EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

A Bipartisan and Reality-Based Way to Cut Tax Rates AND Reduce the Deficit. Really.

November 10th, 2010 . by economistmom

As first reported by the New York Times’ Jackie Calmes, the President’s fiscal commission has just released a proposal endorsed by the commission’s co-chairs, Democrat Erskine Bowles and Republican Alan Simpson.  The New York Times provides a link to the pdf of the co-chairs’ presentation slides here.

The plan achieves the commission’s “medium-term” goal of getting deficits under 3 percent of GDP by 2015 (the co-chairs actually hit 2.2 percent) with a mix of spending cuts and revenue increases, eventually converging the spending and revenue lines at around 21-22 percent of GDP by 2025-30.  The plan is heavier on spending cuts than tax increases, at a ratio of about 3-to-1 according to the Times article, although that calculation no doubt depends on the starting reference point, or “baseline.”  Note that relative to CBO’s official current-law baseline, revenues under the co-chairs’ plan are actually lower, not higher.  (Under current law, revenues are 20.1 and 21.0 percent of GDP in 2015 and 2020, respectively, from table 1-2 on page 4 of the CBO report.  Under the co-chairs’ plan, they are 19.3 and 20.5 percent; see page 13 of the presentation slides.)  Relative to President Obama’s budget proposals, however, revenues do come up, although by only less than 1 percent of GDP by 2020.

More interesting is the fact that the co-chairs have come up with a way to raise revenue/GDP to something above the President’s proposals and something above the “charmed” 18 to 19 percent of GDP (40-year historical average) that Republicans like to insist on, while also managing to lower marginal tax rates–and that they accomplish this without any hocus pocus evoking the magical Laffer Curve.  How do they do this?  By broadening and leveling out the tax base, filling in the holes in the tax base that are known as “tax expenditures.”

Because tax expenditures create inefficiencies in the tax system and require increases in marginal tax rates to make up for the lost revenue, reducing or eliminating them represents one of the most promising avenues for bipartisan compromise in any proposals for deficit reduction.  Raising revenues in these base-broadening ways would allow both deficit reduction and marginal tax rate reduction (both of which Republicans claim to want) and would allow both deficit reduction and progressive tax increases (both of which Democrats claim to want), since most tax expenditures disproportionately benefit higher-income households.

I’ll have a little more on bipartisan tax policy ideas later this week (including my 100th-or-so installment of the short-term issue of what to do about the Bush tax cuts), as well as in the weeks and months to come.

And as an aside, co-chair Simpson has switched animal references; today he said this:

“We have harpooned every whale in the ocean and some of the minnows,” Simpson said. “No one has done this before.”

114 Responses to “A Bipartisan and Reality-Based Way to Cut Tax Rates AND Reduce the Deficit. Really.”

  1. comment number 1 by: Gipper

    I like what I’ve heard. The fact that Paul Krugman is having a conniption is a good sign, too.

    Raising revenue to 21% of GDP is the exact figure I have recommended (of course the commission members have been closely scrutinizing my comments on this blog, ah hem!).

    Placing transportation taxes outside of the general fund is good in theory, but in California, it hasn’t kept the kleptocrats away from using it for our 5 yr. continuing fiscal “emergency.”

    Eliminating deductibility of health insurance premiums is huge. So is getting rid of the home mortgage interest deduction. I guess they left out State Income tax deductions to keep Democrats on board.

    It’s nice that they lowered the rates in combination with eliminating deductions. This gives Republicans some wiggle room to sign on because the commission breaks away from the Bush Tax Cut dichotomy.

  2. comment number 2 by: Underwriterguy

    “Liberal groups immediately condemned the blueprint”
    Looks like a promising start.

  3. comment number 3 by: SteveinCH

    I agree. I don’t think they went far enough on SS reform. I think Medicare should be means tested and I don’t understand the distributive effects of the tax changes but, if I had to vote on it, I would certainly vote for it.

    But it has not a hope in hell of passing, even out of the commission. Given the reaction on the left, nothing like it will get 14 votes to get out of the commission.

  4. comment number 4 by: Jim Glass

    The fact that Paul Krugman is having a conniption is a good sign

    PK told the Asia Times a while back that “We should be getting 28% of GDP in revenue”, implying a 90% income tax increase or new comparable VAT or some such. So you know what he thinks…

    you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies

    Thus in his mind…

    [] An increase in tax revenue to the highest (non-WWII) level ever = large cuts in taxes.

    [] Closing tax expenditure loopholes, so income tax collections can increase with a reduction of rates, improving both equity and economic efficiency = “giving out a lot of goodies” “with large cuts in income taxes.”

    It seems any increase in tax revenue to less than 28% of GDP is a large tax cut that gives away a lot of goodies. The man continues to amaze.

    For some reason Krugman has never mentioned “we should be getting 28% of GDP in revenue” in his own column here in the USA. One wonders why. :-)

  5. comment number 5 by: AMTbuff

    I believe that all the tax reform options kill the state and local tax deduction. That’s how they can remove the AMT, by moving its disallowance into the regular tax system.

    I am curious how they can remove the tax breaks for retirement savings. I can understand eliminating deductible contributions to IRAs and such, but if you tax the annual increase of existing accounts, that creates an accounting nightmare!

    The proposals look really good for anyone who has just started collecting retirement benefits. Those people get increased confidence in their current benefits and reduced tax rates. These people aren’t using any of the tax breaks that will be eliminated, so their taxes may even go down!

    Progressives are unlikely to agree to the 21% of GDP tax cap. They would like a cap closer to 30% to cover long-term growth in benefit costs with minimal restraint. The public will need to weigh in on the 21% debate.

    Overall, this was a more serious attempt than I expected, especially given the Mission Impossible charter.

  6. comment number 6 by: Brooks

    I don’t have time yet to check it out, but FWIW, if it’s 3 parts “spending” cuts* and 1 part reduction of tax expenditure subsidies, and doesn’t increase tax rates, then it’s essentially the same as 4 parts spending cuts.

    As I’ve said before, it’s quite silly to group reductions in tax expenditure subsidies with increases in tax rates as if they are siblings in the category of “tax increases”. Tax expenditure subsidies are just as much “goodies” as explicit “spending” subsidies (albeit often variable based on income level, and therefore regressive, which can partly offset the progressivity of the tax structure, not that anyone making the mistake of lumping them in with tax rates is doing so on that basis).

    Tax rates affect incentives to work and invest. By contrast, tax expenditure subsidies, like their true siblings explicit “spending” subsidies, incentivize or compensate people for purchases of particular products/services or getting their compensation in the form of benefits or having another child or some other life choice (sometimes justified by positive externalities, but often not — often enacting or maintaining them is simply politics).

    The two are entirely different animals.

    * the semantics of “cuts” is another matter — the baseline thing.

  7. comment number 7 by: SteveinCH

    Not again : )

  8. comment number 8 by: Brooks

    Had to say it when I saw the “3 to 1″, with the “1″ on the revenue increase side mostly the reduction of subsidies taxpayers would otherwise have to fund by paying higher tax rates.

  9. comment number 9 by: SteveinCH

    Meh, revenues go up. That seems like a revenue increase to me although I know it doesn’t to you.

  10. comment number 10 by: AMTbuff

    It is simply incorrect to argue that a tax break that benefits a majority of Americans is economically equivalent to withdrawing that tax break and spending the money on a small percentage of Americans. The latter situation will cause much greater deadweight loss. All the bookkeeping analysis you want cannot change that economic fact.

    The name of the game in taxation is to minimize deadweight loss at a given amount of collections. Raise the collections and the deadweight loss increases, in almost every case. Tax deductions used by 50 million taxpayers are not an exception to this rule. On the other hand, revenue neutral reform that eliminates tax breaks does not increase deadweight loss.

    The 3 tax options all increase revenue by $80B per year. That’s a tax increase. If you want to call it a spending reduction, it’s a strange animal indeed: a spending cut that INCREASES deadweight loss to the economy.

    Try this thought experiment. Suppose you have a system that randomly selects 10% of the people to pay double the tax rates that everyone else pays, based on birthdays. The tax expenditure crowd would argue that 90% of the population is receiving a tax expenditure of 50% of their tax bill. The reality is that 10% of the population is paying double. The 90% define the baseline, not the 10%.

    This simple example shows why the tax expenditure logic fails when the tax breaks benefit a majority of the population.

  11. comment number 11 by: Jim Glass

    I don’t have time yet to check it out, but FWIW, if it’s 3 parts “spending” cuts* and 1 part reduction of tax expenditure subsidies, and doesn’t increase tax rates, then it’s essentially the same as 4 parts spending cuts.

    OTOH if there’s an increase in gross spending covered by a revenue increase to 21% of GDP one could call it 100% spending increase.

    I would presume their 3-1 ratio comes from changes they’d make in currently projected future levels of spending and revenue.

    Of course, choice of baseline among all the many different options makes a difference too.

    As I’ve said before, it’s quite silly to group reductions in tax expenditure subsidies with increases in tax rates as if they are siblings in the category of “tax increases”.

    Though an increase of tax revenue to 21% GDP is a tax increase no matter how you do it, cutting tax expenditures or otherwise.

    Reducing tax expenditures isn’t a tax increase *only* if tax rates are simultaneously reduced sufficiently to keep the change revenue neutral.

  12. comment number 12 by: Jim Glass

    The name of the game in taxation is to minimize deadweight loss at a given amount of collections.

    Absolutely. Well, it should be, and it is in public finance textbooks. (Krugman dismissed the concept summarily in his post because he wants much higher tax rates on the rich and the two concepts can’t be reconciled.)

    revenue neutral reform that eliminates tax breaks does not increase deadweight loss.

    It *reduces* deadweight cost, which is the big economic argument for it. Tax expenditures coupled with rates increases to collect the same amount of revenue *increase* deadweight cost, which is the big economic argument against them.

    The critical thing about deadweight cost is that it rises by the square of the increase in the tax rate (double the rate, quadruple the DWC). So the DWC cost reductions resulting from the tax expenditures are smaller than the DWC increases that result from the offsetting rate increase, and society loses.

    For a simple example, say the initial tax rate is 20% and the DWC is 100. Then half the taxpayers get a break that reduces their tax rate to 15%, requiring the other half to have their rate increased to 25% to keep things revenue neutral. From 15% to 20% is a 33% increase, 1.33^2 = 1.77 DWC increase; from 20% to 25% is a 25% increase, 1.25^2 = 1.56 DWC increase.

    In the initial situation, average DWC is 100. The fortunate half’s rate reduction reduces DWC to 56.5 (100/1.77) while the rate increase on the other half increases DWC to 156 (100 x 1.56). As 56.5 + 156 = 212.5, and that/2= 106.25, the revenue neutral creationn of the tax expenditure increased DWC by 6.25%. Reversing the process to eliminate the tax expenditure on a revenue neutral basis cuts the DWC correspondinlgy.

    Thus revenue neutral creation of tax expenditures increases deadweight cost. And, of course, debt-financed creation of tax expenditures increases debt finance cost. So either way, tax expenditures increase economic cost to society, and eliminating them reduces economic cost.

  13. comment number 13 by: Jim Glass

    The 3 tax options all increase revenue by $80B per year. That’s a tax increase. If you want to call it a spending reduction, it’s a strange animal indeed: a spending cut that INCREASES deadweight loss to the economy.

    Because tax expenditures increase deadweight cost, reducing them on a revenue-neutral basis reduces DWC — and revenue can from there be increased by an amount that increases DWC by an amount not exceeding its prior reduction.

    So, in principle, it is possible to increase tax revenue without increasing DWC by reducing tax expenditures. (Though I don’t expect to live to see our politicians actually do it.)

    Try this thought experiment. Suppose you have a system that randomly selects 10% of the people to pay double the tax rates that everyone else pays, based on birthdays.

    To clarify your example: You don’t say whether they are taxed more or the rest are taxed less, so let’s keep the situation revenue neutral. Initially everyone pays a tax rate of say 30%. Then we have the lottery, after which the losing 10% pay double the rate of everyone else. The unfortunate 10% get hiked to 54.5% and the 90% get a cut to 27.25%.

    Initially DWC is 100. Using the same math as in my other comment, DWC increases by 7.4%.

    The tax expenditure crowd would argue that 90% of the population is receiving a tax expenditure of 50% of their tax bill. The reality is that 10% of the population is paying double. The 90% define the baseline, not the 10%.

    This simple example shows why the tax expenditure logic fails when the tax breaks benefit a majority of the population.

    I’d think if the entire change was just that the unlucky 10% got their taxes doubled, revenue going up correspondingly, everyone would consider it a tax hike and nobody a tax expenditure. Tax expenditures reduce revenue, they don’t increase it.

    If the entire change was that the 90% got their tax rates slashed, revenue plunging accordingly, it certainly would be a tax expenditure. Definitionally.

    If the change was revenue neutral, as given above, well, I don’t know how the psychology of crowds would act to form the public’s opinion of it. And I don’t care. It increases DWC to society so it is a bad idea, other things equal.

  14. comment number 14 by: Vivian Darkbloom

    “I don’t have time yet to check it out, but FWIW, if it’s 3 parts “spending” cuts* and 1 part reduction of tax expenditure subsidies, and doesn’t increase tax rates, then it’s essentially the same as 4 parts spending cuts.”

    That would be true as you have formulated it, but the manner in which you have formulated the issue dictates the answer. Not every deduction or credit allowed under the Code is a “tax expenditure”. The JCT struggles with this along with everyone else, but they do have some scoring guidelines that one is certainly free to disagree with. I don’t think we can draw a conclusion as to how much of the elimination of deductions etc would be “spending” versus “taxing” until more details are provided.

    Perhaps related to this is the quote by PK:

    “you don’t propose a plan that involves large cuts in income taxes. Even if those cuts are offset by supposed elimination of tax breaks elsewhere, balancing the budget is hard enough without giving out a lot of goodies”.

    One’s visceral reaction to this might be “what tax reduction” if the income lost by reducing the marginal tax rate is simply offset by the income raised by eliminating “tax breaks”? So, the validity of Krugman’s statement also depends on whether one views eliminating these “tax breaks” as increases in taxes or decreases in spending. Also, “giving out a lot of goodies” suggests that in reducing marginal tax rates, Congress would somehow be increasing its spending on the wealthy (another favorite rhetorical device that turns reality upside down through Krugman’s Looking Glass). Someone like Krugman might find it more rhetorically convenient to call the elimination of the EITC or even other refundable credits as “an increase in taxes on the poor” rather than a “cut in spending to alleviate poverty”. It will be interesting to see how logic gets twisted in favor of rhetorical expedience on questions like this.

    This is a big reason why the debate over the details of this reform will be so difficult for the average American to understand.

  15. comment number 15 by: Monica

    I’m just thrilled that the Commission has put so many sacred cows on the table (to get some non-marine animals back into the metaphors). Maybe this will start to move the political debate away from the land of magic and child-like thinking and more towards reality.

    “The fact that Paul Krugman is having a conniption is a good sign, too.” Also, I see in this morning’s Washington Post that, “Republican anti-tax activist Grover Norquist was not happy and warned that Republicans who support the proposal would be breaking their pledge not to raise taxes.”

    So if the proposal is making the folks at both extremes upset, it must really be moving us in the right direction.

  16. comment number 16 by: Gipper

    Grover Norquist is a sunshine conservative. Talk about tax cuts, but don’t talk about spending cuts. He’s a phony, and a blowhard.

    I can excuse elected representatives for refusing to be specific about spending cuts, but not some chump working at a think tank.

  17. comment number 17 by: rick

    This would be more believable if it targeted Obamacare. That must be the first to go; without wiping that from the legislative books nothing else matters…

  18. comment number 18 by: Arne

    “The critical thing about deadweight cost is that it rises by the square of the increase in the tax rate”

    This is an example of bad math.

    The equation you are using is based on linearizing the supply and demand curves for a single good. It should not be used with aggregated numbers and it should not be used for anything but small changes.

  19. comment number 19 by: Jim Glass

    “The critical thing about deadweight cost is that it rises by the square of the increase in the tax rate”

    This is an example of bad math … it should not be used for anything but small changes.

    The deadweight cost of taxes is well proven in practice and applies to all taxes all the way up in rates.

    Use common sense. Say the govt creates a 10% sales tax. All sales with a profit margin of less than 10% will disappear and GDP will fall accordingly. DWC. Now the govt increases the tax rate to 25%. All sales with a margin under 25% will disappear, further reducing GDP, *and* the govt will lose the tax revenue it formerly received from those sales. Much more DWC. Now the govt increases the tax rate to 50%. There will be no more DWC because the tax increase is so big???

    As Mankiw put it: “if we double the size of a tax, the deadweight loss increases four-fold; if we triple the size of the tax, the deadweight loss increases nine-fold.”

    If you don’t like my very simplistic example you can review the technical explanation.

    Feldstein estimates “An across the board increase in personal tax rates involves a deadweight loss of 76 cents per dollar of revenue”. So if you want a realistic estimate of the DWC of income tax rate increases start from there and figure for yourself.

    Deadweight cost — and it’s “increase by the square of the increase in the tax rate” nature — is probably the single most important economic concern about tax policy, for all that one never hears it discussed in popular politics. It’s why to collect revenue:

    1) Tax preferences are economically costly and flat taxes on broad bases are good.

    2) It’s better to collect a given amount of revenue through multiple taxes at low rates than one tax with a rate that piles up high.

    3) Taxes with the least DWC cost should be utilized. Taxes on investments have higher DWC than income taxes, taxes on consumption have lower DWC.

    4) Taxes are economically costly, period — and the cost they drop on the economy increases at an accelerating rate as tax rates increase.

    Many people think that the big issue with taxes is just who gets to spend money, and who will spend it most wisely, the person who earns it or the gov’t — with the same amount of money being spent into GDP either way, since taxes only redirect the flow of money without changing it. But this is false.

    If someone in the private sector spends $1 and receives a return of >$1 (and that person must expect to do so or he wouldn’t spend it) society benefits. But if the govt collects $1 more in taxes and spends it, then it must earn a return >$1.76 or society loses. And this $1.76 rises at an accelerating rate as income tax rates increase.

  20. comment number 20 by: Jim Glass

    This would be more believable if it targeted Obamacare.

    Pethokoukis says the 21% of GDP revenue cap “basically kills Obamacare” and the commission members know it.

    Of course this is very, very early in a process that very likely will come to about nothing. But it’s interesting that the first bipartisan proposal would be located there.

  21. comment number 21 by: Arne

    “If you don’t like my very simplistic example you can review the technical explanation.”

    I did read it - that is why I know your math is poor. You are using a model valid for small changes and extrapolating to large changes. You are using Feldstein’s 76 cents per dollar which comes from an aggregated number as if is came from a single point on a (linear) curve.

    Not all of what you say is wrong, but your foundation is flawed. Consider your assertion “Taxes with the least DWC cost should be utilized” in light of a carbon tax. The DWC is the utility cost of not burning some fuel. The DWC in no way includes the externalities associated with buring that fuel.

  22. comment number 22 by: Truthfairy

    Bowles-Simpson “Bi-partisan” Deficit Commission is a scam:

    1. Recommendations weren’t generated, according to Fiscal Commission Charter & By-Laws, by “judgment and views” of 18 bi-partisan members. They were generated by Co-Chairs, a small cabal of GOP & Blue Dog Democrats & anti-Social Security Concord Coalition.

    2. Recos were not reviewed by 18 members prior to release to media and American public, or subjected to requisite 14-vote approval. Annoyed members are already on record stating disapproval with many recommendations.

    3. Concord Coalition “dedicated to educating the public about the causes and consequences of federal budget deficits, the long-term challenges facing America’s unsustainable entitlement programs..” was one of 90 groups to make presentations on June 30. Track the presentation to Bowles-Simpson Draft?
    http://www.fiscalcommission.gov/meetings/public-forum/1/Robert_Bixby_6_30_2010.pdf

    3. Deficit Commission documents, meeting minutes, website make no special reference to Concord Coalition. But CC website has section dedicated to Commission & features 8 “Fiscal Commission Updates” issued between April 26 & Nov 12, and Bowles-Simpson publicity is featured under “Concord in the News”!
    http://www.concordcoalition.org...

    CC release issued on Nov 2, ” Bipartisan Panels’ Recommendations Could Provide an Antidote for Ill-advised Campaign Rhetoric”, a week prior to Bowles-Simpson media blitz, suggests CC knew more about Commission’s recommendations than the actual Commission!

    4. Commission Charter says zero about releasing exclusively created draft recos to media & public BEFORE Commission members or Congress have a chance to see/review/approve. On Nov 10, Co-Chairs Bowles-Simpson staged ‘guerilla’ press conference & media blitz…when Pres was conveniently in Asia.

    David Axelrod said WH found out 1 hour before it started and he had to download the Draft recommendations off internet! Commission members were similarly sideswiped. Not Pete Peterson, Concord Coalition founder; he issued a statement re Draft on Nov 10 to coincide with press event & CC issued a Nov 11 release. How did he/they know when Commission members didn’t?
    http://www.pgpf.org/Issues/Fiscal-Outlook/2010/11/10/Draft-Proposal-by-the-Co-Chairs-of-the-National-Commission-on-Fiscal-Responsibility-and-Reform.aspx
    http://www.concordcoalition.org/press-releases/2010/1111/concord-coalition-applauds-bowles-simpson-deficit-reduction-framework

    5.Bowles-Simpson Draft is 80% conservative Concord Coalition - there’s little of more progressive thinking like excellent Economic Policy Institute recommendations:
    http://www.fiscalcommission.gov/meetings/public-forum/1/John_Irons_6_30_2010.pdf

    6. Judd Gregg (R-NH), Paul Ryan (R-WI), Tom Coburn (R-OK) had prior connection to CC.

    Before getting into the recommendations, the public has a right to transparency on this Commission - an investigation should be done.

  23. comment number 23 by: economistmom

    Truthfairy: I’m not sure what your point is in terms of what makes the commission a “scam.” You’re pointing out that many of the same people who have been working toward fiscal responsibility for many years are involved in advising and even working for the commission. That is correct, and that hasn’t been kept a secret. I don’t see what a more natural group of people to work on the issue of deficit reduction would be: those who don’t want to reduce the deficit? Also, the Bowles-Simpson presentation released last week is not the recommendation of the commission and was never sold as the “consensus” proposal (where they would need 14 of 18 members to approve). It is simply analogous to a “chairman’s mark” of sorts–the vision of the co-chairs that can serve as a starting point for the committee’s deliberations.

  24. comment number 24 by: Brooks

    I’d like to see if I can get simple, straight answers to some simple, straight-forward questions from anyone who keeps insisting that there is some substantive difference between tax a subsidy in tax expenditure form vs. in explicit “spending” form. Not the first time I’ve tried (not by a long shot), but I’ll try again with a slightly different illustration.

    I wouldn’t be surprised if I get refusal to answer on the ostensible basis of not wanting to get into this topic again. While generally quite understandable since we’ve gotten almost nowhere on this topic, I’d consider it a cop-out in this case, since I’m going to ask questions so simple that probably the only reason for not answering is if someone sees my point as valid but doesn’t want to admit it.

    Ok, first, I hope I’m not going out on a limb in assuming no one is going to deny that:
    - If “A = B” is true, then “A does NOT equal B” is false, and “A is fundamentally different from and indeed the opposite of B in terms of ideology and economics” is also false.
    - If A = B, then it’s absurd to be in favor of A and opposed to B, let alone strongly in favor of A and strongly opposed to B.
    - x + y – y = x.

    If you dispute any of the above (and if I haven’t made some typo or other sloppy mistake), then you may as well stop here, because you’re unwilling to apply logic.

    Now then, let’s take a step back from where I started upthread, and let’s take a different approach. Forget my assertion that reducing tax expenditure subsidies is more like reducing spending than like “raising taxes” (which I think of as increasing tax rates).

    Let’s start instead by asking: Is reducing tax expenditure subsidies different from reducing explicit “spending” subsidies that offer and provide the same dollar amounts to the same individuals for doing the same things (mainly purchasing Product X), assuming no differences in timing of cash flows.

    So, for example:

    Scenario A: If you buy Product X, you can deduct $500 from your tax liability (or, if your tax liability was already less than $500, your tax liability is now zero – i.e., this is not a refundable tax credit).

    Scenario B: If you buy Product X, the government sends you a check for $500 or the amount of your tax liability, whichever is smaller.

    In either scenario, if you have a tax liability and if you buy Product X, you and others who also bought Product X will end up with more money than you would have if the subsidy had not existed, the Treasury will end up with less money, and thus the deficit and debt will be larger, meaning others will have less in the future because your purchase of Product X was subsidized.

    The only difference between A and B is like the difference between your handing me $10 (Scenario A) vs. your handing me $11 while I hand you $1 (Scenario B). Again, x + y – y = x. There’s no substantive difference between the two, right?

    Sure, in B my cash outflow to you is $1 more than it would be in A, and your cash outflow to me is also $1 more than it would be in A. But hopefully it’s not hard for anyone to see that this technical difference in cash flows is not a substantive difference.

    If I have to make this even simpler, B is like your placing $1 in one of my hands while I place $1 in one of your hands (or you and I simultaneously wiring $1 into each other’s accounts), and A is like neither happening. Seriously, is anyone going to say there’s a substantive difference, let alone that these are opposites in terms of economics or ideology? I sure as heck hope not.

    So if I’m the government (the Treasury), you’d be technically correct to say that taxes and spending are higher in B than in A. But again, is anyone seriously going to say (or continue to say, as the case may be) that there is a substantive difference – even that they are opposites in terms of ideology and economics? Seriously? Again, sure as heck hope not.

    So A is not different from B. Which means that A = B. Which means it’s absurd to favor one and oppose the other [except for reasons related to conceptual confusion that people have that leads them to see a substantive difference, and the different treatment in the budgeting process – for one thing, making the tax expenditure form arguably harder for politicians to get rid of because (1) they are in the tax code and therefore on auto-pilot, and (2) political resistance comes not only from those who currently get the subsidy, but also from confused conservatives who imagine an ideological and economic difference between A and B].

    Now, suppose in Scenario B (the explicit expenditure form) someone proposes eliminating the subsidy. That means lower explicit expenditures, meaning less money flowing out of the Treasury. The Treasury ends up with more money (less outflow) and you and other purchasers of Product X end up with less money (your purchase of Product X is no longer subsidized, so you end up bearing the entire cost of that purchase) than you’d end up with if the subsidy remained in place.

    And suppose instead we have Scenario A and someone proposes eliminating the subsidy. Well, not surprisingly, every party is affected in exactly the same way as in the elimination of the subsidy in Scenario A. That shouldn’t surprise anyone since we’ve already established that A = B. Again the Treasury ends up with the same amount more money, you and other purchasers of Product X end up with the same amount less money.

    Now then…We all agree that eliminating the subsidy in B (explicit expenditure form) would mean “lower spending” than if we kept the subsidy in place. Right? And we see that A = B. So why wouldn’t we think of elimination of the subsidy in A as “lower spending”? Either they are the same or different, and we see that they are the same, right?

    Now, perhaps someone is wondering “But couldn’t you say all the same stuff about a tax rate increase. After all, that means some people pay less, the Treasury will end up with less money, and thus the deficit and debt will be larger, meaning others will have less in the future” (leaving aside the matter of dynamic effects of lower tax rates and any resulting positive externalities, just as we’re leaving aside the positive externalities of purchases of subsidized products). Well, no, tax rate increases are fundamentally different from reduction/elimination of subsidies of purchases of particular products, because they have different bases: the former relates to incentives/rewards for work and investment, and the latter for purchases of particular products. Apples and oranges.

    Perhaps someone might also ask “Well, what if everyone got enough tax expenditure subsidies that no one paid any taxes at all. Would Brooks say that that would be equivalent to having taxes and spending?” Yes, I would. Let’s say the Scenario A is that everyone’s tax liability is equal to or less than $1,000, and there is a $1,000 tax credit available for the purchase of Product X or Y or Z. So assuming everyone buys Product X or Y or Z, and thus eliminates their tax liability, it’s really no different than a Scenario B in which they pay taxes and got a check from the Treasury for the same amount at the same time (or if you prefer, simultaneous electronic transfers of the same amount in opposite directions – from taxpayer to Treasury and vice versa). But IS obviously hugely different from having no tax liability simply because there is no taxation at all – meaning no tax rates.

    Someone might also say, “But the difference is that if you eliminate the tax expenditure subsidy, more money will go to the Treasury, and it can then spend it, whereas if you eliminate an explicit expenditure subsidy, you know you’ve cut spending”. Well, this also reflects confusion. Regardless of whether the subsidy is in tax expenditure form or explicit expenditure form, eliminating it means more money in the Treasury, and the immediate effect is a lower deficit, but of course either way that difference in funds could lead to higher spending and/or lower taxes than would otherwise occur.

    If you’re one of the people who has engaged me on this topic and disputed what I’ve been saying, you’ve probably read this comment. If you understand what I’m saying, you now have a few choices:
    1. Say you realize now that I’m right and you’ve been wrong all along.
    2. Tell me why you think I’m wrong by pointing to some flaw in my reasoning.
    3. Reply in some way that doesn’t really address my reasoning.
    4. Ignore the comment or say you just don’t want to get into this again (in reality either because (a) you don’t understand what I’ve said and are unable to refute it and don’t want to keep trying to understand it, or (b) probably because you realize I’m right but you don’t want to admit it at this point.)

  25. comment number 25 by: SteveinCH

    Or (c) because we believe we’ve proven you’re wrong and nothing anyone could ever say would convince you. : )

  26. comment number 26 by: Brooks

    Steve,

    We can group your “c” into my “a” if I state the latter more neutrally as “You don’t see validity in what I’ve said, yet you are unable to refute it, and you don’t want to continue struggling to either see validity or find a flaw in my reasoning that you can point to and refute.”

    Stated neutrally, that’s your “c” right there.

    By all means, if you really do think there’s a flaw in my reasoning, should be simple and quick to point it out.

    But you won’t.

    That’s ok.This topic aside, I still think your comments overall are excellent and you’re a good guy and you generally engage in good faith.

  27. comment number 27 by: Brooks

    Just for kicks, let’s say you own two grocery stores with a different managers at each.

    At Store A the manager (”Manager A”) has the following special offer for customers: Buy Product X (priced at $10) and the cashier will take $1 off the price (customer will hand cashier $9).

    At Store B, Manager B has the following special offer for the same product. Buy Product X (priced at $10) and the cashier will give you $1 back on the spot. So customer hands cashier $10 and at the same time the cashier hands customer $1.

    Steve, I guess you would see these two approaches as fundamentally different and either opposites or close to it as far as pricing and spending (and I mean leaving aside irrational differences in reactions by customers — reacting differently to essentially the same offer just because it’s described differently).

    I suppose you’d say to Manager B “Hey man, I want you to charge the customers less and I want you to spend less. You should do what Manager A is doing. I like what Manager A is doing. He’s got the right idea: don’t charge the customer so much and don’t spend so much. That’s my business philosophy, and he’s practicing it and you’re doing the opposite.”

    And Manager B might say, “What’s the difference? Either way the customer who buys Product X ends up leaving the store with $9 less than he had when he entered and we have $9 more. And either way the customer ends up with $1 more than he’d have without this special offer of ours, and we end up with $1 less.”

    And you’d say “Hey, what don’t you understand? Your way the store is spending more money. Every time someone buys Product X you are spending a dollar of the store’s (my) money. Manager A is NOT spending that dollar. Also, you’re charging the customers $1 more than Manager A is charging them. I don’t think customers should have to spend $10 on that product, and I sure don’t want for us to spend $1 every time someone buys it. What don’t you get? Yeesh.”

    Manager B would probably just accept at that point that it would be fruitless to try further to get this point across, which would make Manager B either a better or worse man than I am (not sure which).

    Or let’s say both managers come to you and say they think if the stores eliminate the special offer the stores will be more profitable.

    You say you favor eliminating the offer at Store B because you don’t like spending $1 every time a customer buys Product X.

    But you oppose eliminating the offer at Store A because you don’t want to charge the customers more ($10 instead of $9).

    Manager A asks “What’s the difference?”

    You say “If I let you take $10 instead of $9, I think you’ll spend that extra $1″.

    Manager A rightly replies, “But in either case — eliminating the offer in Store A or eliminating it in Store B — in either case the store ends up with $1 more on each purchase than the store would have with the offer in place. The store manager can spend it or not spend it, but that extra $1 is there to possibly spend either way.”

    And you reply…well, I don’t know what you’d reply but it probably wouldn’t address the point he made.

    Feel free to help me out with any of this if I’m missing some valid point you can make.

  28. comment number 28 by: Vivian Darkbloom

    Re: Comment 27

    I’ve never engaged you on this subject, so forgive me if I don’t confine myself to your menu of options for replying.

    I think your analysis is correct as far as “tax expenditure subsidies” are concerned. But this begs the question. The more difficult and appropriate question, which you appear to ignore, is “what is a tax expenditure”.

    The original concept of “tax expenditure” was introduced by the inimitable Stanley Surrey. The original concept, simply put since you asked for it that way, is that a “tax expenditure” is something that lowers one’s tax burden other than by means needed to arrive at “net income” in a true economic sense. To take a simple example, a deduction for cost of goods sold and normal depreciation would not be considered “tax expenditures” in Stanley’s original vision. Beyond that, it gets more complicated.

    The Joint Committee on Taxation, which Surrey headed up, is basically the Decider as far as defining what is and is not a tax expenditure for budget purposes. If you are interested, they’ve got an 87 page summary of the history and current view that you might find useful.

    http://www.jct.gov/component/content/article/26-searchresults.html?cx=008862331380613398025%3A7j4cpky7-u8&cof=FORID%3A10&ie=UTF-8&q=tax+expenditure+history&sa=Search

    I think we probably could spend a lot of time debating each item as to whether it might be a tax expenditure or not. The bottom line, which I’ve used elsewhere, is that if you are the ox that is gored, you are gored all the same whether it is a “tax expenditure” that is being reduced or a tax that is being increased. That’s probably the most important factor as far as the current debate is concerned, although I do find it good sport to see how the rhetoric gets twisted to suit one’s ideological needs.

  29. comment number 29 by: Brooks

    Viivian,

    No offense, but you’re missing the whole point.

    And this is not at all a semantic debate. It’s my attempt to correct some people on fundamental conceptual confusion that is causing irrational policy analysis and in turn suboptimal fiscal policy even based on their objectives and priorities.

    The same people who would say they strongly favor eliminating a subsidy for purchasing a particular product if the subsidy takes the form of a check from the government are essentially saying they’d strongly oppose eliminating the same exact subsidy if it were in tax expenditure form (meaning a tax deduction), saying that the former would be “lower spending” and conservative in terms of economics and ideology, and the latter would be “higher taxes” and “higher spending” and to the left in terms of economics and ideology.

    Again, they view the two as fundamentally different, and even opposite in terms of ideology and economics, even though they are the same exact thing — same incentive, and all the same parties ending up with the same dollars based on the same behavior. That’s pretty nuts. Or more precisely, it reflects complete conceptual and practical confusion in a way that really precludes rational fiscal policy decision-making.

  30. comment number 30 by: Brooks

    And I couldn’t care less what is officially called a “tax expenditure” or what anyone wants to call a tax expenditure.

    If anyone wants to just substitute “One’s tax liability is reduced if they buy Product X vs. if they don’t buy Product X”, that’s essentially what I’m talking about, and that definition of “tax expenditure subsidy” should work for purposes discussing the point I’m making so I don’t have to constantly write out what I mean.

  31. comment number 31 by: SteveinCH

    Brooks,

    I knew that’s how you’d see it. You’re blind on this particular issue but you’re also a good guy.

    Have a nice day.

  32. comment number 32 by: Brooks

    Steve,

    Unfortunately, if two guys are each saying the other is blind on a particular issue, it doesn’t make both right.

    And the difference here is that I’ve once again laid out my explanation clearly, step-by-step, and you won’t point to where you think my reasoning is wrong, yet you want to keep saying it’s wrong and that you’ve shown that before (which of course, you haven’t).

    Again, it’s all laid out above very clearly, just like someone taking you through their math (and on a not-too-complex mathematical problem at that). If you think it’s wrong you should be able to point to something there and say “Here’s where your error comes in and here’s why”.

    But you won’t. And you haven’t previously either. And disputing the validity by serving up technical tautologies (re: tax revenues increasing) obviously doesn’t cut it, nor do any other comments that fail to address my explanation.

    So again, if you can point to a flaw in my reasoning and refute it, go ahead. But address it directly and give a logical refutation.

    Again, I’m not expecting you will, but if you’re going to keep saying I’m blind on this issue, I might keep inviting you to take a moment and show me where I err in my reasoning above.

  33. comment number 33 by: SteveinCH

    Brooks,

    We had a 150 plus post back and forth about this and both of us left convinced we were right. For the sake of the world, I’m not going to replicate it again.

    The short answer however is you err because calling any particular item a tax expenditure depends on a baseline tax code that does not include that item.

    I’m aware you disagree with that point but I think it valid and no amount of examples of a type that excludes that factor will ever be convincing.

    Peace.

  34. comment number 34 by: Brooks

    Steve, I believe you believe that you’ve actually addressed my reasoning previously, but you really never have.

    And you can, in effect, try to represent this matter as a semantic one all about who is calling what a “tax expenditure” but I have a hard time believing you think that has anything to do with what I’m talking about, and I’ve expressed that to you previously repeatedly.

    As I said to Vivian above, I couldn’t care less what anyone labels a “tax expenditure”.

    I’m using the term “tax expenditure subsidy” to refer to provisions in the tax code that mean “If you buy Product X, it will reduce your tax liability”. Call that “spaghetti” if you wish. The label means nothing to me. But for you it’s apparently either a deliberate or subconscious diversion from the actual point I’m making, which is that it obviously makes no sense at all for you to think there are the differences you imagine between the same subsidy if it’s delivered via tax deduction vs. if it’s delivered via government check.

    Your comment re: baseline is an example of your NOT addressing my reasoning, but instead claiming my reasoning is invalid while making an unrelated argument.

    If you ever want to actually address my actual reasoning with relevant, logical refutation, feel free. It would be the first time (and a large quantity of previous responses doesn’t mean that any actually addressed my reasoning and did so logically). I won’t hold my breath. But on other topics you are more willing/able to engage and address others’ actual arguments logically, so I look forward to that.

  35. comment number 35 by: Brooks

    Here’s another illustration that occurs to me. Maybe this one will make it impossible for anyone to see how ridiculous it is to imagine some fundamental difference in economics and ideology between a subsidy via tax deduction vs. the same subsidy via government check.

    Ready?

    Suppose you’re filling out and filing your taxes online.

    Scenario A: You input your income and the program calculates a figure that is your tax liability up to that point in the program. But then you input the amount you paid for a particular product (Product X) and the program recalculates your tax liability by subtracting that amount. You then pay that new tax liability amount online by transferring funds from your account to the Treasury.

    Scenario B. You input your income and the program calculates a figure that is your tax liability. You pay that amount by transferring funds from your account to the Treasury. But you also inputted the amount you paid for Product X, so simultaneously the Treasury is transferring that amount into your account.

    Either way you end up paying the same amount. And that amount is less than it would have been if you had not purchased Product X. And the Treasury has that much less in its coffers either way. It doesn’t matter at all whether you just transferred that much less to the Treasury of if that amount was just flying in both directions through that “series of tubes” (from your account to Treasury and vice versa). As I’ve said before, it’s like your handing me $1 vs. your handing me $2 while I hand you $1.

    For some strange reason though, some people will see enormous difference between the two and will see them as opposites in terms of economics and ideology, simply because of an entirely insignificant difference in cash flows.

    * yeah, I know he’s dead, but that line will always be funny.

  36. comment number 36 by: Brooks

    Meant to say:

    Maybe this one will make it impossible for anyone NOT to see how ridiculous it is to imagine some fundamental difference in economics and ideology between a subsidy via tax deduction vs. the same subsidy via government check.

  37. comment number 37 by: Brooks

    Steve,

    Can I get you to just either tell me why you think you see such a difference between A and B in that “online taxes” illustration, OR to admit that there is no substantive difference between A and B?

  38. comment number 38 by: Brooks

    In my “online tax” illustration above (7:48 pm), does anyone think that A represents smaller government — substantively lower taxation and lower spending — and is more conservative fiscal policy and more desirable than B, simply because A means less cash flowing to the Treasury and less cash flowing out of the Treasury than in B?

    Seriously??

  39. comment number 39 by: SteveinCH

    Brooks,

    I think the question is irrelevant because it does not represent the situation we face.

    All of your examples assume arguendo a tax code that would exist without the tax expenditure and a spending outcome that is different than the current one.. That is your version of the baseline tax code and budget. However, since this tax code never existed, you cannot prove it is superior to any other baseline and therefore your A vs B scenario is irrelevant.

    The current situation, in my view, is the government collects X and spends Y. The fact that it could collect X+Z if tax expenditures were eliminated is irrelevant.

    If tax expenditures are expenditures, how did tax receipts go up as a consequence of Simpson-Bowles? After all, rates went down so doesn’t that mean that taxes should go down. After all, if tax expenditures are expenditures, they shouldn’t affect receipts.

    If, on the other hand, you admit they are receipts, the exact same aggregate effect of decreasing tax expenditures could only be created by increasing tax rates, the appropriate equivalence.

    And in answer to your question in 38, yes I think A is a more conservative fiscal policy than B. But we’ve debated this ad nauseum and you’ve already declared yourself the victor against all comers so I’m not sure why you are still bothering.

  40. comment number 40 by: Vivian Darkbloom

    Brooks,

    You apparently missed the sentence where I said I agreed to your analysis as far as “tax expenditure subsidies” are concerned. Frankly, I’m not aware of any serious people who do not.

    However, you are absolutely wrong when you say that the definition of your “tax expenditure subsidy” is irrelvant. In fact, it is the only issue involved here, as far as I’m concerned. If you carefully read and consider what SteveinCH has written in comment 39, he’s saying the same thing, albeit in different terms. Critics of the tax expenditure analysis are concerned primarily that the concept requires defining a “normative tax system” (Steve’s baseline tax code); they don’t disagree that those cases in which something really is a tax expenditure have the consequences you give it. This is another way of saying we need to define what the appropriate set of rules are for determining economic net income and work from that to define “tax expenditure”. Those critics have a point, but that’s not to say the whole concept is worthless. Some cases are fairly straight forward (mortgage interest deduction); others are more difficult (tax deferral savings on corporate foreign earnings and failure to include imputed income on home ownership in the tax base would be two examples).

    One can call any debate a matter of “semantics” since we’re stuck with language to communicate with each other. But the distinction between something that is properly a “tax expenditure (subsidy)” and which therefore has the economic characteristics you ascribe to it and something that is not has real substance and practical consequences.

    So, here’s a simple question for you: Is every provision in the tax code that allows a deduction, credit or exemption and therefore reduces one’s tax liability that would exist without it a “tax expenditure subsidy” with the consequences you describe? If so, why so and if not, why not?

    As I’ve said above, at the end of the day valid distinctions can be drawn but these distinctions are not going to be very useful in the current debate except to obfuscate rather than elucidate the difference between taxing and spending. I think we had better just stick to an analysis of whose ox is gored. Everyone knows how to feel pain.

  41. comment number 41 by: Haven JORDAN

    Go Simpson & Bowles!

  42. comment number 42 by: Brooks

    Steve,

    Once again, all you offer are (1) statements of obvious fact that I’ve acknowledged repeatedly (that tax receipts increase when tax expenditure subsidies are reduced) which you present as an argument when really it’s just a tautology that doesn’t address my point (like if you say “Hey, if I hand you $2 while you hand me $1, is that or is that not a case where I’m handing you more money and you’re handing me more money than if I just give you $1?” Well yeah, obviously, but that doesn’t make it a substantive difference, does it? Let alone some fundamental difference in economics or ideology), and (2) you keep addressing a different argument than the one I’m making, while not addressing my actual argument.

    Unfortunately, very often in the blogosphere we find both #1 (meaningless tautological responses) and #2 (repeatedly addressing a different argument than the one that was actually made — a “straw man” if deliberate, just sincere confusion if done in good faith — no matter how many times one points out the difference and asks that the actual argument be addressed).

    I don’t know how to make it any more clear that my argument has nothing to do with labels or semantics. If you prefer, use the term “tax deduction subsidies” or, as I said, “spaghetti” to refer to “if you purchase Product X it lowers your tax liability. I don’t care, because the label is irrelevant to my point, which you seem intent on not addressing for some reason. But I guess you won’t just leave the label aside, because you want to keep making a point about labels as if that’s what my argument relates to, even though I’ve explained a gazillion times why it doesn’t.

    I’m going to repeat my most recent illustration:

    Scenario A: You input your income and the program calculates a figure that is your tax liability up to that point in the program. But then you input the amount you paid for a particular product (Product X) and the program recalculates your tax liability by subtracting that amount. You then pay that new tax liability amount online by transferring funds from your account to the Treasury.

    Scenario B. You input your income and the program calculates a figure that is your tax liability. You pay that amount by transferring funds from your account to the Treasury. But you also inputted the amount you paid for Product X, so simultaneously the Treasury is transferring that amount into your account.

    Either way you end up paying the same amount. And that amount is less than it would have been if you had not purchased Product X. And the Treasury has that much less in its coffers either way. It doesn’t matter at all whether you just transferred that much less to the Treasury of if that amount was just flying in both directions through that “series of tubes” (from your account to Treasury and vice versa). As I’ve said before, it’s like your handing me $1 vs. your handing me $2 while I hand you $1.

    Now, Steve, are you actually going to sit there with a straight face and say that there is a substantive difference between A and B — that A is more fiscally conservative, representing lower taxation and lower spending than B, and that it would make sense for someone to strongly favor one and strongly oppose the other on that basis?

    I guess you’ll say “yes” as you did in your last comment, but boy would I love to hear you explain why without simply stating the obvious (that one means more cash going to the Treasury and more coming from the Treasury), since you must at this point realize that that difference is completely non-substantive — again, like the difference between your handing me $2 while I hand you $1 vs. your just handing me $1.

    I mean, really. Seriously. On the one hand, I don’t think you’re inclined to keep denying the validity of what I’m saying just to avoid the embarrassment of admitting you’ve been wrong all along. But I find it even harder to believe that a smart guy like you still can’t get what I’m saying, and would still contend something so obviously nonsensical.

    I guess I have no option but to conclude it’s the former if you still won’t give me a reason why there is a substantive difference between the two, and/or where you think my reasoning is flawed as I equate the two.

    By the way, as for “all comers”, the logical validity of arguments is not a matter of democracy. And if someone’s argument is laid out clearly, step by step, then showing a flaw in someone’s logic isn’t hard if you think there is one.

    As for why I “bother”, it seems every time I make a point about tax deduction subsidies here, you make some comment, usually friendly but still implying (or stating explicitly) that the point I’m making is either invalid or at least of questionable validity. You can hardly blame me for pressing you on those occasions to put your money where your mouth is and show me where you see a flaw in my logic and/or to explain how you can possibly see the differences you see between two things that are the same in every substantive way. And offering up even hundreds of responses that don’t do either does not add up to doing it. It’s not a matter of quantity. It’s just a matter of saying “here’s where your reasoning is invalid and here’s why”, or “here’s why I see a substantive difference, not just the obvious fact of the difference in cash flows”.

  43. comment number 43 by: Brooks

    Vivian,

    I do realize that there is a policy debate in which people are using the term “tax expenditure” and that there can be an issue of baselines.

    But don’t confuse my point with the question of whether or not that label is always applied with the proper implications.

    I’m simply saying something like this: If Politician A proposes a $500 tax credit if you buy Product X*, and Politician B proposes that the government send you a check for $500* if you buy that same product, it’s flat out nuts for a conservative to cheer for the former and strongly oppose the latter with the rationale that A’s proposal means smaller government, lower taxes, lower spending and B’s proposal means bigger government, higher taxes and higher spending.

    Sure, there’s an inconsequential difference in cash flows — A is like your giving me $1 and B is like your handing me $2 while I hand you $1 — but there is no substantive difference, let alone some huge difference in ideology and economics.

    So we have conservatives taking a wholly irrational view of tax deductions (particularly for individuals — business expenses are a different matter), leading to bad policy choices. If a politician wants people who buy Product X to end up with more money and everyone else to end up with a larger deficit as a result, and for it to be popular, all he has to do is represent it as a “tax cut” (as Obama did in his last State of the Union) rather than offer it as a government check, even if every single party is affected in exactly the same way on the same basis either way.

    It’s simply insane. It’s like if you say no way would you sell your candy bar for $1, but you’d jump at the chance to sell it for $2 while giving $1 back in change. Nuts, right?

    So it is, frankly, nonsensical to say that reducing that kind of tax deduction means people are getting “gored” unless you’d say that reducing the same subsidy in explicit “spending” form means people are getting “gored”. Because it’s the same subsidy with the same effects on everybody regardless of form. If you think otherwise, show me what’s different? If people take the same action in question (buying Product X) who ends up with more or less depending on which form the subsidy takes? The buyer-taxpayer person? nope. The Treasury? nope. Other taxpayers who are left with the larger deficit? nope. All effects are the same and all on the same basis (people buying Product X).

    Get it?

    * $500 or your tax liability, whichever is smaller. And assume no timing differences.

  44. comment number 44 by: Brooks

    Vivian,

    And one more point re: oxes getting gored:

    If you get either a check from the government for $500 because you bought Product X or a tax credit of $500 because you bought Product X, then anyone who doesn’t buy Product X is getting gored either way, if by “gored” you mean having to eventually sacrifice more due to the larger deficit that results from your having $500 more and the Treasury having $500 less, whether that’s because the Treasury took $500 less from you because you purchased Product X or because the Treasury sent you $500 because you purchased Product X.

    Same effects all around regardless of which form this subsidy takes — same effects on you, on the Treasury, and on all other people who are sooner or later affected by the larger deficit.

    See what I mean?

    The policy question is “Do we want our fiscal policy such that people who buy Product X to end up with more money than they otherwise would, and so everyone affected by a larger deficit should sacrifice that much more?” (leaving aside dynamic effects and positive externalities)

    If the answer is “yes”, then it should be “yes” regardless of form, as long as all the incentives and effects all around are the same. EXCEPT that one can prefer one over the other because of the irrational view so many people have and/or because of the different treatment in our budget process.

    Even if a subsidy would be the same either way, I would view it as less desirable if done as a tax deduction, because (1) as a tax deduction it would be on auto-pilot, like entitlements, as opposed to subject to annual appropriations where I assume there would be more scrutiny, and (2) because so many conservatives are so hopelessly confused on this matter, they will defend the subsidy on the basis that eliminating it would represent a “tax increase”, even though they might want to get rid of the same exact subsidy if it were in explicit “spending” form.

  45. comment number 45 by: Vivian Darkbloom

    Brooks,

    I asked you a simple question in my original post, but you didn’t answer it, directly at least. I think you did answer it indirectly in comment 43 when you wrote:

    “So we have conservatives taking a wholly irrational view of tax deductions (particularly for individuals — business expenses are a different matter), leading to bad policy choices.”

    What you are really saying here is that those conservatives (whoever they are) cannot distinguish between a “tax expenditure subsidy” and something that is not. In other words, they don’t share your definition or they do and are simply being hypocritical. As far as your definition is concerned, it appears that it is any deduction, exclusion or credit that can’t be properly classified as a “business deduction” (i.e., something needed to arrive at economic net income). Sorry to have to do this for you, but I gave you the opportunity to define it yourself and you declined. Isn’t this more or less what I posited in my first post? This same issue comes back in comment 44 where you wrote: “so many conservatives are so hopelessly confused on this matter, they will defend the subsidy on the basis that eliminating it would represent a “tax increase”, even though they might want to get rid of the same exact subsidy if it were in explicit “spending” form”. Again, these conservatives might not share your view of what a “subsidy” is, or they might simply be hypocritical. You are certainly free to disagree with those conservatives or anyone else, about what a “tax expenditure subsidy” is, but you needed continue to beat that poor dead ox over whether a dollar discount is equal to a dollar refund. No one disagrees with you. In fact, I can agree with you on a straight economic basis that anything other than what would be properly classified as a “business expense” under some sort of “necessary and proper for the production of income” concept could be properly classified as a “tax expenditure subsidy” (i.e;, spending). In other words, you are arguing for some sort of flat tax as the normative base. If you were to finally admit that the definition DOES matter and that this is the most useful one, you and I could well be in full agreement.

    Now, regarding your comment 44 on ox goring. Your example regarding Product X is of limited utility here. Sometimes, people will get the tax break on purchase of Product X even if they would have (because of business necessity etc) bought that product anyway. Some people will get the break because there is a perceived macro economic or societal benefit for encouraging them to do so (various incentive tax credits). And some tax expenditures are given to people who don’t buy any products at all (such as the personal exemption and standard deduction). That is a difference that is important for policy, I think, and it is fundamental to our definition.

    Having said all the above from a perspective of straight economics, as far as ox goring is concerned, you have to recognize that in the real world people do have expectations that have arisen due to historical tax norms. If I am accustomed to getting a mortgage interest deduction, I do feel this pain directly and acutely when it is taken away–it’s like getting gored in the gut. Of course, due to the reduced revenues that are taken in by virtue of this deduction I also suffer indirectly, but this pain can’t be pinpointed by many oxen because they are rather stupid animals–it’s like a slow debilitating aching all over. That is why it is so difficult to get support to balance the budget. In an imaginary world, if those tax expenditures were handed out equally, I suppose it would be a zero sum game. The pain I feel when the expenditure is taken away is equal to the pain that is alleviated when my portion of the deficit is reduced even though the cause and effect are still not equally identifiable. But, this is not an imaginary world and tax expenditures are not handed out equally or for all the same reasons. Psychology is an important driver of economic behavior and it comes very much into play here. And, equally important here is to remember Thomas Mann’s observation: “everything is politics”. By the way, why should I “leave aside dynamic effects and positive externalities”?

    Your last paragraph I can fully subscribe to and, of course, this is why so much spending is driven through the tax code. Since you’ve repeatedly called out “so many conservatives” on this issue, I wonder if you could provide me with a couple of names and examples that demonstrate your point?

  46. comment number 46 by: brooks

    Vivian,

    Why oh why are you so insistent on making this all about labels?

    I’ve said (for purpose of a starting point at least) that I’m talking about anything that reduces your tax liability if you (as an individual, not business) buy Product X.

    And my point is simply that there is no substantive difference — let alone the fundamental ideological difference that Steve and perhaps you see — b/w such a provision in the tax code vs. the same thing happening via government sending you the same amount of money ifyou buy Product X.

    Every party is affected the same way whether it’s done through the tax code or via that explicit “spending”, as I’ve explained and illustrated repeatedly.

    I’m saying that there is no substantive difference between A and B, let alone in ideology or economics, and if you think there is a substantive difference, show me how anyone is affected differently under one form vs. The other.

    It is unnecessary to get into what should be called a “tax expenditure” or a “subsidy” in order to see the validity of my point (or to try to show me why it’s invalid). forget the friggin’ labels please. Just address what I’m saying. Either there is a substantive difference b/w A and B or there isn’t. Labels are irrelevant to the answer.

  47. comment number 47 by: Vivian Darkbloom

    Brooks,

    I’m going to help you out by citing one example in the following article by the group “Americans for Tax Reform” (this qualifies as a conservative group, I thnk):

    Obama Debt Commission calls for $1 Trillion in Net Tax Hikes

    “The report (referring to Bowles-Simpson) deceptively calls their net tax hikes “spending in the tax code.” There is no such thing, unless you assume the government has a right to all your money, and when they cut your taxes this is the same thing as “spending money on you.””

    Read more: http://www.atr.org/##ixzz15Rq5OhPC

    I was alerted to this by Glenn Hubbard’s piece in the NYT today.

    I have not bothered to try to figure out how much of that $1 trillion would be a cut in spending or an increase in taxes (according to the definition of “tax expenditure subsidy” that I posited we might agree on.) What is clear to me, though, is that this statement paints with much too broad a brush. Much of the additional “revenue” in the Bowles-Simpson plan IS correctly characterized as a reduction in spending and not an increase in taxes. If this is what you have a problem with that, I’m with you all the way. But, where to draw the line? Is taxing cap gains and qualified dividends at ordinary rates a tax increase? This is where it gets more complicated and where the definition is relevant. (I say “yes” because that income has already been taxed. If that were not the case, I think we’d have to call it a decrease in spending.)

  48. comment number 48 by: Brooks

    Vivian,

    I’ll try yet again, although I’m losing hope: Forget the labels just for the moment and just address what I’m saying.

    I don’t think it’s humanly possible to make it any clearer: I’m saying that two things — (A) a tax provision that reduces your tax liability by $Z if you buy Product X and (B) the government sending you $Z if you buy Product X — are not substantively different.

    Steve and unfortunately a great many conservatives not only say there is a substantive difference between them, but actually see a fundamental difference in economics and ideology, and thus they support one (or oppose it less) while strongly opposing the other, simply on the basis of which process is used to arrive at the same financial result for all involved as a result of some people purchasing Product X.

    I’m simply trying to get you and others to see that A and B are not substantively different (or if someone thinks he/she can offer a reason why they ARE substantively different, I’d like to know what that substantive difference is. And an inconsequential cash flow differences — like your giving me $1 vs. your handing me $2 while I hand you $1 — is not a substantive difference).

    I’m presenting two things and saying they are not substantively different. You really do not need to get into a different discussion of whether or not this person or that is apply the right label to one or the other in order to say “Yes, of course there’s no substantive difference. It’s the same incentive, and the result is the same for all involved on the same basis (some people buying Product X). Regardless of which process is used, the people who buy X end up with $Z more than they would without that tax provision or explicit expenditure program, and the deficit is that much larger (meaning others will have to sacrifice that much more*)”

    No discussion of labels is necessary to see that as valid and to say that. If you still think such a discussion is necessary for you to say that the two are not substantively different (or to tell me why you think they are), I give up.

    Re: Is taxing cap gains and qualified dividends at ordinary rates a tax increase? This is where it gets more complicated and where the definition is relevant.

    NO, it’s not relevant to MY POINT AT ALL. And this is something I explained in prior conversations with Steve and others. Listen to me please. First of all, you’re talking about tax rates on income which is different from “If you buy Product X”. But moreover, my point is one of equivalence, not of labels. So if we adapt my point to this (not really fitting anyway) example:

    If A is taxing capital gains at at a lower rate than ordinary income, and B is taxing capital gains at the ordinary income rate but the Treasury refunding the difference (how much less one would have paid under A), and if there are no timing differences, then the two are not substantively different. The Treasury is still receiving the same net amount from you, on the same basis (your capital gains). So what would be the substantive difference? There wouldn’t be any. You’d end up exactly the same, as would the Treasury (and by extension, everyone else who is affected by the deficit).

    Do I need to know what label to put on a lower capital gains tax rate in order to say that? Of course not. I see that the two are substantively the same because they obviously are.

    So, if a conservative would say that they favor A (lower cap gains tax rate) but oppose B (cap gains taxed at the ordinary income rate but government essentially refunding the difference at the same time the taxes are paid), on the basis that they view A as “small government, low taxes, low spending” and B as “big government, high taxes, high spending”, then that conservative is being wholly irrational and is absolutely confused, because A and B are not substantively different.

    Get it?

    I really can’t make it any clearer. And it’s not complex or obscure or esoteric to begin with.

    * leaving aside dynamic effects and positive externalities

  49. comment number 49 by: Brooks

    Vivian, Steve, (and all),

    If this helps:

    1. Do you see a substantive difference between (A) your giving me $1 vs. (B) your giving me $2 while I give you $1?

    Hopefully your answer is “no”.

    2. Do you see a substantive difference between (A) your sending the Treasury $1 vs. (B) your sending the Treasury $2 while the Treasury sends you $1?

    Hopefully your answer is “no”.

    3. Do you see a substantive difference between (A) your only having to send the Treasury $1 rather than $2 because you bought Product X vs. (B) your sending the Treasury $2 while the Treasury sends you $1 because you bought Product X?

    Hopefully your answer would be “no”.

    4. And if, as you’ve hopefully now acknowledged, there is no substantive difference between A and B, does it make sense for someone to support A, calling it “smaller government, lower taxes, lower spending, and conservative” and oppose Policy B, calling it “bigger government, higher taxes, higher spending, and liberal”?

    Hopefully your answer is “no”. And if so, guess what? You’re now saying exactly what I’m saying.

  50. comment number 50 by: Arne

    Brooks,

    Your logic is unassailable. The problem is that your A and B example does not adequately represent anything that people actually spend time discussing.

  51. comment number 51 by: AMTbuff

    >Your logic is unassailable. The problem is that your A and B example does not adequately represent anything that people actually spend time discussing.

    Correct. As I argued back in post 10: “the tax expenditure logic fails when the tax breaks benefit a majority of the population.”

    For example, everybody gets a personal exemption. I claim that this makes the exemption part of the tax baseline. If you call it a tax expenditure you have to regard the baseline as a hypothetical tax code without this exemption, a code that has never existed. That’s sophistry. It’s also fantasy.

    Brooks, I’m tired of hypotheticals, especially hypothetical refundable credits. Those are an insignificantly small subset of what the tax expenditure people are talking about.

    Let’s instead pick a real example. What’s your argument that ther personal exemption is a tax expenditure?

  52. comment number 52 by: Vivian Darkbloom

    Brooks,

    I think we probably need to just agree to disagree and move on. I’ve said repeatedly that I agree with you that a dollar refunded is equal to a dollar discounted no matter how many ways you want to re-phrase the same thing. It’s obvious that I don’t get your point and you don’t get mine, so perhaps it’s time to move on to other matters. I will give you this, though: You’re stubborn–like an ox.

  53. comment number 53 by: Brooks

    AMT,

    Are you saying your answers are all “no” to my questions 1 through 4 in my 10:26 comment?

    And are you therefore acknowledging that there is no substantive difference between A and B and that it would make no sense for someone to see those differences re: ideology and economics between them and to support one and oppose the other?

    Go ahead and confirm what you seem to be saying, and we can take it from there, including my answering your question (which is completely irrelevant to the validity of my point, by the way). I can’t respond until at least tonight though.

  54. comment number 54 by: Brooks

    Vivian,

    What are you “disagreeing” on?

    What are your answers to my questions 1 through 4 in my 10:26 comment?

  55. comment number 55 by: Brooks

    AMT,

    Just to follow up on my 8:01am comment, it sounds like you’re saying you see that, as Arne put it, with regard to my point and explanation, that my “logic is unassailable”.

    Therefore, you are acknowledging that there is no substantive difference between (A) the mortgage interest deduction vs. (B) if there were no mortgage interest deduction, but the government sent people checks (i.e., “spending”) for the same amounts they’d save if there were a mortgage interest deduction.

    You’re acknowledging the above, correct?

  56. comment number 56 by: Vivian Darkbloom

    I’m disagreeing on your failure to acknowlege that the definition of “tax expenditure” is relevant to this discussion. We seem to agree about the fact that there is no difference between an outlay and a refund with respect to a tax expenditure. Because I’m a patient person, albeit with limits, I’m going to give you another chance to answer my initial question. In case you’ve forgotten, here it is again:

    –So, here’s a simple question for you: Is every provision in the tax code that allows a deduction, credit or exemption and therefore reduces one’s tax liability that would exist without it a “tax expenditure subsidy” with the consequences you describe? If so, why so and if not, why not?

    If you answer that question, I’ll answer your 1 to 4. Is that fair enough? I sense AMTbuff is asking pretty much the same thing with respect to his or her question at comment 51.

  57. comment number 57 by: AMTbuff

    1 thorugh 4 describe refundable tax credits, so yes, they are valid. They are also irrelevant to any serious policy discussion fo tax expenditures, since refundable credits are a tiny fraction of what people call tax expenditures. Now please answer my question as directly as I’ve answered yours..

  58. comment number 58 by: AMTbuff

    However if a refundable credit is given to everyone, that is a tax cut, not a tax expenditure. For refundable credits given to a majority of taxpayers, and there are no such credits in current tax law, the answer to 4 is no.

  59. comment number 59 by: Brooks

    AMT (and much of this comment is addressed to both AMT and Vivian),

    I’ve made it clear throughout this thread that I’m not talking about refundable tax credits. As I’ve said, let’s assume the dollars in question are $Z or your tax liability, whichever is smaller.

    Now if you’re engaging here in good faith, apply that assumption (NOT a refundable tax credit) to my questions 1 through 4 and please give me straight answers to those simple, straight-forward questions (with obvious answers). If your answer to any is not “no”, please tell me what the substantive difference is (and if anyone thinks there’s a substantive difference between your handing me $1 vs. your handing me $2 while I hand you $1, and if anyone thinks it could make any sense for someone to call me thrifty in the former case and a big spender in the latter, then he/she and this conversation are utterly hopeless)

    If your answers to all 4 are “no”, then I repeat:

    And are you therefore acknowledging that there is no substantive difference between A and B and that it would make no sense for someone to see those differences re: ideology and economics between them and to support one and oppose the other?

    And if your answers to 1 through 4 are “no”, I also repeat:

    Therefore, you are acknowledging that there is no substantive difference between (A) the mortgage interest deduction vs. (B) if there were no mortgage interest deduction, but the government sent people checks (i.e., “spending”) for the same amounts they’d save if there were a mortgage interest deduction.

    You’re acknowledging the above, correct?

    Now, (1) please don’t make assumptions that are contrary to what I’m saying and which enable you to avoid answering my questions, and (2) please make a good-faith effort to give straight answers to my questions.

    As for your question, which is obviously irrelevant to my questions and not at all something that needs to be discussed before you can answer my questions…

    What’s your argument that the personal exemption is a tax expenditure?

    I have no such argument, I probably wouldn’t label it a “tax expenditure”, but more importantly, for the millionth time, there’s absolutely no need to discuss labels (what should be called a tax expenditure) for you guys to see the validity in my argument or at least to answer my questions.

    It’s like I’m asking you guys if you can see that 1 + 2 = 3 and you guys keep saying “We can’t answer that unless we can agree on whether or not to call the 1 “one” or “uno”, the 2 “two” or “dos”, etc.”

    As I’ve said repeatedly on this thread and every time we’ve had this discussion, there are some things that some people call “tax expenditures” that are not so conceptually distinct from lower tax rates, and which do depend on one’s chosen baseline.

    I’ve been very clear that I’m talking about tax provisions that lower your tax liability if you (as an individual, not a business or even employment-related expense) buy a particular product (Product X).

    And all I’m saying is that there is no substantive difference between (1) that tax provision that lowers your tax liability because you bought Product X, and (2) not having that tax provision, but at the same time you pay your taxes, the government sending you the same amount of money you would have saved on your taxes if that provision had existed, also because you bought Product X.

    It is nothing short of amazing (1) that you guys can’t bring yourselves to acknowledge the validity of the above, and (2) that you guys persist in saying/implying that the question of whether or not there is a substantive difference — indeed whether or not there is a fundamental difference in terms of ideology and economics — can’t be answered unless we first discuss which examples of tax provisions fit which labels.

    I’m still hoping you guys are engaging in good faith, and not just jerking me around to avoid giving the obvious answers to my questions.

    I really feel like it’s ridiculous that I have to pull teeth just to get answers to such simple questions, and I still haven’t gotten them.

    I know in the blogosphere it’s pretty typical for people (whether to promote/defend an ideological “side” or just to protect one’s ego rather than taking a chance on being proven wrong about something) to avoid answering the actual questions asked and instead throw out straw men or other diversionary tactics, and sometimes to presume they know where the argument will go next and just start fighting that fight instead of just answering the question they’re asked or addressing the actual argument that’s been made, but I sure hope that’s not what’s going on here.

    My questions are painfully simple. If you guys want to answer them you can, without any discussion of labels. Period.

  60. comment number 60 by: Brooks

    Vivian,

    It’s really strange that you’d insist that I answer a question about labels as a condition for you to answer my questions which obviously don’t require any labels to answer, but since that seems to be my only hope to get you to give straight answers to simple, straight-forward questions with obvious answers, I’ll try that approach.

    Is every provision in the tax code that allows a deduction, credit or exemption and therefore reduces one’s tax liability that would exist without it a “tax expenditure subsidy” with the consequences you describe? If so, why so and if not, why not?

    I’d say not. First of all, I probably wouldn’t call them all “subsidies” but people can differ on that definition. Secondly, I’m not sure but I probably wouldn’t even call every one of those a “tax expenditure” but again people can differ on their definitions. Third, as I’ve made quite clear (repeatedly) one could have such a broad definition of “tax expenditures” that it muddies up or even eliminates the distinction between “tax expenditures” and differences in tax rates (see my discussion above [November 16th, 2010 at 8:58 pm] of capital gains tax rate vs. ordinary income tax rate.)

    But again, none of this relates to my point, which is simply that two things that I’ve described are not substantively different. Again, see my explanation using capital gains tax rate as an example above.

    You simply don’t need to get into a discussion of labels to answer my questions about whether one thing I described is substantively different from another thing I described. It’s painfully simple: A is “If you buy Product X, you pay $Z less in taxes”, and B is “If you buy Product X, you won’t pay less in taxes, but at the same time you send the Treasury your taxes, the Treasury will send you $Z”

    What could possibly be simpler than answering the question of whether or not there is a substantive difference (let alone a fundamental ideological or economic difference) between those two?

    And why in the world would anyone think we must first get into a discussion of which tax provisions fit which labels before someone can answer the question of whether or not there is a substantive difference between those two?

    If you (and AMT) still won’t just give straight answers to simple, clear questions with painfully obvious answers, unfortunately I’ll have to conclude that you’re either not really listening or you’re just not engaging in good faith, because both of those would seem more likely than the possibility that you really think one cannot answer them without a discussion of labels or for any other reason.

  61. comment number 61 by: SteveinCH

    Could I suggest you all drop it. Brooks won’t stop until you drop it or capitulate. You can pick which is more useful.

  62. comment number 62 by: AMTbuff

    1,2,3 = no
    4 = no if the situation applies to only one person, but yes if it applies to all taxpayers. In other words, it depends on whether the tax reduction is the exception or the typical case. I have made this clear earlier, but I guess I needed to spell it out.

    If you want to carefully read my posts and respond directly to them, I will answer you. Otherwise I would be wasting my time and yours. Fair enough?

  63. comment number 63 by: Vivian Darkbloom

    Brooks,

    The answers to your questions 1-3 inclusive are all “no” as I have repeatedly said. Tbe answer to question 4 is “it depends” as, I think, AMT has appropriately replied. If I were to limit my answers to your hypothetical questions, this debate would be over. But, in the real world of taxing and spending there is no simple A and no simple B. That is where your logic is flawed because you assume your syllogisms accurately represent all of the possible situations that might arise under the tax code. This is what in logic is called a faulty premise.

    Not everyone in the United States is in the same financial circumstances. Nor is every instance in which money is exchanged with the government under the tax code equivalent to the one-for-one exchange you describe in your simple syllogisms. Let’s take the example of a refundable credit since this was raised by AMT. Now, a refundable credit by definition, means that some taxpayers get more back from the government than they have paid in the form of taxes. Thus, Taxpayer A might give in $1 in tax and receive $2 in return. Taxpayer B might give in $5 and get $0 in return under the same provision of the tax code because his income is too high. Here I seem to disagree with AMT (but maybe not since AMT assume everyone would get the refund, which is not reality). I would also say the refundable credit would not be a tax expenditure if every taxpayer were in the same circumstances and the provision were to therefore treat everyone exactly equally. But that is not the real world. Here, we’re spending on Taxpayer A only. I suppose I’m relying on some notion of a baseline tax system under which to constitute a “tax cut” one needs to pay tax in the first place.

    Since you seem fond of your Product X example, let me use that to demonstrate in another way what I mean. Suppose that Person A were to buy Product X, normally priced at $10, on a sales discount for $9. Person B buys the same product X for $10 but returns Product X to the store because it is damaged. The merchant agrees to give Person B a $10 refund as fair compensation for that damage. If you want to reduce these according to your simple syllogism there is no difference, ,but that is because you use a faulty premise that there is no difference between these two situations and you inappropriately want everyone to assume that we are talking about the same person in the same circumstances in both these examples. But, of course, the reality of the situations is different because the contexts are not the same and the reasons each pays $90 are different and substantively important.

  64. comment number 64 by: brooks

    AMT,

    What are you talking about re: “if it applies to all taxpayers”????

    The people who end up with more money due to the provision are only the people who bought Product X. (The opportunity to buy it is available to all)

    What could possibly be unclear about that?

    So now please either tell me the answer to 4 is also “no” or explain how it could be “yes” or “maybe/sometimes”.

    The net effects on everyone are exactly the same and on the same basis (some people purchasing Product X). So what substantive difference can there be?

  65. comment number 65 by: brooks

    Vivian,
    I’ll reply tonight but for now:

    It’s ironic that you attribute to me an assertion/assumption that I’m clearly not making (indeed, that I’ve explicitly distinguished from my point) and then you call my supposed assertion/assumption a false premise on my part.

  66. comment number 66 by: AMTbuff

    Wow, Brooks, I’m really having to type it all out here. I know you are much smarter than this.

    Suppose Product X is toilet paper. Then the provision applies to everyone.

  67. comment number 67 by: Brooks

    AMT,

    So you’re saying that, as long as Product X is not a product that everyone buys, your answer to #4 is “no”, CORRECT? And you’ve already said that your answer to #3 was “no” regardless of whether or not everybody buys Product X.

    In other words (just to repeat what #4 is so it’s clear to all in one neat package), you’re saying (as I am) that as long as Product X is not a product that everyone buys, then (from #3) there is no substantive difference between (A) your only having to send the Treasury $1 rather than $2 because you bought Product X vs. (B) your sending the Treasury $2 while the Treasury sends you $1 because you bought Product X; and (from your answer to #4) since there is no substantive difference between A and B, it does NOT make sense for someone to support A, calling it “smaller government, lower taxes, lower spending, and conservative” and oppose Policy B, calling it “bigger government, higher taxes, higher spending, and liberal”. CORRECT? Please confirm this. I’d appreciate an explicit “yes, that’s correct” if that’s your answer (and man, if it’s not, I don’t know what your concept of logic is).

    If I get a “yes”, then we’ve got quite a breakthrough here, because, with that one exception (more on that below), you are saying exactly what I’ve been saying, and maybe there’s hope for Steve and Vivian.

    Now then, about your exception. I’ll leave aside the question of whether such an exception has much/any practical significance, because I want to ask you how it is even valid. Let’s take that scenario where Product X is something everyone buys (and by the way, per your thinking, do they have to spend the same amount on it? And does it have to be bought by everyone in the same year or some one one year and some in other years?).

    Anyway, so let’s say Product X is something “everybody buys”.

    Why would that make your answer to #4 “yes”?

    And how does it make sense for your answer to #3 to be “no” and your answer to #4 to be “yes”? If you’re acknowledging that there’s no substantive difference between A and B (your “no” to #3), how can it makes sense for someone to support A on the basis that it’s “conservative, smaller government, lower taxes, lower spending” and oppose B on the basis that it’s “liberal, bigger government, higher taxes, higher spending”…when, again, you’ve just said there’s no substantive difference between A and B ???

    I’ve bolded my questions because I’d really appreciate if you answer all of them, not just one or some.

  68. comment number 68 by: Brooks

    Vivian,

    Re: The answers to your questions 1-3 inclusive are all “no” as I have repeatedly said. Tbe answer to question 4 is “it depends”

    First, same questions to you that I ended with in my comment to AMT above. See the last two questions and please answer them.

    You then go on to talk about particular provisions in the tax code even though nothing you said has anything to do with the validity of my point or your ability to answer “no” to my question #4. Your point may relate to the question of which provisions my point applies to (which fit my scenario) and which it does not apply to, but that’s a separate question that, again, should not in any way affect your answer to #4, which is a question about the scenario I’ve presented, not about some different scenario you’d like to present. So I’d appreciate it if you’d just answer the questions I’ve asked rather than persisting in answering completely different questions that you apparently prefer to answer.

    As for the illustration in your last paragraph, I wish I could see enough sense in it to even comment on it, but it’s simply incomprehensible, and any relevance to my point is just impossible to see.

    Feel free to be a sport and really try to give straight answers to the actual questions I’m asking.

  69. comment number 69 by: Arne

    Brooks you need to add another step.

    4) “does it make sense for someone to support A, calling it “lollipops” and oppose Policy B, calling it “suckers”?”

    5) “does it make sense for someone to support A, calling it “smaller government, lower taxes, lower spending, and conservative” and oppose Policy B, calling it “bigger government, higher taxes, higher spending, and liberal”?”

    I suspect the problem is that for Brooks “smaller government, lower taxes, lower spending, and conservative” is just a character string that can be equated to A, whereas others interpret A as a model of smaller government. Since A is a lousy economic model of anything worth discussing, there is disagreement.

  70. comment number 70 by: Vivian Darkbloom

    Brooks,

    Perhaps I’m in a bad mood today or I’m just thin-skinned, but your suggestion that I have not been a “sport” with respect to this entire issue has hit the wrong nerve. I think I have tried to answer your questions as honestly as possible–more directly, I might add, than you have mine. I might add that I don’t view this exercise as one in which you get to fashion the debate by asking questions the answers to which are limited to your own multiple choice answers. Sometimes, the correct answer to such questions is “none of the above”.

    Have a nice day.

    Viv

  71. comment number 71 by: Brooks

    Vivian,

    Sometimes in the blogosphere someone reaches a point at which he/she is asked simple, straight-forward questions, and he/she realizes that the answers are quite obvious, yet really answering them would mean admitting that he/she has been wrong all along.

    At that point some point some people (unfortunately a minority in the blogosphere) will put ego aside, acknowledge the obvious answers, and admit their error. Others will deliberately obfuscate with straw men or non-responses masquerading as answers, or with various other diversionary tactics so they can appear to be answering and appear to have a genuine disagreement, even though they aren’t really answering the questions. And some will make some excuse to walk away at that point, in some cases claiming to be too offended or annoyed to want to continue.

    It seems (from your comment) I’ve encountered the latter case. I guess you won’t be answering my questions because you realize there is no way to answer them in a way that makes any sense without admitting that you were wrong. I realize some people just can’t bear that. But if you know that about yourself, maybe you shouldn’t waste others’ time. Kind of like the kid who throws the checkers board off the table when it’s clear he’s going to lose, except that this isn’t a game; these are important issues.

    As for your “none of the above” silliness, if you really wanted to discuss this in good faith you could simply explain what you mean — i.e., explain how the answer to #4 could be other than “no”. Simple enough, right? But if you’re looking for an excuse not to answer, I guess claiming that I’m asking questions in an unreasonable and invalid way is just as good an invalid excuse as any other invalid excuse.

  72. comment number 72 by: Brooks

    Arne,

    Your comment makes no sense whatsoever that I can see, and it certainly makes no valid point about anything I’ve been saying.

  73. comment number 73 by: AMTbuff

    If Product X is bought by one person, the answer to 4 is no. If Product X is bought by everyone, then the answer is yes because the rebate (or whatever you want to call it) is effectively just a universal feature of the tax rate schedule.

    If Product X is bought by some, but not all, the answer lies somewhere between yes and no. There is no discontinuity at any particular percentage. It’s a gray area.

  74. comment number 74 by: Brooks

    AMT,

    I guess I’m just not going to be able to get real answers from you. I bolded my questions hoping to get direct answers — meaning that if your answer to #4 were not “no”, you’d really explain in something resembling a clear way why your answer is what it is. I don’t know if it’s deliberate on your part or not, but you’re obviously not providing anything remotely resembling a clear explanation of direct answers to my questions — ya’ know those things I bolded so you couldn’t miss them. Go ahead, lay out your reasoning in a clear way (yeah, spell it out for me) instead of some kind of shorthand supposed conclusion to some supposed reasoning. Spell it out for me — addressing what I’m asking you. Explain WHY your answer is what it is and how does your explanation address my questions. Go ahead if you actually have an explanation that makes any sense.

  75. comment number 75 by: Brooks

    AMT,

    And just to recap:

    Question #3 was: Do you see a substantive difference between (A) your only having to send the Treasury $1 rather than $2 because you bought Product X vs. (B) your sending the Treasury $2 while the Treasury sends you $1 because you bought Product X?

    Your answer was and is “no”, so you are acknowledging there is no substantive difference between A and B.

    Question 4 was: And if, as you’ve hopefully now acknowledged, there is no substantive difference between A and B, does it make sense for someone to support A, calling it “smaller government, lower taxes, lower spending, and conservative” and oppose Policy B, calling it “bigger government, higher taxes, higher spending, and liberal”?

    Your before was “no” if only one person buys Product X, “yes” if everyone buys Product X, and a “gray area” if some, but not all buy Product X

    So again I ask you: How can it make sense for there to be no substantive difference between A and B, yet for you to say that, unless only one person buys Product X, it can make sense for someone to support A on the basis that it’s “conservative, smaller government, lower taxes, lower spending” and oppose B on the basis that it’s “liberal, bigger government, higher taxes, higher spending”…when, again, you’ve just said there’s no substantive difference between A and B ???

    Or are you know going to change your answer to #3 to drag this out further by making me go step by step with you until you think of some supposed reason to change your answers to #2 and #1.

  76. comment number 76 by: Brooks

    Meant to say above:

    Your answer was “no” if only one person buys Product X, “yes” if everyone buys Product X, and a “gray area” if some, but not all buy Product X.

  77. comment number 77 by: SteveinCH

    Brooks,

    Let me just point out that there’s no hope for me because I disagree with you.

  78. comment number 78 by: Brooks

    Steve,

    I’ve resisted saying this but since you continue to try to discourage people from engaging on this, I think I should go ahead and say it.

    Most likely your either realize or sense that you’ve been wrong all along on this topic, or at the very lease you are unable to come up with any actual refutation to what I’m saying, and you feel embarrassed. And you don’t want to feel more embarrassed as you will if AMT or Vivian or anyone who doesn’t get it comes to realize that what I’m saying is obviously correct (not as a matter of opinion but of logic — so it’s not like “agreeing” or “disagreeing” on opinion but more like the math is correct) or if, through the course of discussion, it looks even more and more ridiculous for anyone to dispute what I’m saying (and to avoid giving direct answers and clear explanations as to why they dispute it).

    Which is why you are making these comments, implicitly and in some cases explicitly discouraging others from engaging with me on this topic. It’s unbecoming and just not cool. Please put the ego aside on this one rather than do that.

  79. comment number 79 by: Brooks

    AMT,

    And to put this together slightly differently:

    You are saying that unless only one person in America buys Product X…

    …that there is no substantive difference between A and B, yet it can make sense to support A and oppose B.

    …and that there is no substantive difference between A and B, but it can make sense for someone to view A as “conservative, smaller government, lower taxes, lower spending” and view B as “liberal, bigger government, higher taxes, higher spending”.

    Really?? Even though you are acknowledging that there’s no substantive difference between the two?

    Please explain how your answers supposedly make sense to you.

  80. comment number 80 by: SteveinCH

    No Brooks,

    I’ve resisted saying this. On this particular topic, you behave like a complete asshole. You are so sure you are right, you are unwilling to listen to anyone. You refuse to engage in debate on any terms other than your own and you persist in name calling when people don’t capitulate to your point of view.

    That’s why I discourage people from engaging with you because you don’t engage. You attack, you hector and you insult.

    As I said, in this discussion with you, it’s capitulate or the highway.

  81. comment number 81 by: brooks

    Steve,

    Whatever you feel you have to say to get by, I guess it is what it is.

    No, you’ve never walked through this with me, giving straight answers with clear explanations. Even on this thread you showed that your supposed reason for disputing what I’m saying has nothing to do with what I’m saying, but relates instead to the entierly different question of labels (and thus baselines), because you’d rather discuss that while pretendinf your addressing my questions and my point.

  82. comment number 82 by: brooks

    And steve, I do think you should stay away from profanity. We’re all guests here.

  83. comment number 83 by: SteveinCH

    Brooks, I rarely use profanity. So I apologize to the board.

    I’ve simply chosen to say, many times, that your examples that you want to force people to answer, are not reality. Applying tax expenditures to reality requires a baseline. That’s my point. You disagree and I’m OK with that. It is you who are unwilling to allow anyone to disagree with your perspective.

    Sorry to call out your behavior but you really should stop and consider that if three, reasonably articulate people don’t agree with you, there is some change, however minute, that you aren’t right.

    And incidentally, this entire subject is not a question of fact, nor is it mathematical tautology, it’s a question of opinion. I know you also don’t see it that way and it frustrates you that others do.

    You feel baselines are irrelevant. I feel they are relevant. That leaves us in an area of disagreement. In your mind, it means I’m wrong. I get that but I think you may someday want to think about it since it seems to be an issue that multiple folks are raising in response to what you think is a brilliant argument.

    If you can imagine an outcome from a fellow poster that is different from “Yes Brooks, you are right” that would allow you to drop the thread, I’d be interested to hear it.

    My warnings were simply that I don’t think any such outcome is possible. Hence, drop it or capitulate.

    Peace

  84. comment number 84 by: Arne

    Let me try again.

    Brooks is giving us if A=B, B=”C”, A=”D”, then “C”=”D”. “C” and “D” are just labels, so it does not matter is they sound contradictory, Brook’s logic is valid.

    Vivian looks at the problem as if the givens are A=B, B=C, and A=D, but we know that C is not the same as D, then one of the givens is false. If C and D are attributes rather than labels, then Vivian’s logic is correct.

    AMTbuff is looking at it as A representing C and B respresenting D. Since C and D are different even though A=B, then C and D are not good models.

    Strictly speaking, Brooks is correct, because he is the one who defined it as a logic problem with labels “C” and “D”. Given that this is not a blog about logic problems, Brooks should not be surprised that people interpret things in a different light.

  85. comment number 85 by: AMTbuff

    Sorry Brooks, I have explained this as well as I can. If substantially everyone gets the tax rebate, the tax net of rebate is the norm, and people who don’t buy product X are being surcharged. That’s not legitimate adjustment to tax liability based on ability to pay.

    Try the example where product X is government-approved health insurance if you like that example better. Tax increases for failure to buy that product are opposed by advocates of small government.

  86. comment number 86 by: AMTbuff

    My preceding posts relate more to both question 3 and question 4. Sorry about that.

    The primary issue with question 3 is how much economic damage the incentive to purchase product X produces. I don’t have time to explain that now, but perhaps you understand the concept that subsidies distort decisions in ways that destroy economic value.

    Steve, the reason I am participating here is curiosity as to where Brooks will take it after question 4.

  87. comment number 87 by: Brooks

    Steve,

    Once again you’ve managed to show that you are not responding at all to what I’m actually saying and asking.

    I’ve simply chosen to say, many times, that your examples that you want to force people to answer, are not reality.

    My questions 1 through 4 say nothing about any particular tax provisions or spending programs. I’m just trying to first get people to see the logic, then the next step is to apply it to actual items or categories of items. But you, AMT, and Vivian won’t even acknowledge the logical validity of something so simple it’s the equivalent of 2 -1 = 1 or x + y - y = x. It’s like you guys are so concerned with what I’ll assert or ask next that you are all insisting on addressing completely different questions than the ones I’m asking, and I can’t seem to shake you from it and get you to simply answer my actual questions, no matter how clearly I state them, no matter how obvious the answers as a matter of clear, simple logic, and no matter how ridiculous it is for anyone to persist in disputing those answers.

    Applying tax expenditures to reality requires a baseline. That’s my point. You disagree and I’m OK with that.

    See what I mean? First, your addressing something different from my point, and second, I have said many times here and in our previous conversations that the concept of a tax expenditure as distinct from lower tax rates can indeed depend on a baseline. And I’ve given examples of how that is the case — See upthread my example of capital gains tax rates being lower than ordinary income: I not only concurred (as I have all along) with those who say that one could call the lower cap gains tax rate a “tax expenditure”, but that that broad a definition erases the distinction between “tax expenditure” and lower tax rates, rendering the former so broad that it’s almost meaningless or at least far too broad a term to be used as one would want to use it. And yes, in that case and some others, whether one calls it a “tax expenditure” depends on one’s assumption of a baseline.

    I then showed, using the same example, why all of that is irrelevant to the validity of my point, which has nothing at all to do with labels or definitions or anything semantic. Personally, I wouldn’t call the lower cap gains tax rate a “tax expenditure”, but that doesn’t have any bearing on the fact that there would be no substantive difference whatsoever between (A) that lower tax rate, and (B) taxing cap gains at the ordinary rate, but at the same time one pays his taxes, the Treasury transfering to him the same amount he would have saved via the lower tax rate. Yet you would call A more conservative and representative of smaller government, lower taxes and lower spending than B even though there is absolutely no substantive difference — the net cash flow for all involved is exactly the same and on exactly the same basis.

    So either you should explain what substantive difference you think there is, or you should acknowledge that there is no substantive difference, and acknowledge that therefore it makes no sense to say A is fundamentally different from B in terms of ideology and economics. But you just won’t…because you don’t want to acknowledge the obvious, yet you also can’t explain what substantive difference there would be. I say for the millionth time to you, it’s exactly like I’m asking you if there is a substantive difference between (A) your handing me $1 vs. (B) your handing me $2 while I hand you $1. I can’t believe you’d say there is a substantive difference, let alone that in B I’m extracting more from you (net) and I’m spending more ($1 in B vs. $0 in A), and attribute some difference in ideology and economics between the two.

    It is you who are unwilling to allow anyone to disagree with your perspective.

    No, what I’m doing is not accepting as answers to my questions and arguments answers to entirely different questions and responses to entirely different arguments masquerading as actual answers and as refutations.

    you really should stop and consider that if three, reasonably articulate people don’t agree with you, there is some change, however minute, that you aren’t right.

    Sorry Steve, but logic isn’t a matter of democracy any more than is math, and what I’m saying is such basic logic that it’s not like some complicated math problem where I might be making some mistake that makes my point invalid, and anyway if that were the case someone could point to my error and explain clearly why it’s an error (and no, someone claiming they’ve done so doesn’t make it so).

    There are a number of reasons why three intelligent people (particularly in the blogosphere) would persist in disputing something even if it’s ridiculous to do so. I’ve already touched on some: ego (not wanting to admit one was wrong earlier); partisanship (wanting to defend one’s ideological “side”); a mental block in which someone is so fixated on some aspect of the policy debate out there that they just cant take a question at face value and answer that actual question, so instead their response is an answer to some other question on which they are fixated; and (overlapping with all of the above) presumptuously assuming they know where the question or argument is headed and addressing what they guess will be subsequent arguments if they acknowledge the validity of the initial argument, and refusing to answer the initial question because they think it is a building block toward that next argument, and they simply don’t want the other person to build a logical argument, so they try to nip it in the bud by refusing to answer the actual initial question or address the actual initial argument.

    All of the above are probably the main reasons why most discussions in the political blogosphere go nowhere. They are all forms of bad faith to one degree or another; many people, particularly in the blogosphere, simply won’t make a good faith effort to address what they’ve actually been presented with, out of fear of being proven wrong in part or whole.

    this entire subject is not a question of fact, nor is it mathematical tautology, it’s a question of opinion.

    Absolutely incorrect. I it a matter of opinion that x + y - y = x? No, right? Are you saying it’s a matter of opinion whether or not your handing me $1 is substantively different than your handing me $2 while I hand you $1? (assuming you have the $2 to start with and I have the $1 to start with, which is not important for our purposes but just a technical note.). If so, tell me what the substantive difference is, given that you end up with the same amount, as do I. Applying that same dynamic, is it a matter of opinion that there is no substantive difference between (A) your sending the Treasury $Z less than you otherwise would have (Let’s say $9,000 instead of $10,000) because you bought Product X vs. (B) your sending the Treasury $10,000 while the Treasury simultaneously sends you $1000? I don’t know what’s more ridiculous: that you persist in claiming there’s a substantive difference — even a fundamental difference in ideology and economics — or that you never explain what that substantive difference is, instead only throwing out statements of non-substantive facts (that in B more money is sent to the Treasury and more money leaves the Treasury) or talking about labels (the definition of “tax expenditure”). You simply cannot be serious, so as reluctant as I am to conclude that you are not engaging in good faith, at this point that is less hard to believe than that you are sincerely persisting with such an absurd contention and doing so without any explanation that actually relates to the question.

    You feel baselines are irrelevant. I feel they are relevant.

    They are irrelevant to the questions I’ve asked. They are not irrelevant to the policy debate in which the term “tax expenditure” is used.

    If you can imagine an outcome from a fellow poster that is different from “Yes Brooks, you are right” that would allow you to drop the thread, I’d be interested to hear it.

    If you’re asking will I be satisfied with responses that are completely illogical, the answer is no. This isn’t a matter of opinion, and it’s very, very simple logic, so I rather doubt that my point is invalid and that your rejection of it is valid.

  88. comment number 88 by: Brooks

    AMT,

    So now you are, as I thought you might, changing your answer to #3? What is it now, the same as your answer to #4?

    How about your answer to #2 — still the same. Definitely not going to change that one next?

    Let me paste #3:
    Do you see a substantive difference between (A) your only having to send the Treasury $1 rather than $2 because you bought Product X vs. (B) your sending the Treasury $2 while the Treasury sends you $1 because you bought Product X?

    Do you see that everyone has same exact incentive under scenario A as they have in Scenario B, and every party involved — those who purchase Product X, those who don’t, and the Treasury — ends up the same financially under either A or B? Do you see that? Please tell me. And if you do see it, then tell me how any of the stuff you’re talking about has any bearing on whether or not there’s a substantive difference between A and B — what are you saying happens that amounts to a substantive difference. What incentive or effect is different under A vs. B?

    And again, I’m NOT talking about refundable tax credits. I’m saying if the dollar amount the Treasury would send someone if they bought product X in Scenario B is the same dollar amount that same person would save on taxes in Scenario A (and it could be zero in both cases if they have no tax liability).

  89. comment number 89 by: SteveinCH

    Brooks,

    Thanks for proving my point.

    Peace.

  90. comment number 90 by: Brooks

    Although I’ll never know, I’d bet that if the three of you had never heard of the term “tax expenditure”, or if the term weren’t being used in public debate over fiscal policy, you would have no problem at all acknowledging the obvious validity of what I’ve been saying.

    You’d say:

    1. “Obviously there’s no substantive difference between (A) your giving me $1 vs. (B) your giving me $2 while I give you $1.”

    2. “Obviously there’s no substantive difference between (A) your sending the Treasury $1 vs. (B) your sending the Treasury $2 while the Treasury sends you $1.”

    3. “Obviously there’s no substantive difference between (A) your only having to send the Treasury $1 rather than $2 because you bought Product X vs. (B) your sending the Treasury $2 while the Treasury sends you $1 because you bought Product X?”

    4. “So obviously, since there’s no substantive difference between A and B, it wouldn’t make sense for someone to support A, calling it “smaller government, lower taxes, lower spending, and conservative” and oppose Policy B, calling it “bigger government, higher taxes, higher spending, and liberal”.

    Yet for some reason you guys are either not engaging in good faith or you are just so fixated on the usage of the term “tax expenditure” in the policy debate that you somehow think the above statements are invalid, even though the above statements have nothing to do with labels of any sort.

  91. comment number 91 by: Brooks

    Steve,

    Nope, but thanks for proving mine.

    And sorry, but just because we both say it doesn’t make it equally likely that your points are valid.

    I have shown you time again, very clearly, as I just did for the nth time in my long comment above, why you are not making sense, and how you are addressing points I’m not making rather than addressing the points I am making (and how you’re also attributing arguments to me that are not only not at all what I’ve been saying, but which I’ve repeatedly, explicitly said and explained were not even related to what I was saying).

    But I guess you think that if you just keep firing back it will create the impression that you might have a valid point. If you need to do that to save face, which apparently you do, it’s unfortunate, but quite common in the blogosphere, although I must say it’s disappointing to see it from you.

    The least you could do is to stop butting in to try to eliminate whatever chance there may be that someone else who initially is as confused as you were (and maybe still are) will eventually get it, even if you’d find that embarrassing.

    There are much worse things in life than being proven wrong on a blog and acknowledging it when you see it. Oh well.
    Peace.

  92. comment number 92 by: Brooks

    Ahh, thank you, Greg Mankiw (which rhymes, so he should trademark it for some future promotional use).

    From his columns in today’s NYT http://www.nytimes.com/2010/11/21/business/economy/21view.html?_r=1

    SHOULD the government cut spending or raise taxes to deal with its long-term fiscal imbalance? As President Obama’s deficit commission rolls out its final report in the coming weeks, this issue will most likely divide the political right and left. But, in many ways, the question is the wrong one. The distinction between spending and taxation is often murky and sometimes meaningless.

    Imagine that there is some activity — say, snipe hunting — that members of Congress want to encourage. Senator Porkbelly proposes a government subsidy. “America needs more snipe hunters,” he says. “I propose that every time an American bags a snipe, the federal government should pay him or her $100.”

    “No, no,” says Congressman Blowhard. “The Porkbelly plan would increase the size of an already bloated government. Let’s instead reduce the burden of taxation. I propose that every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.”

    To be sure, government accountants may treat the Porkbelly and Blowhard plans differently. They would likely deem the subsidy to be a spending increase and the credit to be a tax cut. Moreover, the rhetoric of the two politicians about spending and taxes may appeal to different political bases.

    But it hardly takes an economic genius to see how little difference there is between the two plans. Both policies enrich the nation’s snipe hunters. And because the government must balance its books, at least in the long run, the gains of the snipe hunters must come at the cost of higher taxes or lower government benefits for the rest of us.

    I’ll send Greg Mankiw a link to this thread, in case he (or any of his students or anyone else) wishes to spend some time seeing just how difficult/impossible it is to get some people to see the equivalence, even though, as he says, “it hardly takes an economic genius to see how little difference there is between the two plans”, or as I’d put it, to see how there is no substantive difference.

    My efforts here, and the bizarre, persistent rejection of my point by Steve, AMT and Vivian, serve as testimony to how immovable people can be when they just don’t want to see — or to acknowledge — the validity of something that they really want to reject.

  93. comment number 93 by: Brooks

    More from Mankiw’s NYT piece.

    I’m deliberately separating this from my prior comment, since this quote includes the label “tax expenditure” and I don’t want to do anything to encourage the strange, obviously invalid insistence that that label (or any other label) has anything to do with the validity of my point.

    Now then, I do think that generally speaking what people talk about when then say “tax expenditures” are subsidies of one sort or another that are not substantially different from doing the same thing via explicit “spending”, but are fundamentally different from — and closer to opposite than similar to — lower tax rates.

    With that in mind, here’s more from Mankiw:

    Pundits on the right, meanwhile, are suspicious of anything that increases government revenue. But they should recognize that tax expenditures are best viewed as a hidden form of spending. If we eliminate tax expenditures and reduce marginal tax rates, as Mr. Bowles and Mr. Simpson propose, we are essentially doing what economic conservatives have long advocated: cutting spending and taxes.

    Ahh, which brings me back to my first comment on this thread (before I made the point that didn’t relate to labels at all), which was:

    I don’t have time yet to check [the Bowles-Simpson proposal] out, but FWIW, if it’s 3 parts “spending” cuts* and 1 part reduction of tax expenditure subsidies, and doesn’t increase tax rates, then it’s essentially the same as 4 parts spending cuts. http://economistmom.com/2010/11/a-bipartisan-and-reality-based-way-to-cut-tax-rates-and-reduce-the-deficit-really/#comment-16142

  94. comment number 94 by: Brooks

    In case anyone doesn’t know, Mankiw is a conservative economist, former Chairman of W. Bush’s Council of Economic Advisers, and since then has been back as Harvard professor of economics. He was also economic adviser to the Romney campaign.

    So when he speaks of “what economic conservatives have long advocated”, he’s speaking of a group to which he belongs (not someone of a different ideology speaking of conservatives).

  95. comment number 95 by: AMTbuff

    Let me paste #3:
    Do you see a substantive difference between (A) your only having to send the Treasury $1 rather than $2 because you bought Product X vs. (B) your sending the Treasury $2 while the Treasury sends you $1 because you bought Product X?

    Thank you for pasting that. No difference between A and B there.

  96. comment number 96 by: Brooks

    AMT,

    So now your answer to #3 is back to “no” — “no difference between A and B there.” Well, I ask about the same A and B in question #4.

    So, I ask you again:

    If there is, as you’ve acknowledged, no substantive difference between A and B, how can it make sense for you to say that, unless only one person buys Product X, it can make sense for someone to support A on the basis that it’s “conservative, smaller government, lower taxes, lower spending” and oppose B on the basis that it’s “liberal, bigger government, higher taxes, higher spending”…when, again, you’ve just acknowledged that there’s no substantive difference between A and B ??? How can there be no substantive difference between the two and at the same time the two be so different in terms of ideology and economics, and one more desirable than the other?

  97. comment number 97 by: Brooks

    And for your convenience, I’ll paste #4:

    4. And if, as you’ve hopefully now acknowledged, there is no substantive difference between A and B, does it make sense for someone to support A, calling it “smaller government, lower taxes, lower spending, and conservative” and oppose Policy B, calling it “bigger government, higher taxes, higher spending, and liberal”?

  98. comment number 98 by: Brooks

    AMT,

    Or, I could put it this way: How can you say that the following two statements are consistent — i.e. that it is logical to assert both?

    1. “There is no substantive difference between A and B..”
    2. “Under most circumstances, there is a substantial difference between A and B in terms of ideology and economics.”

  99. comment number 99 by: Brooks

    In 2, I meant to say “a substantive” difference, although actually both “substantive” and “substantial” would apply.

    But key is that it makes no sense to assert that (1) there is NO substantive difference and that (2) there IS a substantive difference. Hopefully we can agree on that much.

  100. comment number 100 by: AMTbuff

    Thanks for pasting #4. The answer to that specific case is no, just as you have asserted. What’s question 5?

  101. comment number 101 by: Brooks

    AMT,

    Good. I’m glad you realize (hopefully) at this point that you could have said from the start (as you are saying now) that the answers for #1 through 4 are “no”. Hopefully you can understand my frustration with the resistance from you and others who wouldn’t acknowledge the validity of something that is so obviously valid.

    With Question #5 we can start considering how the answer to 4 applies to reality.

    Now, in Mankiw’s piece, which I quoted above, he seems to be talking about a refundable tax credit (assuming that $100 would still go to someone even if he had no tax liability), and you’ve already said you see no difference between the Treasury sending someone money because they purchased Product X vs. a refundable tax credit going to that person for the same reason. So I won’t use Mankiw’s example, because I want us to put aside refundable tax credits and discuss tax deductions or credits that are limited by what one’s tax liability would have been without the provision in question.

    I’ll start with new letters so we don’t mix up a scenario containing particulars with the A and B in Question 4.

    Let’s say that under Scenario C, if you buy Product X, your tax liability is lowered by $Z or your tax liability, whichever is greater (so no refundable tax credit). And under Scenario D, if you buy Product X,

  102. comment number 102 by: Brooks

    oops, accidentally submitted. Wait until I finish

  103. comment number 103 by: Brooks

    AMT,

    Actually, rather than continue per my prematurely submitted comment, I’ll take a different track. If it turns out this jumps ahead too many steps to work through this logically, I may have to ask that we take a couple of steps back and build from your answer to #4 step by step.

    So, as I was saying, now that you’ve finally acknowledged that the answer to 4 is simply “no”, let’s see how we can start applying that to reality.

    Given your (correct) answer to 4, as I said to you earlier, implicitly you are acknowledging that there is no substantive difference between (C) the mortgage interest deduction vs. (D) if there were no mortgage interest deduction, but the government sent people checks (i.e., “spending”) for the same amounts they’d save if there were a mortgage interest deduction. And in B the amount would, of course, be limited by the amount of their tax liability — again, we’re talking about the same net benefit to each individual regardless of whether it takes the form of tax provision in C or the form of “spending” in D.

    So,

    Question #5: Do you acknowledge that there is no substantive difference between C and D? And therefore — since there is no substantive difference — obviously it makes no sense for one to favor C on the basis that it is “conservative, smaller government, lower taxes and lower spending” and oppose D on the basis that it is “liberal, bigger government, higher taxes and higher spending. Correct?

  104. comment number 104 by: Brooks

    Meant to say “D” instead of “B”.

  105. comment number 105 by: AMTbuff

    There is no substantive difference. However there is a politically significant structural difference.

    The mortgage deduction is, in effect, a statement that a person paying $10,000 of mortgage interest is economically equivalent to someone making $10,000 less who own his home free and clear.

    Recasting this provision as a nonrefundable tax credit completely obscures the logic of the provision, making it politically vulnerable. This is wny it makes sense to favor C on the basis that it is “conservative, smaller government, lower taxes and lower spending” and oppose D on the basis that it is “liberal, bigger government, higher taxes and higher spending.

    You don’t need to agree with logic of the mortgage deduction* to see this point.

    *One flaw in the mortgage deduction is that while it approximates horizontal equity between free and clear owners and owners who pay mortgages, it does not achieve horizontal equity for renters vs. owners. Advocates of abolishing the mortgage interest deduction would instead achieve horizontal equity between renters and owners with large mortgages, leaving free and clear owners at an advantage. This is due to the imputed rental value of owner-occupied housing, which you should Google if it’s not famiilar to you.

    Just as with the marriage penlty and marriage bonus, there is no simple and fair anwser to treatment of mortgage interest. Any structure is a compromise that is unfair to someone.

  106. comment number 106 by: Brooks

    AMT,

    ok, let’s stay away from mortgage interest deduction since that seems to have particulars that will get in the way of our discussing this overall topic. I don’t want us to get side-tracked by all the stuff you want to get into re: horizontal equity, free and clear, yadda yadda.

    I don’t know what you are saying when you say there is no substantive difference, yet there is a “politically significant structural difference”.

    And I don’t know what you’re saying in your paragraph re: supposedly “Recasting this provision…etc.”

    If you want to spell out what you mean and make it clear, ok, but if it’s not relevant to the general questions at hand, let’s not get lost in it.

    And for now, let’s take a step back and just call it Product X again. Again, we are not talking about a refundable tax credit. We are talking about (C) a tax credit of, say, $100 or what your tax liability would have been, whichever is smaller, if you purchase Product X vs. (D) the Treasuring sending you whatever amount you would have saved under C (so if your tax liability were $40, the Treasury would send you $40, not $100).

    So you acknowledge there’s no substantive difference.

    Now, I repeat question #5, but generically, not for the mortgage interest deduction.

    5. Do you acknowledge that there is no substantive difference between C and D? And therefore — since there is no substantive difference — obviously it makes no sense for one to favor C on the basis that it is “conservative, smaller government, lower taxes and lower spending” and oppose D on the basis that it is “liberal, bigger government, higher taxes and higher spending. Correct?

  107. comment number 107 by: AMTbuff

    Brooks, please permit me to modify your question, using a specific example different than the mortgage deduction. Call this Question 5A.

    Let’s say you run a business that buys widgets in bulk, repackages them for retail, and sell them. Let Ca be the situation in which you can deduct your cost of goods sold directly from your gross income. Let Da be the situation in which the Treasury gives you a tax credit to reduce your tax liability by the same amount as the deduction would have.

    Mathematically, Ca and Da are equivalent. Therefore Q5A becomes:
    “Do you acknowledge that there is no substantive difference between Ca and Da? And therefore — since there is no substantive difference — obviously it makes no sense for one to favor Ca on the basis that it is “conservative, smaller government, lower taxes and lower spending” and oppose Da on the basis that it is “liberal, bigger government, higher taxes and higher spending. Correct?”

    I would oppose Da on the grounds that Ca represents a proper way to compute tax liability based on first principles. The method of Da is a recasting of the computation that unnecessarily obscures the rationale behind the computation.

    In fact, the only plausible reason to prefer the method of Da is that you believe the method of Ca is incorrect based on first principles, and that changing the method to Da will make repealing the tax reduction easier.

    DO you agree with my answer? If so, you may understand why there is no right answer to the generic form of Question 5.

  108. comment number 108 by: Brooks

    AMT,

    I’ve made it clear repeatedly that I’m not talking about a business. I’m talking about individuals for non-business purposes (and as I’ve said, not even job-related expenses).

    So please, at least for now, stick with what I was talking about — individuals, not businesses.

    I’m not saying it matters to the equivalence I’m talking about, but I’d rather start with what I was actually talking about.

    And I’m really, really tired from work so forgive me if I don’t address your business example. I’ll be glad to get back to that if you wish after we cover individuals.

  109. comment number 109 by: Brooks

    Actually, if it helps, I took a quick look at your business example. Sounds like you’re saying that you object based on some principle even though there is no substantive difference, just like a shopper in a store (who has a $10 bill) objecting to purchasing an item by giving the cashier $10 and getting $3 immediately back in change, but being fine with just paying $7 for that item, on the basis that in principle, he shouldn’t have to “pay” $10 for that item in the first place. Is that essentially the difference that you see as so important that it justifies supporting policy A (or C) and opposing policy B (or D) based on all that claimed difference in ideology and economics? And are you really saying that conservatives who have those positions are really basing their objection on that, as opposed to seeing tax deductions and credits as substantively similar to tax rate reductions and very different (and toward the other end of the ideological spectrum) from the same subsidies via “spending”? No way.

  110. comment number 110 by: Brooks

    And let me ask you this: Which is more conservative, more in line with smaller government, lower taxes, lower spending…

    1. You get a tax credit for $100, or the amount of tax liability you would have otherwise had, whichever is smaller, because you bought Product X (and remember, you’ve acknowledged no substantive difference between that and the Treasury “spending” by sending you a check for $100, or your tax liability, whichever is smaller, because you bought Product X.)

    2. Government giving you a tax credit for $50, or the amount of tax liability you would have otherwise had, whichever is smaller, because you bought Product X (which, as you’ve implicitly acknowledged, is equivalent to the same size subsidy in “spending” form — so this is subsantively equivalent to lower “spending”)

  111. comment number 111 by: Brooks

    And again, let’s keep it with individuals for now, not businesses

  112. comment number 112 by: AMTbuff

    I’ll try your store example.

    Suppose Store A has a price of $7. Store B has a price of $10 and a mail-in rebate of $3. You prefer Store A because you correctly suspect that Store B is trying to trick you. You know from experience that the chance you will receive the rebate is significantly less than 100%. The whole point of offering a rebate is to give the appearance of a price reduction without costing the store as much money.

    Similarly, the whole point of restructuring tax deductions as complicated credits is to lay the foundation for withdrawing the benefit. This is obvious to proponents and opponents alike. Brooks, you don’t really dispute that this is the motivation, do you?

    You may protest that the motivation is irrelevant, but it’s not. When someone wants to walk you step by step into a corner from which you cannot escape, it is entirely reasonable to question his motives from the very first step, no matter how reasonable that first step might seem. Labeling a provision as a tax expenditure is the first step to eliminating it. In many cases this would be a good idea if paired with rate reduction. The argument about which provisions belong in the tax code as legitimate adjustments and which provisions are hidden spending programs is the argument about what is the correct tax baseline. That’s what Steve and I have always contended.

    To repeat: re-structuring a tax provision is not a politically neutral act. It is a first step toward eliminating the tax provision, and everyone knows this. Depending on what the original tax provision was, eliminating it might favor conservatives or progressives, or it might be just plain right or wrong based on fundamental accounting principles. But there are always solid reasons not to be indifferent.

  113. comment number 113 by: brooks

    AMT,

    I’m asking you for now to still make some assumptions just for the sake of answering my questions.

    One, which I’ve repeated a million times, is no timing difference between the two sceanarios — so no delay for Treasury sending funds to you in B. If you want, think of B as an instant redeemable coupon (or voucher in the case of the Treasury). So don’t reject the assumption for now, even if it’s convenient to do so.

    And let’s assume there is no significant, rational doubt about the refund or voucher or whatever form B takes or the store’s “cash back” takes.

    Play along with those assumptions for now. Let’s go step by step from the conceptual point to application to reality (where it does apply and where it may not apply).

    That’s more likely to move us along productively than for you to just reject a core assumption (that some money will indeed flow to the person from the store or from the Treasury).

    I’ll have to revisit tonight to be sure you’ve still got a clear question to answer (pain in tha a– doing this on Blackberry)

  114. comment number 114 by: AMTbuff

    Brooks, the rebate analogy is accurate. It’s not that there is a rational doubt that in year 1 your net tax liability will increase, or that the timing will be different in year 1. The risk is that in year 2 or 3 or 4 the rules will change, precisely because the change in format has made removable of the benefit politically easier.

    Sure, if we assume away this risk there is no difference. But the whole point of making the change in the first place is to create that risk!

    Rebates don’t make sense for the seller without breakage. Changing the format of tax computation doesn’t work for politicians unless it makes changing the financial reality easier. Why do you want to assume away this fundamental point?