and other taxpayers must pay $X more to make up the difference if deficits are reduced.

    I’ve already acknowledged, above and in our past discussions the conceptual point you’re making, but guys simply do not address my point. Please answer MY question, my ACTUAL question, and ONLY my question, not some point someone else out there may be making or you think I’m going to make.

    I asked a very simple question. Again, using my example above, does it make any sense to consider the same exact thing (the check from Treasury to the guy who purchased Product X) to be more conservative, representing smaller government if
    that check is called a “tax rebate”, but to consider it more to the left ideologically or economically, representing bigger government if it’s called a “reimbursement” or “voucher”. If you think it does make sense, please explain in a clear way (an impossible task, since it doesn’t make sense). If you see that it doesn’t make sense, let’s proceed…

    Now let’s assume instead of “rebate check” it’s a tax deduction. This difference is equivalent to you just handing me $9 vs. you handing me $10 and my handing you $1 (the latter a voucher or reimbursement). There is obviously no substantive difference, no practical difference, no ideological difference. Net result is that you have $9 less, I have $9 more, but $1 less than I’d have if I either collected $10 from you or if I collected $10 but didn’t give you the $1. And because I didn’t get that $1, if I’m the Treasury, either way I have to eventually either spend (roughly) $1 less or tax someone (roughly) $1 more in the future. Do you really see some substantive — even ideological — difference b/w those two transactions, IF we assume no timing differences and we are certain you will get that $1 either before, during, or while you pay that $10? If so, please explain clearly (again, an impossible task, because there is no substantive difference). So you can say this or that about baselines yadda yadda but that stuff is completely irrelevant to what I’M asking you.

    Show me the substantive difference, or let me know that you get it at this point.

  27. comment number 27 by: Brooks

    Just to refine with part in italics, as I stated later in the comment:

    The person making the purchase ends up with $X more because he made that purchase, the Treasury ends up with $X less, and other taxpayers must pay $X more or (other) spending must be $X less to make up the difference if deficits are reduced.

  28. comment number 28 by: SteveinCH

    Brooks,

    I think I’ve said this before. I agree with the micro point you are making in the example you use every time. But, in my mind, that micro example is not sufficient to carry the macro discussion. It’s not as if the government sits down and has a conversation about how to deliver benefit (tax expenditure versus expenditure). It’s a theoretical construct that once applied to the real world falls apart for me.

    I’m sorry if I continue to frustrate you but trust me, the feeling is mutual ; )

  29. comment number 29 by: Brooks

    Steve,

    I have no idea why you would say that I am making a micro point that falls apart when applied in the real world.

    Please be explicit as to what you are saying you “agree with” (I would call it “getting” because it’s not a matter of opinion or questionable logic). Are you acknowledging that there is no difference — practically, economically, ideologically, etc. — between the same subsidy (for purchasing some product, calculated as a function of price paid and each person’s marginal tax rate) provided via explicit spending vs. provided via tax deduction, assuming no timing differences? Please give me a yes or no, or if it “depends” on something, please explain clearly (which would be impossible, since there is no substantive difference).

    If you are acknowledging the equivalence, then how can you at the same time assert some ideological, economic, or other substantive difference between the two, and how can you think that one is more or less desirable than the other in a given case or in general simply based on the vehicle for delivering that same subsidy? Why would providing a voucher or reimbursement for purchase of a “clunker” car — i.e., “spending” — be ideologically or economically different, representing “bigger government”, and either more or less desirable — than the same subsidy provided via tax deduction? Ditto for mortgage interest payments. Ditto for college tuition payments.

    We are talking very large sums of money affecting our fiscal imbalance, and you, most conservatives, some centrists and perhaps even some liberals like Policy A and dislike Policy B (or prefer one over the other) because of the completely nonsensical notion that there is some substantive difference between A and B, and you are (apparently) acknowledging now that there is no such substantive difference, apparently completely contradicting yourself.

    What exactly is “micro” or not applicable to the real world about my point that a large part of the electorate is choosing policies with huge consequences on a completely nonsensical basis?

  30. comment number 30 by: Brooks

    http://dmarron.com/2010/02/08/the-problem-with-tax-expenditures/#comment-1841

  31. comment number 31 by: AMTbuff

    I’ll try again. Suppose today’s tax system extracts 20% of GDP and has 1% of GDP as tax expenditures. Now suppose you change that to 21% of GDP tax with no tax expenditures, but you hand out the 1% of GDP to those same people in the same amount. No change, we all agree.

    However the point of using the tax expenditure terminology is not to do this; it’s to hand out the money to different people, more deserving people in the opinion of those making the new rules. Or maybe it’s to spend on a new entitlement, or unaffordable old entitlements. Is this result economically equivalent to the original arrangement? Obviously not, or else advocates wouldn’t be advocating it so energetically.

    Is the new arrangement economically superior to the old one? Probably not, based on the fact that people have arranged their affairs to match the old tax system, and based on the inevitable waste when dollars pass through government’s hands. Is the new system politically superior to the old one? Absolutely, for the advocates anyhow.

    If tax expenditure talk were about leaving the same percentage of GDP in the control of the private sector as before, there would be no difficulty with this issue. However the whole point is to advocate a decreased percentage of GDP remaining in the private sector and an increased percentage of GDP moving to the public sector.

    You may claim that allowing 1% of the GDP to remain in the private sector via “tax expenditure” is equivalent to taking that 1% as taxes and spending in on government programs, but you’d be wrong. Handing people money (or leaving it in their pockets) is better for the economy than putting it through the government Cuisinart and waiting for some of it to leak out to the private sector. You are aware of the dismal percentage of welfare spending that actually ends up in the hands of welfare clients, aren’t you?

  32. comment number 32 by: AMTbuff

    Continued attempt to clarify:

    Money that is mechanically handed out is analogous to tax credits. That money remain in private hands and is used subject to the constraints of market forces. It will tend to flow to economically preferred uses.

    Money that is retained by the government is not analogous to tax credits. Its use is not subject to the constraints of market forces. Its use increases the number of government employees who produce less than their cost in market value, not counting the regulatory and other damage they may cause.

    A tax system that takes a net of 20% of GDP after tax breaks provides a healthier economy than a tax system that takes 21% of GDP after tax breaks. Only if the extra money were to be handed back to the private sector entirely mechanically and predictably would the latter not be econmically inferior to the former. And we all know that handing out the money mechanically, with no political involvement and no extra government employees or government control, is not at all what the advocates have in mind.

  33. comment number 33 by: Brooks

    AMT,

    I must admit I only red a bit of your comment (apologies, I’ve got to get to bed), but let me just say that my point is simply that it is nonsensical for people to take such a different view and to react so differently (more or less favorably) to essentially the same policy proposals based on the illusion of some economic and ideological difference that simply does not exist. That’s why Obama can roll out a list of “tax cuts” in his State of the Union that are actually no different from “spending” subsidies, then turn to the Republicans and say he expected applause…and then get applause from Republicans, even though those same Republicans (and the rank and file among the public as well) would have harshly criticized and opposed the same exact subsidies if Obama proposed providing them as explicit “spending” subsidies. (See my link above to my comment at dmarron, and see in particular my quote of Obama and the alternate semantics I present). It’s beyond asinine — it’s also harmful, because this irrationality gets in the way of good policy choices and promotes bad policy choices, with huge consequences.

    Most of the money involved with tax expenditures relates to subsidies that are no different than they would be if in explicit “spending” form, so people should stop viewing them as a form of “lower taxes” and “smaller government” vs. unless they’d say the same thing about the same subsidies if they were in explicit spending form (which they wouldn’t and shouldn’t, because they represent MORE government interference in the economy and yet MORE ways in which the government redistributes income, whether or not it offsets some other ways it redistributes).

    I don’t know who you guys are talking about, but when Diane, or Len Burman, or Donald Marron or I (not to put myself in that prominent company) talk about reducing tax expenditures, we’re talking generally about changes that are no different, substantively speaking, than reducing spending subsidies. Either way the result is that (1) individuals who now end up with more money than they otherwise would because they purchased Product X or got some compensation in the form of employer-provided health insurance would then end up with less money, (2) the Treasury would have more money (just as it would if we reduced explicit spending subsidies), and (3) we could use that extra money in the Treasury for more spending and/or lower tax rates and/or lower deficits (just as we could if we reduced explicit spending subsidies).

    If either or both of you still don’t get it, I’ll probably stop here. I think I’ve explained this (on prior threads and this one) about as well as possible, so I give up (at least for now) trying further. Maybe Diane can give it a shot if she’s following comments.

  34. comment number 34 by: SteveinCH

    Brooks,

    This is why I describe your point of view as theoretical and AMTs as practical. Were we simply having a debate about a tax code that has no tax expenditures versus one that does and raises the same amount of revenue, we’d all agree the former is better and go home happy.

    But that’s not what this discussion is about. This discussion works like this. We have a deficit of X% of GDP. Say 10 for the sake of argument. We agree that a balance of tax increases and spending cuts is the solution. Let’s say we go 50/50. But now we say wait, we can cut tax expenditures instead of actual expenditures and raise tax rates and see that’s 50/50.

    But to AMT’s point above, it’s not. It’s actually taking money from private citizens and flowing it through the government to other purposes. Your example fails for two reasons. First, you always assume the distribution of the money won’t change as a result of moving away from tax expenditures. This is almost certainly wrong although you always position it that way in your examples. Second, flowing the money through the government is inefficient relative to not taking it in the first place. How inefficient depends on how government deploys the money.

    So while I can agree with your theorized example, it has little to do with how this is going to work in practice.

    As I’ve said many times before, I’m all for an individually neutral reduction in tax expenditures (meaning we adjust rates so that all people are left neutral by the change). That’s not what’s going to happen but that’s what you always refer to when you make your theoretical examples.

    You see it as a debate about the equivalence of tax expenditures and actual expenditures. I see it as a debate about who pays (net) how much. I know you hate that answer but I’m not likely to change it even if a bunch of smart people (all of whom favor a tax heavy solution to the current budget crisis) say it’s correct.

  35. comment number 35 by: Brooks

    No, no, no Steve. No offense, but you are completely mischaracterizing the issue as well as my perspective on it (inadvertently; I’m certainly not accusing you of dishonesty).

    It’s hard for me to have any chance of enabling you to get this if you won’t give straight answers to my simple, straight-forward questions. I’ll try yet again, but first: Clear your mind of what you think others are saying, of what you think I’m building toward as some ultimate point, of whatever point you think you’re making validly, and just focus on what I’m saying and asking.

    And I’m asking both you guys to respond if you don’t mind.

    Ready?

    Let’s say we are talking about subsidies for purchasing Product X. If Joe buys Product X he’ll end up with $Y more than if he did not buy Product X or if the subsidy did not exist, and the Treasury will end up with (roughly) $Y less. And to avoid higher deficits as a result of the existence of this subsidy, either we must spend (roughly) $Y less (on other “spending” if the subsidy is via explicit spending) than we otherwise would or tax (roughly) $Y more (from other taxpayers or via other taxes or from Joe in the future), or some combination of the two.
    (1) Do you agree? Sure hope so. (I’m saying “roughly” because I’m ignoring dynamic effects; they are extraneous to our discussion).

    Now, I think (maybe) you have both acknowleded that there is no substantive differenc between that subsidy provided via tax deduction or tax rebate vs. if
    it’s provided via a voucher (explicit spending), as long as there are no differences in the dollar amounts each person would get, and no timing differences. Via either method, we have the same exact incentive for each person and the same effects on each and every person and on the Treasury on the same basis (because Joe bought Product X). Again, there is no substantive difference of any sort. It’s just like Joe handing me $9 vs. Joe handing me $10 while I hand him $1.
    Agree? I sure hope so.

    Now, where you guys get all messed up (or at least one point at which that happens) is that you say “Yeah, but if we reduce tax expenditures, that money will probably just be used for more ’spending’, not for tax reduction or deficit reduction.” And here’s what you’re not getting (or at least one thing you’re not getting about this): It’s still the same regardless of the method of delivery of the subsidy — explicit spending (say, a voucher) or tax expenditure (tax rebate/reimbursement/deduction). Either way, the result of eliminating the subsidy is that Joe would have $X less, the Treasury would have $X more, and the deficit would be $X lower, and either way, that initial incremental money in the Treasury could be used for more spending in other areas, lower taxes, deficit reduction, or some combination. And either way, government is meddling less in Joe’s economic/consumer choices and in our economy in general, and letting the market set the (actual) price Joe would pay and letting Joe decide if it’s worth it to him to buy at that market price. So either way government is “smaller” in terms of its intrusiveness/manipulation of the economy and of our choices.

    So we have Obama saying in his SOTU that he brought a change that left taxpayers who paid college tuition with more money than they would have had if they hadn’t made that purchase and if he hadn’t brought that change. That also means the Treasury has that much less and other taxpayers (and/or those same taxpayers later or through other taxes) have to pay more to make up the difference to avoid higher deficits as a result of the subsidy. Now I ask you, why in the world would you see a substantive, economic and even ideological difference between that subsidy provided via tax deductions or tax rebates vs. if they were provided via explicit spending (e.g., a voucher) if all the effects on each and every person and on the Treasury and on other/future taxes and taxpayers is exactly the same and the exact same basis????

    Or will you let me know that you finally get it — that you see that there is no rational basis for seeing a substantive difference between the two simply because of the different methods of doing the same exact thing?

  36. comment number 36 by: Brooks

    Minor correction, not central to the point: The people who paid college tuition would not really have ended up with more money if they had not made that purchase. I should have said that they ended up with more money than “if they had made that purchase and there had not been that subsidy”.

    Similarly, Joe ends up with $X more than he’d have without the subsidy if he does buy Product Y, and if that subsidy is eliminated, he ends up with $X less if he buys Product X anyway.

  37. comment number 37 by: AMTbuff

    On (1), yes. I thought I had made that clear. On to the disagreement:

    It’s still the same regardless of the method of delivery of the subsidy — explicit spending (say, a voucher) or tax expenditure (tax rebate/reimbursement/deduction). Either way, the result of eliminating the subsidy is that Joe would have $X less, the Treasury would have $X more, and the deficit would be $X lower, and either way, that initial incremental money in the Treasury could be used for more spending in other areas, lower taxes, deficit reduction, or some combination. And either way, government is meddling less in Joe’s economic/consumer choices and in our economy in general, and letting the market set the (actual) price Joe would pay and letting Joe decide if it’s worth it to him to buy at that market price. So either way government is “smaller” in terms of its intrusiveness/manipulation of the economy and of our choices.
    I have great difficulty understanding how increasing the taxes of homeowners (by repealing the mortgage interest tax expenditure) makes the government “smaller”, especially if the government turns around and spends the money on an otherwise unaffordable program. Please tell me what I missed here.

    I accept that repealing the mortgage interest deduction would remove a distortion in the market, at substantial transition cost. The improvement from reduced distortion is much smaller than the economic harm caused by taking all that money away from the private sector.

    Note that I have already accepted the proposition that repealing the mortgage interest deduction and reducing tax rates to maintain revenue neutrality would improve the economic well-being of the country after the costly transition period. However AFAIK nobody is proposing revenue-neutral changes to tax expenditures.

    Maybe the following will get us somewhere. Given that a tax code has to raise X% of GDP, what should the code look like? Which of the so-called tax expenditures are justified, and which are not? That’s the purely structural tax reform debate. We probably have mostly the same ideas there.

    There is a separate, hot debate on the proper value of X. Advocates of ending tax expenditures conflate these two debates, saying that we could increase X if only we got rid of these evil tax breaks. They need to step back and debate the two issues separately. Until then, opponents on the “proper value of X” debate will oppose any change regardless of its structural advantages.

    Are we reaching common understanding finally?

  38. comment number 38 by: SteveinCH

    LOL. I doubt it. I agree entirely but I’m sure Brooks doesn’t.

    The fundamental disagreement I think is in your formulation of a tax code will raise X% of GDP. I think from the tax expenditure perspective, it doesn’t work that way. The way you describe it (and I think about it), tax expenditures are offsets to tax rates in certain circumstances. The way Brooks describes it, they are equivalent to potential expenditures that actually don’t exist today.

    To me, tax expenditures go on the tax side of the budget as one of many ways to get to X% but Brooks and others don’t see it that way.

  39. comment number 39 by: AMTbuff

    If brooks sees a tax expenditure as not to be counted (negatively) when computing X, then the choice of a baseline is paramount.

    For example, if your baseline is 100% taxation, then every dollar left to taxpayers is a tax expenditure and X is 100. In which case the clean solution is simply to take all income and spend it. According to the tax expenditure logic, this is equivalent to a loophole-ridden income tax that takes less than 100%. Except that in the real world the latter has a prayer of economic viability and the former has none.

  40. comment number 40 by: Brooks

    Well, I think I may have done everything humanly possible to use logic in various ways to get you guys to get this, but apparently you guys have a strange mental block on this issue and all I’m getting is an Abbot & Costello “Who’s on First” routine, so I guess I should stop, but I’ll try a bit more with this comment, not that I think a different result is likely. What can I say when I keep explaining in all sorts of ways essentially that, substantively speaking, X + Y – Y = X and you guys keep insisting that X + Y – Y is substantively, economically, practically and ideologically very different from X? And you keep getting lost in some completely irrelevant notion that whether or not X + Y – Y = X depends on the “baseline” value of X or something along those lines. No, it’s just an algebraic equation, and we can see that it’s an equation without knowing the values. And it’s not a matter of ideology or economic theory; it’s just algebra.

    Give Joe a subsidy for purchasing Product X, and if he does so, Joe ends up with $Y more than he would have without the subsidy, the Treasury has $Y less, and either other taxpayers (and/or Joe via other taxes or in the future) must eventually pay $Y more in taxes, other spending must by $Y less, or some combination (all speaking of $Y roughly, leaving aside dynamic effects, interest expense, and any other extraneous matters). Assuming no timing differences and no differences in the subsidy amount to which each person is eligible, there is no substantive difference in, say, a check the government sends Joe that is a “tax rebate” vs. the same check the government sends Joe that is a “voucher”, yet you guys insist that the former would represent smaller government, lower taxes, and more conservatism, and you’d be inclined to favor it or oppose it less strongly, and the latter would represent bigger government, higher spending, and more liberalism (in a “left” sense), and you’d be inclined to oppose it. Can you really not see how nuts that is??

    And you guys layer confusion on top of your confusion, and add an irrelevant element, by also getting diverted by the possibility that increased revenues by reduction of tax expenditure subsidies would be used for higher explicit spending. I’ve corrected you guys on this numerous times very clearly. First, it’s irrelevant to my point regarding the substantive equivalence of a subsidy regardless of whether it’s in explicit spending form or tax expenditure form. Second, as I’ve said repeatedly, regardless of which form a subsidy is in, reducing it means the Treasury has more money, whether because explicit spending on a subsidy has been reduced or because a tax expenditure subsidy has been reduced. Whatever is done with that extra money (used for deficit reduction, tax rate cuts, higher explicit spending, more on other tax expenditure subsidies, or any combination or anything else) could be done regardless of how that extra money ended up in the Treasury (more received or less sent out).

    And AMT, to answer your question, what you’re “missing” is that government subsidies, in my mind and I think even in yours, represent “bigger government”. They interfere with the market, distort economic decision-making, etc. There may be times when they are justified (positive externalities or other rationale), but they represent bigger (more meddling) government. Removing subsidies thus means smaller government. If the additional money in the Treasury is used for more explicit spending in other areas, then it would be arguable that there was no net reduction in the “size” of government (depending on which was seen as representing “bigger” government, the subsidy or the incremental explicit spending in other areas). But whether the subsidy was in tax expenditure form or explicit spending form, removing it means smaller government in the sense of meddling in the economy. And whatever is done with the extra money in the Treasury could be done regardless of which form the subsidy had taken.

    Maybe you guys are just unshakably stuck on debating someone (real or imagined) who isn’t in the room who you think is making some assertion or seeking some policy rather than just responding directly and rationally to what I’m saying and asking. Anyway, however bizarre it is that two intelligent guys can’t grasp something so obvious and so simple no matter how clear I make it, I’ll leave you with your complete misconception, with which you’ve grown perhaps too attached to think straight when presented with clear refutations.

    Very unfortunately, if my experience with you guys on this issue is any indication, very important policy choices will be made on a wholly irrational basis, with conservatives and some centrists favoring particular policies that are substantively the exact equivalent of policies they would strongly oppose, simply because of completely inconsequential differences in cash flow equivalent to the difference between someone giving me $9 vs. someone giving my $10 while I simultaneously give him $1. It’s a perspective that makes no sense at all, but you guys are apparently determined (consciously or not) to cling to it.

    So again, Obama can applause from conservatives for subsidies that are substantively exactly the same as subsidies they would oppose if they were provided via a different mechanism even if the subsidy works exactly the same way in every substantive sense for everyone involved, with the same results and effects for everyone involved. It’s just plain nuts. But I’ll leave you with it. (Which isn’t to say I won’t make the point in the future on this blog, just that I don’t see the point in trying further to get through to you guys).

  41. comment number 41 by: AMTbuff

    brooks, we can all agree that a refundable tax credit is fully equivalent to a spending program. That case is truly X + Y – Y = X. If the advocates of the term tax expenditure stopped there, we’d have no disagreement at all.

    You insist that the agenda behind the use of the term is irrelevant. I disagree. The whole point of using the term is to frame the debate as tax break = spending, then to push the definition of tax break as far as possible. My 100% baseline example, which you did not address at all, shows how far one can push the definition of tax break (by choosing the baseline against which a break is measured).

    I have accepted that X + Y – Y = X, and that refundable tax credit = spending. Beyond that case, the equivalence begins to break down and the judgment of what is a tax expenditure begins to depend on your choice of baseline. I thought my example would make that last sentence clear to you. Read the recent posts again and tell me if you see this point.

    To repeat: The identification and quantification of tax expenditures become more debatable as the scope of the term expands beyond refundable tax credits. It begins to depend on an implicitly or explicitly assumed baseline tax code free of tax expenditures. This makes the definition of broad-scope tax expenditures circular!

    Nobody disagrees with you on narrow-scope tax expenditures, namely refundable tax credits. You don’t need to show us any more examples of that. As to wider scope tax expenditures, Steve and I can see that the name of the game is to increase revenue, something that should be debated openly on its own merits rather than claiming that a major tax increase should be considered nothing more than ordinary loophole closing.

  42. comment number 42 by: Brooks

    AMT,

    I am NOT talking about refundable tax credits. That equivalence to spending is even more obvious than what I’m talking about.

    Here’s another thing you’re “missing”, to answer your earlier question:

    You write:
    I accept that repealing the mortgage interest deduction would remove a distortion in the market, at substantial transition cost. The improvement from reduced distortion is much smaller than the economic harm caused by taking all that money away from the private sector.

    Here’s what you’re “missing” above:

    First, let’s be clear that the question of whether or not we should reduce/eliminate a particular tax expenditure subsidy (or do so in general) is completely unrelated to the point I’m making, which is that, regardless of one’s preferences regarding subsidies, it makes no sense for one to view a given subsidy as substantively different in any way (economically, ideologically, etc.), or to view it more or less favorably, simply because it takes tax expenditure form rather than explicit spending form (like a voucher).

    Whether a subsidy for buying Product X is in tax expenditure form or in explicit spending form, it has the same exact financial impact on everyone involved — the receivers of the subsidy have that much more and the deficit and debt (i.e., the burden on taxpayers generally, sooner or later) is that much larger. So imagine that, instead of mortgage interest being a tax deduction, government sent a check for the same amount that people would get at the same time they pay their taxes, so it’s equivalent to the change I’ve stated, from someone giving me $9 (the tax deduction scenario) to someone giving my $10 while I simultaneously give him $1 (the explicit spending scenario). These two are substantively the same thing, and I think you are saying you see that, even though I can’t get you to correctly apply this valid premise, and you keep acknowledging it, then following with apparent non sequiturs and/or irrelevancies.

    When you speak of the harm done by taking more money out of the private economy, you fail to see that adding/increasing such a subsidy or ending/reducing such a subsidy would have the same impact on everyone, on the same basis (i.e., some people bought Product X) regardless of whether the subsidy was provided via tax deduction or explicit spending. So again, if instead of a mortgage interest tax deduction, homeowners with mortgages were sent “voucher” checks (explicit spending) to use toward their mortgage payments (and of course this “spending” is funded, sooner or later, by taxpayers generally), and then that subsidy were eliminated, the impact on everyone would be exactly the same as it would be in the tax deduction scenario if the tax deduction form of subsidy were eliminated. Regardless of which form the subsidy took, those homeowners would end up with that much less, and the deficit and debt would be that much less because the Treasury would end up with more money. Again, to use the analogy, if I’m the Treasury, in the scenario of eliminating that subsidy in tax expenditure form, I end up with more money because Bob is now sending me $10 instead of $9. In the scenario of eliminating the subsidy in tax expenditure form, I end up $1 more because Bob is still sending me $10 as he was before, but now I’m no longer sending him $1 at the same time. And either way, the debt that Steve, AMT, Brooks and everyone else shares would be $1 less.

    Now, whether or not you like a particular subsidy and want to keep it — in effect, adding to the tax burden of taxpayers generally so beneficiaries of the subsidy can benefit — is a matter of personal preference based on one’s economics, ideology, etc. But again, it is completely irrational to see a given subsidy as substantively different, and to see it more or less favorably, simply because of which form it takes, tax expenditure subsidy vs. explicit spending subsidy.

    If you want purchasers of Product X and/or Product Y and/or Product Z to have more money than they’d have without a subsidy, and you consider that result worth adding to the debt everyone shares, that can be your preference. But saying that eliminating a subsidy that is currently in tax expenditure form does “harm” because it “removes money from the private sector” only makes sense if you would say the same exact thing about eliminating the same subsidy if we were currently providing it via explicit spending (a “mortgage interest voucher”). Yet if this same exact subsidy were provided in such an explicit spending form, apparently you’d see eliminating the subsidy as putting more money into the private sector and you’d view it favorably (or less unfavorably). Can’t you see that such a view makes no sense at all?

    So let me ask you. Suppose we did not have a mortgage interest tax deduction, but instead the government sent voucher checks for homeowners to apply toward mortgage payments (sent only to people with tax liability, with the amount for each person calculated the same way, applying each person’s marginal tax rate, and with no timing difference vs. when people would benefit if it were a tax deduction). Now someone proposes eliminating that (voucher) subsidy, which would reduce “spending”. Would your preference be the same and would you be saying the same things (expressing the same objections) about that proposal to eliminate the voucher form (”spending”) subsidy that you’ve been saying about eliminating the same subsidy that is currently provided via tax deduction? If not, why not, given that it’s the same exact subsidy in either case?

    Would you express concern/opposition to elimination of that spending (the voucher subsidy) because it would do “harm” by “removing money from the private sector? Would you oppose eliminating that spending (the voucher-form subsidy) because some/much of the extra money that would end up in the Treasury would likely be used for higher spending on other things?

    And would you need to get in to a discussion of “baselines” to know that whatever your preference is, it should be the same regardless of which form the subsidy currently takes?

  43. comment number 43 by: AMTbuff

    Would I favor the mortgage interest deduction is the form of a direct expenditure? No, because there is no advantage to doing it that way vs. by allowing the deduction. A mortgage interest deduction makes sense if and only if it improves the fair measurement of disposable income. In other words, the question is whether or not the deduction belongs in my idea of a fair baseline income tax.

    As to the mortgage interest deduction specifically, I favor it somewhat, for an obscure reason: It puts mortgage holders on an approximately equal level with people who own their houses free and clear. The latter pay no tax on the (imputed rental) value that the paid-off house is providing them, and nobody has seriously proposed forcing the elderly to pay tax on this non-cash income.

    With the mortgage interest deduction, mortgage holders get a tax benefit of similar size to the benefit that free and clear owners get. For this reason, I believe that the mortgage interest deduction belongs in a fair baseline. Calling mortgage interest deduction a tax expenditure assumes that it is not a proper adjustment to income in the first place, but I claim that it is.

    As to your last question, yes the answer is the same regardless of form. However there is no good reason to change something that is naturally part of the fair measurement of income to a direct expenditure program . Conversely, direct expenditures should not be buried deeper in the tax code than refundable tax credits.

  44. comment number 44 by: Brooks

    AMT,

    For some reason you went off in an irrelevant direction for almost all of your comment. I wasn’t asking you if you think we should shift the mortgage interest subsidy from tax deduction to explicit spending, nor was I asking you if you liked that subsidy, but for some reason those were the questions on which you focused.

    The only relevant line was “yes the answer is the same regardless of form”, although it might have been helpful if you expanded on that and made it clear what you were saying, instead of devoting your comment almost entirely to responding to questions I didn’t ask and which are irrelevant to my questions and to my point.

    So I’ll try to get a very clear answer from you.

    Scenario #1. We currently have a tax expenditure subsidy for purchasing Product X (mortgage, college tuition, clunker car, whatever). Joe buys it, and Joe gets a tax deduction per the subsidy. Joe ends up with $Y more than he would without the subsidy, and the Treasury with roughly $Y less, and the the public with roughly $Y more debt. Someone proposes eliminated this subsidy, which would mean all those effects in the opposite direction, including the more money going to the Treasury, which can be used to reduce deficits and debt, reduce other taxes, increase explicit spending, or some combination.

    Scenario #2: Same subsidy as in Scenario #1 exists, but as explicit spending — a voucher, with each person eligible for the same amount of subsidy as they would be in Scenario #1 and no timing differences in when the subsidy has it’s impacts. Someone proposes eliminating this subsidy, which would eliminate that outflow of money from the Treasury to Joe, and would have all the same effects on Joe, on the Treasury, and on everyone else, and we’d have the same options for how to use that extra money that ended up in the Treasury — lower taxes, increase other explicit spending, reduce deficits and debt, or some combination.

    (1) I have been telling you guys that there is absolutely no substantive difference between Scenario #1 and Scenario #2. No difference in economics, no difference ideologically, no difference in any substantive aspect. The only difference is an inconsequential cash flow difference akin to the difference between Joe handing me $9 vs. Joe handing me $10 while I hand him $1. Agree?*

    (2) If your answer above was “yes”, clearly you must consider it nonsensical for anyone to assert that the elimination of the tax expenditure subsidy in Scenario #1) represents bigger government and is less conservative (or more “liberal”) than elimination of the “spending” subsidy in Scenario #2. Agree?*

    (3) And if your answer to the first question was “yes”, then clearly you must consider it nonsensical for anyone to view elimination of the subsidy in Scenario #2 (voucher) any more or less favorably than he/she would view elimination of the subsidy in Scenario #1 (tax deduction). Agree?*
    (As a note, I’m leaving aside the extraneous matter of irrational differences in behavioral responses by taxpayers, some reacting differently simply due to form of the subsidy, and I’m also leaving aside any assumptions of differences in the political impact, again due to the kind of irrationality and misunderstanding you guys have been exhibiting).

    (4) So what would you say to someone who would say in Scenario #1, “I oppose eliminating that tax deduction because I’m a conservative/libertarian. I favor lower taxes, so I oppose that tax increase” but who would say in Scenario #2 “I favor eliminating that subsidy because I’m a conservative/libertarian. I favor lower spending so I favor eliminating that spending”? Wouldn’t you tell that person that he is making no sense at all?

    (5) So to whatever extent you favor maintaining the mortgage interest tax deduction (and it’s not relevant how much or how little you favor it or why), you would favor maintaining that subsidy just as much if it were via explicit spending (let’s say via voucher check sent by the government that homeowners) rather than via tax deduction, as long as all incentives and effects were the same for everyone (and for the Treasury) regardless of which form the subsidy takes. Right?

    * I say “Agree”, but there really isn’t room for disagreement here. It is not a matter of opinion that X + Y - Y = X. That’s just algebra and logic.

  45. comment number 45 by: AMTbuff

    1,2,3,4,5 agree.

    However as I explained, some policies are naturally related to accurately measuring disposable income. I put the mortgage interest deduction in that category. Therefore to change it into a direct payment would be bass-ackwards. And, as you and I agree, changing its form would also be economically pointless.

    However if the form of the mortgage deduction were changed into a direct payment, that would completely obscure its logical basis as an adjustment to income. That in turn would serve the political needs of those who want to raise taxes by eliminating the adjustment.

    Going back to my 100% taxation baseline, imagine a system that confiscates all income then hands out a check exactly equal to the after-tax income you would have under the current law. You and I agree that this is mathematically equivalent to today’s income tax. Yet it’s a moronic idea that nobody would seriously propose. Replacing all after-tax wages with government checks would obscure the logical basis of earning income for no benefit to anyone, except possibly political benefit.

    Perhaps we can agree on the following generic statement, which every person will interpret somewhat differently: Adjustments to tax liability should not be called “tax expenditures” to the extent that they are attempts to accurately measure disposable income with horizontal equity. Changes in tax liability unrelated to accurately measuring disposable income can legitimately be called “tax expenditures”.

    Because people will never agree on which items can correctly be deemed tax expenditures, generic discussion of what to do about them is not useful or perhaps even possible. However when there is an item that everyone agrees can be deemed a tax expenditure, then all the points you have made on the subject fully apply.

  46. comment number 46 by: Brooks

    AMT,

    Re: 1,2,3,4,5 agree.

    I’m glad to see that. And if Steve’s answers are different, as they apparently would be, perhaps you can discuss with him.

    And we can examine the points you’ve argued above.

    Re: However as I explained, some policies are naturally related to accurately measuring disposable income.

    First, I am sure you realize that the meaningfulness of the concept of “disposable income” is itself questionable in this discussion. In other words, all one’s income is “disposable” — one can spend it all on whatever one wishes. Certainly most people would regard sufficient calories, hydration (and in some climates sufficient shelter) to survive as necessities, but come on — anything close to a “middle class” home in America is a choice of what to spend one’s money on. Ditto for just about everything people get tax expenditure subsidies to purchase (college tuition, whatever).

    So here’s what you seem to be really saying: A subsidy that is provided in larger dollar amounts to higher income individuals (or couples) can be something you favor because (1) it offsets what you consider excess progressivity of our tax rate structure, and (2) you like the fact that it forces other taxpayers to help and encourage higher income people to spend more money on the subsidized products (e.g., mortgage) and, since money is fungible, helps them spend more overall than they would without the subsidy, and more than lower-income people (the bigger the home and/or the higher the income, the bigger the subsidy).

    Obviously both of those reasons for supporting a subsidy whose dollar amount for a given individual is a function of purchase price and income, rather than an equal dollar amount of subsidy for everyone, are matters of economics and ideology. What I think you realize, though, is that if one does support a tax expenditure subsidy for those reasons, he should consider the same subsidy provided as explicit “spending” to be just as good (leaving aside which is more efficient to implement, and assuming we didn’t/don’t already have the subsidy in tax expenditure form — it would be the same thing in either form, so no reason to go through the process of switching). Basically, if you think that higher income people are paying too much in taxes (too large a portion of total tax revenue and/or too high a percentage of their income) and/or if you think we should encourage or aid people who purchase Product X, you should be indifferent between providing the subsidy via tax deduction vs. via government “spending” (voucher or whatever), if the timing of the subsidy’s benefit and the dollar amounts could be the same for each person via either method. It so happens that an upfront voucher would bring a timing difference that, for a given subsidy amount one receives, would mean a higher value for this subsidy you support, although it would also have to be based on estimated income so that would be an issue.

    Re: However if the form of the mortgage deduction were changed into a direct payment, that would completely obscure its logical basis as an adjustment to income. That in turn would serve the political needs of those who want to raise taxes by eliminating the adjustment.

    Let’s view this in its essence, stripped of distracting technical/euphemistic language. Rather than talking about “an adjustment to income”. It’s a subsidy that says “If you purchase Product X, then the more you spend and the higher your income, the more money you’ll end up with due to the subsidy than you’d have without the subsidy, and everyone else who has a lesser combination of income and spending on Product X will end up with less so that you can end up with more. People who have your level of income but spend less on Product X will end up with less money so you can end up with more as a result of the subsidy. Same for people who spend as much on Product X as you but have lower income. We’re doing this either because we want to encourage private spending on Product X (it has positive externalities) and/or we want to aid people who spend more on Product X because that is some kind of hardship (some kind of ‘equity’ argument), and/or because it’s just a back door way of lowering the excessive tax burden on higher income people and it’s worth doing in this sloppy way of tying it to levels of spending on Product X because we can’t get the tax rate changes we’d like.”

    Re: Going back to my 100% taxation baseline, imagine a system that confiscates all income then hands out a check exactly equal to the after-tax income you would have under the current law. You and I agree that this is mathematically equivalent to today’s income tax. Yet it’s a moronic idea that nobody would seriously propose. Replacing all after-tax wages with government checks would obscure the logical basis of earning income for no benefit to anyone, except possibly political benefit.

    I’ve essentially acknowledged the equivalence much earlier on this thread and on previous threads. There would be no point in doing that, but as long as the amount returned to everyone were based on his/her income, there would be no loss of connection to one’s income as you seem to think would occur. Anyway, it’s an abstraction that we can skip and just get straight to the point (as I have) of what we are really talking about with regard to subsidies — what happens with or without a given subsidy.

    Perhaps we can agree on the following generic statement, which every person will interpret somewhat differently: Adjustments to tax liability should not be called “tax expenditures” to the extent that they are attempts to accurately measure disposable income with horizontal equity. Changes in tax liability unrelated to accurately measuring disposable income can legitimately be called “tax expenditures”.

    As you can tell from what I’ve said above in this comment, I don’t consider that a meaningful (let alone clear) statement, nor do I think anyone should waste so much time debating the fine points of the definition of “tax expenditure”. I refer to “tax expenditure subsidies” and I make clear that I mean subsidies for purchasing product X or for getting compensation in the form of employee benefits. I think that covers the bulk of the total dollars involved with what prominent folks are labeling “tax expenditures”, and last I checked, we’re not being asked to vote in a referendum on banning “tax expenditures” as a category, so instead of wasting time (and leading some people astray in terms of policy preferences) with a debate over semantics, just address what’s actually being discussed/asked — what policies with what effects on what basis.

    Because people will never agree on which items can correctly be deemed tax expenditures, generic discussion of what to do about them is not useful or perhaps even possible.

    I don’t have an actual stat, but if 90%+ of the dollars involved in what Diane, Len Burman, etc. are referring to as “tax expenditures” are subsidies for purchasing Product X or extra money at the expense of others because you get some of your compensation in the form of health insurance, I’m ok with people using the shorthand of “tax expenditures” to make the point that these are subsidies that are not substantively different from explicit spending subsidies.

    Re: However when there is an item that everyone agrees can be deemed a tax expenditure, then all the points you have made on the subject fully apply.

    And here’s why it’s a shame that you are so fixated on semantics, precision of a definition, and a conceptual abstraction that confuses the issue and ends up leaving people with the fundamental confusion that leads them to favor one policy and oppose another even though there is no substantive difference between them. So no, I have a much better idea than throwing our hands up in the air and saying that, because the term “tax expenditures” doesn’t have a precise enough definition, we shouldn’t correct this fundamental confusion that leads people toward such irrational policy preferences with such great consequences. Again, how about we just talk about what we’re actually talking about:
    1. We’re talking about a subsidy for purchasing Product X that means the purchaser ends up with more money than he would without the subsidy, and a benefit that is a function of his income and how much he spends on Product X, and providing this subsidy means that others who don’t spend as much on Product X and/or don’t earn as much end up with less than they would if the subsidy didn’t exist.

    2. The fact that it is provided through the tax code should not make it more or less attractive per se than if the same subsidy were provided as explicit “spending”, IF there would be no timing differences or differences in the amount for which each person would be eligible.

  47. comment number 47 by: AMTbuff

    I don’t agree that all tax expenditures are purely or even mostly subsidies for preferred activities. I believe that relief should be provided through the tax code as needed to provide a horizontally equitable measure of disposal income. That is my baseline: a horizontally equitable measure of disposal income. Once you are there, the rest is subsidy and tax expenditure. Up to that point, it’s legitimate income measurement, not subsidy.

    Once we have agreement on a baseline, horizontally equitable code, we will then agree on whether an item deserves to be considered a subsidy or not. Then everything else you seek follows. But you cannot put the cart before the horse, asking for agreement on how to treat subsidies while having very different ideas of what is or is not a subsidy. That kind of agreement with two different meanings is useless; it’s what diplomats make a living doing.

    I contend that a tax code without a mortgage interest deduction violates horizontal equity, and that therefore such a tax code should not be used as a baseline against which tax expenditures are measured. Most tax adjustments are in the code for reasons of fairness, not merely as giveaways to favored groups.

    I wonder: Did you understand my unusual reasoning on the horizontal inequity that results from elimination of the mortgage interest deduction? 30% of homeowners have no mortgage, so the numbers are very substantial. Did you disagree that the problem exists, or disagree that it is important? Or do you see no problem with taking a benefit away from one group while leaving a very similar group untouched?

  48. comment number 48 by: AMTbuff

    Or, if you think it’s reasonable to ask for agreement on how to treat tax expenditures while having very different ideas of what is or is not a tax expenditures, I have a simple proposal for you:

    We agree that all tax subsidies should be eliminated and converted to direct spending if they are to be maintained, and that I alone get to decide what is a tax expenditure and what is not.

    Yes, that one I can definitely agree to. Deal?

  49. comment number 49 by: SteveinCH

    I’m not getting into the substance but Brooks, I’ll just point out that “everyone who disagrees with me is wrong and I’m going to beat them until they come around” is not an attractive form of argument.

  50. comment number 50 by: Brooks

    AMT,

    You still have a fixation with semantics (now it’s “subsidy”) and with vague abstractions (”disposable income”) that are both preventing you from seeing and discussing this topic clearly.

    I’m calling it a “subsidy” when either our tax code or explicit spending policy are such that if you buy Product X, you won’t have to pay the full price for X, net of the subsidy. If you don’t like using the word “subsidy” for that, it matters not a whit to me. It is what it is, regardless of the label. Maybe you’re concerned with connotations of labels that are used that tend to lead people to favor or oppose some type of policy (e.g., “subsidy” perhaps implying that one is benefiting undeservedly at the expense of others), but in our conversation what matters is what the policies are (what they do and how they affect various people) not what they are called. So if you want to use the term “Cute Fluffy Kitties” for policies that leaves anyone who Purchase Product X with more money after purchasing Product X than they’d have without that policy, be my guest, but I suggest you get away from being so distracted by labels.

    As for “disposable income”, what is that in your view? Based on your argument, it seems that you think that disposable income for a high income earner — the “disposable income” figure we should use as a basis to change individual’s tax liabilities in a way that provides more equity than would just the tax rates — is what’s left over after tax liability per the tax rates and after mortgage payments on a very expensive home, as opposed to either someone with the same income who has chosen to buy a less expensive home and has smaller payments or no mortgage at all. In other words, you think that equity considerations in shaping our tax code should shift more of the tax burden from those spending a whole lot more on products to which the Cute Fluffy Kitties apply to those spending much less (or nothing) on those products, because apparently however much you spend on those products, all of your particular level of spending on them constitutes purchases of necessities.

    Re: your last question, I don’t know what you’re referring to, but fiscal policy changes either through the tax code or explicit spending typically benefit some at the expense of others. Whether or not that is desirable obviously depends on a whole host of factors. There is nothing wrong per se with a given design of a policy nor anything wrong per se with given changes in policy even if/though some benefit, some lose. If Joe and Bob are both eligible for something and then we change the eligibility rules such that Bob is no longer eligible, there’s nothing per se wrong with that.

  51. comment number 51 by: Brooks

    Steve,

    That’s just silly, and you know better. If you are feeling bad because you have persisted unshakably with a nonsensical argument, that’s unfortunate, but let’s not get into silly complaints about a fictitious attitude you want to attribute to me for some cathartic purpose.

  52. comment number 52 by: Brooks

    AMT,

    I assume your proposal was not serious. You are still way too fixated on labels.

  53. comment number 53 by: AMTbuff

    Imputed rental value of owned assets is a component in Haig-Simons income. This non-cash income is not taxed by any current or proposed income tax. Owners of paid-off houses are not taxed on this income, but owners with mortgaged houses will in effect pay this tax if their mortgages become non-deductible. This is why prominent economists have said the mortgage deduction is not the real tax expenditure, rather it’s the exclusion of imputed rental value for owner-occupied housing. Since the latter will never be taxed, the mortgage deduction should remain, or else horizontal equity is violated.

    My ideal measure of disposal income would be Haig-Simons, but it’s an impractical base for an income tax because of the non-cash components and the need to compute all asset values annually.

    I don’t deny that the mortgage deduction provides a discount on the cost of owning a mortgaged house. That’s a subsidy, but one that merely matches the exclusion of imputed rental value for owner-occupied housing. This is a “gave it to Paul, have to give it to Peter too” horizontal equity argument.

  54. comment number 54 by: Brooks

    AMT,

    If you want, answer my question regarding your view of what one’s “disposable income” is, as a factor you think should be applied to our tax code to make it more “equitable”, and while you’re at it, explain your concept of equity for this purpose, and why that equity is increased vs. simply applying the tax rates by shifting the tax burden away from individuals based on the combination of their how much they earn and how much they spend on particular products.

    But please avoid jargon, esoteric references and unnecessary abstractions and just answer in plain language that provides a clear answer, just as my questions were posed.

  55. comment number 55 by: Brooks

    Oh, and what I was referring to as my clear questions was the following from my prior comment:
    Based on your argument, it seems that you think that disposable income for a high income earner — the “disposable income” figure we should use as a basis to change individual’s tax liabilities in a way that provides more equity than would just the tax rates — is what’s left over after tax liability per the tax rates and after mortgage payments on a very expensive home, as opposed to either someone with the same income who has chosen to buy a less expensive home and has smaller payments or no mortgage at all. In other words, you think that equity considerations in shaping our tax code should shift more of the tax burden from those spending a whole lot more on products to which the Cute Fluffy Kitties apply to those spending much less (or nothing) on those products, because apparently however much you spend on those products, all of your particular level of spending on them constitutes purchases of necessities.

  56. comment number 56 by: Brooks

    AMT,

    To follow up a bit on my comments/questions above…

    If one favors some subsidies (by which I mean the government, one way or another, in effect making some particular products cheaper for you to buy, and as a result the Treasury having less money than it otherwise would and our debt that much larger) as just a back door way of getting to less progressive taxation that one favors but cannot achieve politically via the tax rate structure, obviously that’s a matter of preference, although I think you and I would agree that it’s generally an inefficient way to do it, given the distortions and inefficiencies that are created by subsidizing purchases of particular products.

    If, as you are indicating, it’s not just the above rationale, but instead/also an effort to achieve more “equity” — some concept of fairness that takes into account one’s ability to pay — you really should clarify what you mean by that and explain why it is more “equitable” for someone to end up with less of a tax burden because he earns more and spent more on a particular product, other than a product he needs to physically survive (food, water, adequate shelter for survival, life-sustaining medical treatment, etc.), or if you prefer, other than what one needs to live as an “average poor person” in the U.S. Seems to me that any after-tax income (per the tax rates, before introducing subsidies) above those expenses for necessities would be “disposable income” if you are to use “disposable income” as a factor in adjusting the tax code to achieve greater equity.

    And of course one can argue that positive externalities make a particular subsidy desirable, but that’s not what we’re talking about.

  57. comment number 57 by: AMTbuff

    My view of disposable income would be to get as close as possible to Haig-Simons without becoming impractical. (Haig-Simons income is your consumption plus your increase in net worth.) To the extent that the tax code departs from Haig-Simons income, the departures should be horizontally equitable. Thus my position on the mortgage deduction.

    I’d really like to see some sort of tax on unrealized gains (and some sort of break for unrealized losses too) if we could figure out how to do it. Gates and Buffet got a free ride for decades, then created charitable foundations to avoid tax altogether (both income and estate taxes) on most of their gains. That’s not what I call fair.

    For a brief non-technical explanation of the imputed income point, see http://www.samefacts.com/2005/01/microeconomics-and-policy-analysis/mortgage-interest-deduction-loophole-what-loophole/

    For a rebuttal that makes sense too, see http://stuartbuck.blogspot.com/2005/02/imputed-rental-income.html

    As you can see, there are many different reasonable ways to compute income. Several important so-called tax expenditures merely reflect honest differences of opinion on how to fairly compute income.

  58. comment number 58 by: Brooks

    AMT,

    Yes, I’ve been thinking all along that net worth should be a factor in “equity” (since one can sell assets to raise money to pay taxes and still have enough left over for necessities).

    You still haven’t given anything approaching a clear answer to my question regarding “disposable income”. Do you just not want to answer it? I think I’ve expressed some issues/questions related to it fairly clearly, so you should be able to provide a direct, clear answer if you wish.

  59. comment number 59 by: AMTbuff

    My fair measure of income is consumption plus increase in net worth.

    Concessions to practicality would have to be made, including limiting any calculation of imputed consumption income to assets worth more than 10 times the median value of a home and entirely excluding any concept of imputed consumption income from leisure of from your personal efforts. I would also exclude gifts, since we need to encourage people to support each other as the government begins breaking its promises.

    Increase in net worth would be capped at the risk-free rate of return, say 2% plus inflation, for individuals with less than $10M net worth, so you could claim that or file your detailed calculation if your increase was less than the cap.

    As explained above, I would allow a mortgage interest deduction as a matter of horizontal equity.

    This is how I would compute disposable income for individuals. Accurate and fair computation of business income is a much more difficult proposition.

  60. comment number 60 by: AMTbuff

    By the way, I was not serious about the proposition that tax expenditures are treated your way if I get to decide which items are tax expenditures.

    However you are in effect asking for the same pig in a poke deal: I agree to consider tax expenditures as fully equivalent to spending, and someone else gets to decide what items are tax expenditures. The second half of that proposition makes the first half unacceptable.

  61. comment number 61 by: Brooks

    AMT,

    I guess you don’t want to just answer my questions about what you mean by “disposable income”, what your desired “equity” actually is, how you’d use the former to help achieve the latter, and why subsidies to buy particular products (with the subsidy amount a function of one’s income and how much he spends on those products) increases that equity vs. just applying tax rates. This may be my last try to get you to give actual, clear answers if I get little/nothing along those lines again. You seem to prefer going off in irrelevant directions, addressing questions I didn’t ask, unnecessary minutiae, and making esoteric references.

  62. comment number 62 by: SteveinCH

    Brooks,

    Let me know if you’ve shown any propensity to listen to either AMT or myself during the hundreds of posts on this topic. I haven’t seen it but if you think I missed it, please point it out.

    Otherwise, there’s no point in having a discussion with you since my choices are either saying you’re right (which I don’t think you are) or an endless thread. That’s why I’m not bothering with the substance here.

  63. comment number 63 by: Brooks

    Steve,

    If someone keeps telling me that X + Y - Y does NOT equal X, no matter how many ways I explain to him that his assertion is clearly invalid, the way I show I’m listening is to try to see where his logic is going wrong, so I can try another way to explain that may help him see why his logic is faulty, and that’s what I have done a gazillion times on threads regarding this topic with you.

    If your requirement for proof that I’ve “listened” is that I “agree to disagree” or agree to some compromise on the question of whether or not X + Y - Y = X, sorry, but that is hardly what I would consider required evidence that someone is listening.

    Other evidence that I’ve been listening, by the way, is that I immediately and repeatedly acknowledged the validity of the point that AMT and/or you have made that one could view the lower rates in a progressive tax structure as “tax expenditures” and other similar points that were valid, but largely or completely beside the point.

    You do have a third choice, as opposed to the two you stated: You could try harder to listen to me, to respond to the explanations and questions I’ve actually presented rather than to something else on which you are fixated, and to figure out where your thinking is not making sense. But if that hasn’t happened by now, I wouldn’t expect it to if we continued.

  64. comment number 64 by: Brooks

    Steve,

    In any case, AMT agreed with me on all of the 5 questions upthread, so if your answers are different, perhaps he can help you understand your error.

  65. comment number 65 by: SteveinCH

    Brooks,

    I told you, I’m out. You see this issue far to black and white for it to be worth discussing in my view.

    I do this a lot frankly on the web. When people seem to me unwilling to listen, I just stop. That’s where this stands for me.

  66. comment number 66 by: Brooks

    Steve,

    Basic algebra IS black or white. You really should accept that not everything is a matter of opinion or a matter on which compromise is best or is a requirement as evidence that someone was listening. Sometimes one person is making sense and the other is not, and it’s very clear which. Sorry if you’re on the wrong end of that and you wish it were some matter of opinion or perspective, but to keep saying I must not be listening is quite silly.

    In any case, even if the supposed problem you assert with me were valid, why would you not take up the issue with AMT?

    If you sense that you’re probably wrong and you just don’t wish to discuss it anymore because it’s a face-saving thing, ok, but again, to claim some unwillingness to listen and some unreasonable attitude on my part is really silly, as well as unfair and unproductive.

  67. comment number 67 by: AMTbuff

    Martin Feldstein advocates cutting to tax expenditures in today’s Wall Street Journal: http://online.wsj.com/article/SB10001424052748704518904575365450087744876.html?mod=djemEditorialPage_h

    As we all know, it’s not about fairness but about revenue: “If tax expenditures are not cut, taxes on households and businesses will have to rise to prevent an explosion of the national debt, which is now projected to increase to 90% of GDP by 2020 from today’s 63%.”

    But here’s the point that I want to stress to brooks: “Not every type of tax expenditure should be cut. Some provide good incentives while others increase the fairness of the tax system.”

    That point makes it completely clear that the debate over cutting tax expenditures is fundamentally a debate about what is a fair baseline for the income tax. Which so-called tax expenditures make sense, for example in the service of horizontal equity and accurate measurement of income, and which are just handouts? Once we have agreed on that baseline, cutting the handouts is merely a political exercise rather than an argument about fairness.

    The baseline is not irrelevant; it is central. Agreement on the baseline must come first. Failing that, one could attempt to agree on each tax expenditure one by one, ending the ones that everyone agrees are handouts. But nobody is going to agree to wholesale elimination of tax expenditures without knowing what the word means, and the word has no meaning absent an agreed baseline.

  68. comment number 68 by: Brooks

    AMT,

    You are fundamentally misconstruing what I’ve been saying. Let’s be clear on two things — two assertions that you seems to be mistakenly falsely attributing to me:

    1) As we consider which tax expenditure subsidies we want and which we don’t, I was NOT saying that the concept of a baseline — in the sense of either what is the “ideal” tax structure (rates and deductions) or in the sense of where our current structure is relative to some ideal — is irrelevant, nor was I asserting that all tax expenditures move us away from what would be optimal “fairness”. What I WAS saying was that, to see the equivalence of a tax expenditure subsidy with its counterpart as an explicit spending subsidy, it is absolutely unnecessary to consider what one considers some baseline. Again, to know that X + Y - Y = X, I don’t need to know the value of X or Y, nor do I need to have any opinion of those values as a “baseline” or as an ideal. Obviously one can be of the opinion that a given tax expenditure subsidy actually remedies/mitigates some unfairness that would exist if tax rates were simply applied (or tax rates and other tax expenditure subsidies). That’s a matter of personal preference, and has absolutely nothing to do with my point about the equivalence of tax expenditure subsidies with the same subsidy via explicit spending.

    2) You write:
    But here’s the point that I want to stress to brooks: “Not every type of tax expenditure should be cut. Some provide good incentives while others increase the fairness of the tax system.”

    Why in the world would you need to stress something if I haven’t been arguing the contrary? As I’ve said, it’s certainly possible for one to make a reasonable case that a given tax expenditure subsidy is justified on the basis of increasing fairness and/or encouraging some purchase or behavior with positive externalities. I think in at least most cases, the bulk of our current tax expenditure subsidies as currently structured do not meet either of those tests, but I would be inclined, for example, to favor subsidies of purchases some highly energy-efficient products, as well as industry subsidies that truly help kick-start alternative energy technologies in either R&D or distribution / supporting infrastructure.

    So, in a nutshell:
    - My main point has been that, however much one likes or dislikes a given subsidy, it is nonsensical to see a substantive difference between that subsidy in tax expenditure form vs. the same subsidy in explicit spending form, simply by virtue of which form it is taking. And it is doubly nonsensical not just to see a substantive difference, but to imagine some profound ideological difference or difference in economic philosophy, seeing one as conservative and representing smaller government and a tax cut while seeing the other as liberal and bigger government and higher spending. Yet most conservatives/libertarians, and many centrists and liberals, too, believe strongly that such substantive differences actually exist, and it has a great effect — introducing massive irrationality to public consideration of fiscal policy choices, with huge consequences.

    We’d be much better off if people were corrected on this nonsense, and if someone keeps saying “Well, we can’t talk about this equivalence until we agree on a baseline”, it introduces yet more nonsense and prevents people from seeing this important correction.

    - Totally separate point from the prior point: I think most tax expenditures (in dollar terms) are bad policy. They interfere with markets, introduce inefficiencies, and are a very clumsy way (at best) to seek greater “fairness” in taxation.

    I’m also still waiting for you to answer my questions. I’ll just copy and paste what I wrote upthread:
    I guess you don’t want to just answer my questions about what you mean by “disposable income”, what your desired “equity” actually is, how you’d use the former to help achieve the latter, and why subsidies to buy particular products (with the subsidy amount a function of one’s income and how much he spends on those products) increases that equity vs. just applying tax rates.

  69. comment number 69 by: Brooks

    AMT,

    Feldstien says it well (not that it’s anything different from what I’ve been saying, if I may say so myself). My favorite parts:

    Republicans also are reluctant to cut these tax perks, because they regard the additional revenue collected by the federal government as a “tax increase”—even though the increased revenue is really the effect of a de facto spending cut. A Republican who would vote to cut or eliminate an ordinary spending program therefore won’t do so if it is packaged as a tax benefit.

    But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking. It would also increase overall economic efficiency by removing incentives that distort private spending decisions.

    and

    Cutting tax expenditures is really the best way to reduce government spending.

  70. comment number 70 by: AMTbuff

    Yeah, I thought you’d like Feldstein’s piece, brooks.

    I did answer the income question to the best of my ability, essentially consumption plus increase in wealth. I explained why mortgage interest is a legitimate income adjustment to promote horizontal equity in the absence of an economically just measure of income. Please re-read it because I can’t do it any better than I did.

    As to (1), that was well stated and I agree. I hasten to add that mathematical equivalence means only X+Y-Y=X and nothing more. Some spending programs would look ridiculous when moved to the tax code and some legitimate income adjustments would look ridiculous when structured as spending.

    The latter effect is precisely what advocates of using the term “tax expenditures” desire. In other words, the advocates want to use the mathematical equivalence and the ridiculous appearance of the spending form of the tax provision to “prove” that the original tax provision was nonsense. It proves nothing of the sort. Don’t fall for that defective syllogism.

    By analogy, the number 1/3 can be written as a fraction or as 0.33333 continuing to an infinite number of digits. The forms are mathematically equivalent. The first form is the natural one; the second is artificial. Nobody would claim that the concept of 1/3 is defective because it cannot be accurately represented in a finite number of decimal digits. Yet that’s exactly the game the tax expenditure terminology people want to play.

    I maintain that some items BELONG in the tax system as income adjustments and such, no matter how crazy the mathematically equivalent spending program would look. And I know that the tax expenditure terminology people want to play their little game to try to fool the public. I’m very comfortable with taking one item at a time and considering, on the merits, whether it belongs on the spending side or the tax side or neither. That’s the fair and open approach.

    On (2), I am glad that I misunderstood you and you agree with me.

  71. comment number 71 by: Brooks

    AMT,

    Again, to be clear, I’m not “falling for [any] defective syllogism”. The equivalence I’m pointing out only means that one should not be baselessly, irrationally biased for or against some subsidy simply due to the form of the subsidy — tax expenditure subsidy vs. explicit spending. I’m NOT asserting that this equivalence means one should be inclined to favor or oppose the subsidy, whichever form it takes. And that’s not the point of “people who use the term tax expenditures” either. Their/my argument for reducing/eliminating many tax expenditure subsidies is exactly the same as it would be if those same subsidies were in explicit spending form, and they (e.g., Feldstein) point out exactly what I’ve pointed out about the equivalence for exactly the reason he and I (and others) I have done so: Because unless people are corrected on their nonsensical view that some subsidy in tax expenditure form represents smaller government, a tax cut, and conservatism while the same exact subsidy in explicit spending form is the opposite, a huge portion of the public will strongly oppose reducing the subsidy tax expenditure form even though they would strongly favor reducing it if it were in explicit spending form.

    The arguments, though, is what it would be if the subsidy were in either form, and the main arguments are that we need to reduce deficits in a way that combines the objectives of economic impact / efficiency and “fairness”. People can disagree on both for a given subsidy and can thus either favor or oppose a given subsidy.

    When you say that you see “tax expenditure people trying to fool the public”, it seems odd, because on the one hand you say you get it (the equivalence), and on the other hand, statements like that indicate you either don’t really get it or you are confused about what their argument is. Or you think (mistakenly, I assume) that they are using the term way too broadly in a way that lumps in far too many programs that aren’t really what they imply. But again, I assume that most (in dollar terms) of what they are talking about are subsidies that are indeed pretty clear subsidies — If you buy Product X (or get part of your compensation in employer-provided health insurance), you end up with more money than you would without the subsidy, and everyone else ends up with less sooner or later as a result.

  72. comment number 72 by: Brooks

    AMT,

    Oh, and you haven’t answered the second part of my question about:
    what you mean by “disposable income”, what your desired “equity” actually is, how you’d use the former to help achieve the latter, and why subsidies to buy particular products (with the subsidy amount a function of one’s income and how much he spends on those products) increases that equity vs. just applying tax rates.

  73. comment number 73 by: Brooks

    AMT,

    So the arguments of advocates of cutting many tax expenditure subsidies are essentially:
    - Subsidies for these things is inefficient and/or unfair.
    - These subsidies are hidden. If you’d oppose them if they were explicit spending subsidies — if you’d think they represent undesirable spending — you should oppose them in tax expenditure form.
    - They also add complexity to the tax code that costs more in compliance and administration (although they would as well for income-based explicit spending subsidies)

  74. comment number 74 by: AMTbuff

    why subsidies to buy particular products (with the subsidy amount a function of one’s income and how much he spends on those products) increases that equity

    In most cases I would categorize such a provision as a tax expenditure. The major exception is the mortgage interest deduction, which is the provision you started with. At the moment I can’t think of any others that give a benefit that increases with your marginal tax rate. If you have other provisions in mind, just list them and I’ll tell you what I think. Energy conservation tax credits are not hidden and do not increase with marginal rate, although they sometimes get phased out with income explicitly or via the AMT.

    Oh, here’s one: the exclusion for employer-paid health insurance. People with this are better off than people without it. Tax-free treatment does not promote horizontal equity, so I’d call it a tax expenditure. Same for flexible spending accounts, another target of tax reformers. See how much easier this is when you talk about specific provisions?

  75. comment number 75 by: AMTbuff

    Again, to be clear, I’m not “falling for [any] defective syllogism”. The equivalence I’m pointing out only means that one should not be baselessly, irrationally biased for or against some subsidy simply due to the form of the subsidy — tax expenditure subsidy vs. explicit spending. I’m NOT asserting that this equivalence means one should be inclined to favor or oppose the subsidy, whichever form it takes.

    If you’d oppose them if they were explicit spending subsidies — if you’d think they represent undesirable spending — you should oppose them in tax expenditure form.

    Can you see where your position in the second quote appears to assert the defective syllogism?

    I think the proponents of the term tax expenditures are riding the wrong horse. Horizontal equity is a much better vehicle. Its name is not as catchy, but the concept has universal appeal across the political spectrum.

  76. comment number 76 by: Brooks

    Where do you see some “defective syllogism”?? Do you think that second paragraph of mine represents advocacy? It clearly doesn’t. It’s a statement of equivalence. I could just as easily have said “If you’d support them if they were explicit spending subsidies — if you’d think they represent desirable spending — you should support them in tax expenditure form.” Or I could have switched the order. Doesn’t matter. There’s no advocacy, just an “If you believe X”, “then you should believe X”. Just saying people should approach this logically, which is to say, arrive at premises logically and then not directly contradict themselves in the application of those premises. As I like to say, I can’t insist that someone agree with me, but I can insist that he agree with himself.

    Re: tax expenditure subsidies for a given person being larger or smaller than it is for others as a function of the marginal tax rate of each, the answer is that anything that is a tax deduction (as opposed to a tax credit) fits that description. If you and I each deduct $1000 from our taxable income, but you are at a higher marginal tax rate, the difference between tax liability with or without the subsidy is larger for you, meaning the higher your income (the higher your marginal rate, to be precise), the more the tax burden would shift away from you and toward me. If we start out at the same marginal tax rate, then you move up to a higher marginal rate, then I’ll have to pay more in taxes (sooner or later) and you’ll get to pay less, other things equal.

    Re: your view of “horizontal equity” as you’re defining it as the ideal for which to strive in our tax policy, isn’t your concept of horizontal equity — the ideal you think should guide adjustments to tax policy so that some pay more so others can pay less — a function of (1) how much one chooses to spend on particular product categories that are selected (but which are not literally necessities) and (2) in the case of deductions (not credits), one’s income (or income and some metric of net worth)? So if you and I earn the same and have the same net worth, but I spend a lot more on one of those subsidized products, it’s “fair” for me to have to pay more so you can pay less, in effect having to take money out of my pocket and put it in yours, because you chose to spend more on non-necessities? And if you and I spend the same amount on those items but you have a higher marginal tax rate, it’s “fairer” for me to have to pay more taxes so you can pay less? You really need to explain this concept of equity and how you associate it with “fairness” or with whatever guiding principle(s) you have. And please don’t just keep repeating that you want horizontal equity or giving the formula using “disposable income” as a component without addressing my questions clearly.

  77. comment number 77 by: AMTbuff

    brooks, you are not understanding me. (1) and (2) are no. I don’t believe that tax breaks for consuming specific products promote horizontal equity, with the exception of the mortgage deduction.

    The mortgage deduction is fair because without it a person who owned a home free and clear would pay the same tax as a person with an 80% loan against the home. The first person enjoys cost-free use of the value of the home. The second person has cost-free use of only 20% of the value of the home. The first person is much better off (larger Haig-Simons income), so a higher income tax than the second person is appropriate. Allowing the mortgage deduction accomplishes this.

    If you can’t follow my reasoning, perhaps you have a friend who can read my posts with new eyes, understand them, and explain them to you. I really can’t make it any more clear than I have. Sorry.

  78. comment number 78 by: Brooks

    AMT,

    It’s unfortunate that you can’t explain what you’re saying clearly, but I’ll have to accept that I guess. I doubt anyone else will see my questions addressed by you any more clearly than I do.

    As for your position re: mortgage interest deduction, so it seems that you are indeed confirming that your position is that if you and I have the same income and net worth, then we each buy a home, if you choose to get a home that’s twice as expensive as mine, with twice the mortgage payment, then it’s fairer for me to pay more in taxes so you can pay less in taxes vs. what we’d each pay if either we just paid per tax rates or if we spent the same amount on a home. You don’t seem to want to face and address this (apparent) core fact about the concept of “equity” you are presenting as ideal. You are picking a product category and saying “If John spends more on that than Bill, Bill should pay more in taxes so John can pay less” (vs. what they’d each pay with out any subsidy), and you’re calling that an increase in fairness. And you’re saying the same about if John and Bill pay the same amount, but John has higher income and is at a higher marginal rate.

    If you can address the above clearly and explain why you think that’s an increase in fairness, go ahead. If you can’t, ok.

  79. comment number 79 by: AMTbuff

    No, your example is not the case I’m talking about.

    Try this example. Say brooks gets a $400k mortgage to buy a $500k house, using $100k of savings as the down payment. AMTbuff already has $500k in the bank, and he buys the $500k house next door for cash.

    According to standard economic principles, AMTbuff is getting value from his house, called imputed rental value of owner-occupied housing. He is living rent-free in a house that would cost, say, $20,000 per year to rent. This $20,000 consumption occurs completely tax-free.

    Now look at brooks. He has to make mortgage payments on $400k, say $20k per year in interest. I don’t count the principal, because that’s in effect a payment to himself, directly reducing his liability. brooks is clearly $20k per year worse off than AMTbuff. I’ll say it again: brooks is clearly $20k per year worse off than AMTbuff. Do you agree?

    The mortgage interest deduction allows brooks to reduce his taxable income by $20k, correctly treating him as living $20k lower than AMTbuff.

    The numbers don’t normally match precisely, but approximate horizontal equity is achieved between free and clear owners and owners carrying mortgages.

    I realize that the concept of imputed income is difficult to grasp for non-economists. According to this link, Marxists have a particularly difficult time accepting it: http://en.wikipedia.org/wiki/Value_added
    Therefore if some university only taught you Marxist economics, we might be at an impasse. However I hope that the simple and concrete example here makes it clear that removing or limiting the mortgage interest deduction without adding a tax on imputed rental value of owner-occupied housing would be inequitable.

    Preventing this inequity does not amount to a subsidy for borrowing money in my book: it’s merely a matter of fairly measuring income.

    In another variation on the example, brooks has another $400k that he invests in assets that produce taxable income. This variation is left to the reader as an exercise. I’ve always wanted to write that!