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Can We Fix It? Yes, We Can!

November 28th, 2010 . by economistmom

bob-the-builder

I couldn’t help but think of Bob the Builder’s motto (”Can we fix it?  Yes, we can!”) as he floated down the street behind my daughter and her fellow ballet dancers at our local Thanksgiving parade.  Bob’s got a “can do” attitude because he knows it just takes hard work and the right tools.

When it comes to the tough task of reducing the federal deficit, the same saying goes.  In Sunday’s Washington Post, a few of us pick out some of our favorite “tools” offered by the fiscal commissions toward this goal of fiscal sustainability, and Bill Gale does an awesome job in his latest “five myths” piece explaining why although the situation is not yet a “crisis,” we shouldn’t push our luck; why we’ll need all our “tools”; and why the solutions are not that impossible and the seemingly disparate goals not that contradictory.

So yes, we can!  But will we?

54 Responses to “Can We Fix It? Yes, We Can!”

  1. comment number 1 by: Gstorm

    Isn’t the real “do we need to?” Historically, it seems that each time we balance the budget/develop a surplus we take enough spending power out of the economy to induce the next recession. At the moment our economy is fairly weak, setting expectations that we will soon take enough money out of the economy to induce the next recession isn’t necessarily the right way to strengthen the economy (and quite likely would induce a “double dip” recession). In the meantime, federal deficits add to private sector assets; which increases spending power and increases the likelihood we will continue to increase economic activity (see http://neweconomicperspectives.blogspot.com/2010/11/keep-deficit-ditch-doves.html for an excellent explanation by Dr. Kelton). The question shouldn’t be “what does it take to balance the budget?”, rather it should be “what does it take to operate the economy at/near full employment?”.

  2. comment number 2 by: Gipper

    Dr. Kelton doesn’t understand financial accounting and its relationship to interpreting the wealth of an individual, a company, or a nation. It’s not total assets that count. It’s the net worth (NW). NW = assets - liabilities. When the federal government issues debt, it doesn’t increase net worth. Assets and liabilties increase one for one.

  3. comment number 3 by: Brooks

    Diane,

    Nice piece. Glad to see you making it harder for people to set up the straw man of the supposedly inflexible, unreasonable, single-minded “deficit hawk”.

    Re: your comment:
    the one I find most intriguing and (surprisingly) “fiscally responsible” is one that actually increases the deficit - at least in the short term. This is the payroll tax holiday in the Alice Rivlin-Pete Domenici-Bipartisan Policy Center plan

    Are you saying that this particular stimulus would net out reducing our long-term fiscal imbalance, or just saying it worsens it to an acceptable degree, given the desire to increase employment and living standards via economic growth?

    As I see it, “stimulus” amid a bad economy provides two benefits: (1) reducing current pain, and (2) generating revenues that are higher than they would otherwise be by (hopefully) boosting GDP.

    It seems that there is a fairly widespread mantra among even economists in the public sphere that such stimulus is, in general, a good idea (if well designed). But as I commented a year or two ago, for all the discussion, and even talk of multipliers, I don’t recall seeing economists asserting that stimulus will improve or exacerbate our long-term fiscal imbalance.

    It’s akin to asking how strong a Laffer Curve effect would be. Does stimulus give us all gain, no pain, or does it mitigate today’s pain at some cost later by increasing the long-term fiscal imbalance, even net of dynamic effects.

    I’m not suggesting that anything that increases the long-term fiscal imbalance to any degree is bad — matters of degree matter. I’m just asking a question that I think has been mostly glossed over as so many economists in the media over the last couple of years have advocated stimulus or at least expressed that “now is not the time to reduce deficits” or “to increase tax rates” or “to cut spending”, etc.

    Also, if I can take advantage of your attention, over at this thread http://economistmom.com/2010/11/a-bipartisan-and-reality-based-way-to-cut-tax-rates-and-reduce-the-deficit-really/ I really would like to reply to AMT, but the thread is closed for comments. I think we were making some progress in the discussion. If you could re-open for comments I’d appreciate it.

  4. comment number 4 by: Brooks

    Well said, MARK ZANDI, Chief economist at Moody’s Economy.com, whose commentary is just below Diane’s in that WaPo piece:

    The latest proposals to address the nation’s long-term fiscal challenges have put tax expenditures in the cross hairs. Let’s hope policymakers pull the trigger.

    The exclusions, exemptions, deductions and credits that riddle the tax code cost the federal government more than $1 trillion each year. The mortgage interest deduction alone costs well over $100 billion annually. But there are hundreds more, indirectly funding student expenses, health insurance, child-care costs, local property taxes and on and on.

    Tax expenditures are more properly thought of as government spending rather than tax cuts. A deduction for local property taxes, for example, is no different from the federal government sending checks to homeowners. Cutting tax expenditures is thus cutting government spending. Indeed, removing tax expenditures - which are really tax breaks targeted for specific purposes - is analogous to eliminating congressional earmarks.

    And while I’m at it, thank you Martin Feldstien http://www.washingtonpost.com/wp-dyn/content/article/2010/11/28/AR2010112802912.html :

    There is a way to cut budget deficits without raising tax rates. “Tax expenditures” are the special features of U.S. income tax law that subsidize mortgage borrowing, health insurance, local government spending and more. Although these subsidies are a form of government spending, they are counted as reduced tax revenue rather than increased government outlays. Yet tax expenditures increase the deficit by hundreds of billions of dollars a year…

    A critical feature of the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president’s bipartisan fiscal commission, is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest.

    And as I previously pointed out, Greg Mankiw http://economistmom.com/2010/11/a-bipartisan-and-reality-based-way-to-cut-tax-rates-and-reduce-the-deficit-really/#comment-17111 said essentially the same thing as Zandi, Feldstein, and…well, me. Not that I think one needs to be a top economist to recognize this equivalence. It’s painfully obvious. As Mankiw put it, when considering a subsidy in tax expenditure form vs. explicit “spending” form:

    it hardly takes an economic genius to see how little difference there is between the two plans

  5. comment number 5 by: Brooks

    (As a note, I don’t want something misread in my prior comment: I certainly wasn’t implying that I’m “a top economist” — I’m not an economist at all)

  6. comment number 6 by: Arne

    How do those who say we should limit Federal revenue to a percentage of GDP treat tax expenditures?

  7. comment number 7 by: Brooks

    Arne,

    They don’t count tax expenditures as spending. They don’t seem to realize that tax expenditures throw a monkey wrench into the concept of “spending as a percentage of GDP”.

    I pointed this out (among other places) at http://keithhennessey.com/2010/03/03/budget-bubble-graphs/#IDComment59653317 in response to Keith Hennessey’s “bubble graphs”

  8. comment number 8 by: Gipper

    Brooks,

    Just because the economic incentives of “tax expenditures” are identical to subsidies, doesn’t make them identical in an accounting sense. The private sector GAAP equivalent of the “federal budget” is the portion of the Statement of Cashflows called “Changes in Cash Due Operating Activities.”

    For purposes of deficit spending, it’s about whether that’s a positive or a negative number. How you define the line items that arrive at that sum is beside the point. Call them tax expenditures, spending, or whatever you want. Who cares about how many angels dance on a pin head?

    In an accrual accounting sense, you seem to be suggesting that tax expenditures should be treated something like “Sales Discounts.” You have gross revenues from taxes that could have been collected. But then you net out the tax expenditures to arrive at a “Net Revenue” figure.

    Or you could put tax expenditures in the lower section of the income statement and label them as “Expenses.” This lower section of the income statement is what Hennesey and others have in mind when they talk about “Percentage of GDP” spent by the government.

    This is probably something for a class on National Income Accounting to grapple with, but you can get in all kinds of tangles just talking about accruals and cash flow and capital spending versus “current” spending.

    In a larger sense, though, I think we all understand what we’re aiming for with spending as a percentage of GDP. It’s a bit rough on the edges, but it’s not nebulous. There is no doubt that eliminating Departments of Agriculture, Education, and HHS would reduce spending as a percentage of GDP.

  9. comment number 9 by: Brooks

    Gipper,

    The point is that — no matter what label you put on them — there’s no substantive difference between such subsidies in tax expenditure form vs. the same subsidies in “spending” form, so if one would oppose the latter, one should oppose the former. But because of massive conceptual confusion among conservatives, they oppose the latter, but support the former, because they incorrectly see the former (tax expenditures) as “lower taxes”, as if similar in nature to reductions in tax rates and very different from subsidies in “spending” form — both of which are invalid views.

  10. comment number 10 by: SteveinCH

    Brooks,

    Speaking for one conservative, you are wrong. Personally, from a deficit perspective, I see a reduction in tax expenditures, an increase in tax rates, and a decrease in actual spending as equivalent. It is you who always wants to argue that only two of the three are equivalent.

    From an accounting perspective, a reduction in tax expenditures is more equivalent to an increase in tax rates than a reduction in spending, in the sense that a contradebit is more equivalent to a credit than it is to a debit.

    From a policy perspective, I do not believe there is any way that tax expenditures could be replaced with regular expenditures, counter to your examples you like to use over and over again. As a consequence, a reduction in tax expenditures is an increase in “general” government spending as opposed to targeted foregone revenue. One can debate the relative merits of those two things but saying they are equivalent strikes me as something that you can only think about in the realm of theory as opposed to practice.

    P.S. I know you’ll feel compelled to respond but I will not respond in kind. If you could respond directly to the notion of deficit equivalence, accounting equivalence, and policy equivalence, that would be more helpful (at least to me) than another detour into conceptual examples that don’t really relate to any of the three.

    Peace

  11. comment number 11 by: Arne

    “I see a …, an increase in tax rates, and a decrease in actual spending as equivalent. ”

    Is that really what you meant to say? A larger government is the same as a smaller government as long as he deficit is the same?

  12. comment number 12 by: SteveinCH

    Yes Arne, in terms of their deficit impact, all three are equivalent.

    They aren’t equivalent from an accounting or policy perspective, but from the perspective of deficit reduction, they are.

  13. comment number 13 by: Arne

    Brooks,

    The government made a tax expenditure on my behalf when I bought a hybrid vehicle. It reduced my taxes by $750. Would it be substantively different if the government had given that $750 to the auto maker as long as they sold the vehicle to me for $750 less?

  14. comment number 14 by: Brooks

    Steve,

    Re:
    from a deficit perspective, I see a reduction in tax expenditures, an increase in tax rates, and a decrease in actual spending as equivalent. It is you who always wants to argue that only two of the three are equivalent.

    I sure hope you’re not suggesting that my point was — or that I have ever said or implied — anything different from what you’ve just said about equivalence from a deficit perspective.

    You seem to be stuck on (1) labels (in my past attempts to get you to put aside labels and just address logically what we were talking about (reduction in one’s tax liability if he purchases Product X vs. the same amount of money from the Treasury if he purchases product X), and (2) (previously and again here) tautologies that don’t address the matter of substantive differences and equivalencies. Nevertheless, despite the obvious lack of value, I’ll respond to your questions.

    Revenue minus (explicit) expenditures equals the deficit. Other things equal, obviously any policy change that increases revenues by $X (by raising tax rates, reducing tax deductions, whatever) or decreases explicit expenditures by $X will, by mathematical definition, have the same impact on the size of the deficit. This is not illuminating or insightful or controversial or relevant to anything I’ve been saying — and certainly not worth asking me about. It’s simply another way to state the definition of the deficit. If a - b = c, anything that increases a by $X or reduces b by $X has the same impact on c. Obviously. By definition.

    As for your second tautology that is neither illuminating nor says anything meaningful with regard to anything I’ve said: Yes, if by “from an accounting perspective” you mean how we officially treat tax expenditures, well, again by definition an increase in revenues resulting from a reduction in tax expenditures would be an increase in revenues, as would higher revenues resulting from an increase in tax rates. So what? That says absolutely nothing about any substantive difference or equivalence between a tax expenditure subsidy for buying Product X and a “spending” subsidy that would provide the same incentive for buying Product X and affect everyone equally. As I’ve told you a million times now, if in scenario A you hand me $1 and in scenario B you hand me $2 while I hand you $1, you can say that you’re “spending” less in scenario A and I’m also spending less in scenario A, but that doesn’t mean there’s a substantive difference between the two scenarios, let alone the fundamental difference in ideology and economics that you imagine.

    Re:
    From a policy perspective, I do not believe there is any way that tax expenditures could be replaced with regular expenditures, counter to your examples you like to use over and over again.

    Well, first of all, we never get to that point in the discussion — the matter of practical application and any limits thereof — because you refuse to apply logic in the simple, basic conceptual discussion.

    Second, although there would be some practical difficulties in providing current tax expenditure subsidies in explicit spending form due to the fact that most tax expenditures are related to how large one’s tax liability would otherwise be, that’s a bizarre non sequitur as an argument that therefore tax expenditure subsidies are by nature fundamentally different from subsidies in explicit spending form — and that they are closer to tax rate cuts — in terms of ideology and economics. That practical difference just means that tax expenditures subsidies typically take a regressive form (in the case of home mortgage deduction, regressive by two factors — income and, generally, price of the home).

    Re:
    saying they are equivalent strikes me as something that you can only think about in the realm of theory as opposed to practice.

    Apparently you can’t or won’t even logically discuss it conceptually.

  15. comment number 15 by: Brooks

    Arne,

    Re:
    The government made a tax expenditure on my behalf when I bought a hybrid vehicle. It reduced my taxes by $750. Would it be substantively different if the government had given that $750 to the auto maker as long as they sold the vehicle to me for $750 less?

    I don’t know why you’re adding what seems to be an extraneous complication of involving the auto company — having them receive and expend the same $750 — but yes, if there’s a $750 incentive/reward to you if you buy it either way, then they are substantively equivalent. (As a note, if you would have gotten $750 even it exceeded your tax liability, then you’re talking about a refundable tax credit, which is different from tax expenditure subsidies whose value is related to taxable income and prior tax liability)

    I don’t know what you’re getting at.

  16. comment number 16 by: Jim Glass

    The government made a tax expenditure on my behalf when I bought a hybrid vehicle. It reduced my taxes by $750. Would it be substantively different if the government had given that $750 to the auto maker as long as they sold the vehicle to me for $750 less?

    Of course what really happened here is that the govt gave you $750 and the auto maker increased the price of the car you bought by most of the $750. Which is why hybrid cars cost a lot more than identical non-hybrid models. The govt *is* giving the money to the car makers.

    This is just an aside, another little aspect of the joy of tax expenditures. I won’t intrude in the endless main argument you guys have going.

  17. comment number 17 by: Brooks

    Jim,

    Don’t you mean to say that it’s an aspect of the joy of subsidies, regardless of whether in tax expenditure form or explicit “spending” form?

  18. comment number 18 by: SteveinCH

    Brooks,

    This is my point, you don’t want to discuss it practically, only conceptually.

    As to your first response. I won’t go back in the epic thread but you as much as told me that a reduction in tax expenditures was not equivalent to an increase in tax rates. But I’m glad you now agree.

    On the second point, the relevance is that the terms contradebit and contracredit exist. Were a contracredit equivalent to a debit, there would be no need for the concept of a contracredit.

    On the third, we’ll have to agree to disagree. There’s no point in determining conceptual relevance without practical application.

    As I said though I have nothing more to say on the issue and thank you for responding (mostly) in form.

  19. comment number 19 by: Arne

    “the auto maker increased the price of the car”

    Is this a cycnical joke, or do you believe it? Because it contrdicts microeconomic theory. The subsidy shifts demand and sellers end up producing more at lower cost.

  20. comment number 20 by: Arne

    “I don’t know why you’re adding what seems to be an extraneous complication”

    There are intermediaries in many real examples (mine was totally made up). I do not get a rebate every time I buy a loaf of bread or a can of soda, but they cost me less because the government pays farmers to produce more wheat and corn.

    How is that different?

  21. comment number 21 by: Brooks

    Arne,

    Re:
    The subsidy shifts demand and sellers end up producing more at lower cost.

    No, Jim’s right.

    Before the subsidy there was equilibrium where the supply curve intersected with the demand curve at quantity X. After the subsidy, suppliers in aggregate will be willing to supply X quantity at a price to the buyer of $750 less (the supply curve has shifted downward), but at that lower price buyers in aggregate are willing to buy more than quantity X, let’s say quantity X + Y. Because of that disequilibrium, we move back up the demand curve from that point of quantity X + Y until we hit the supply curve at some quantity between X and X + Y, and at some price between the original price and that price minus $750. Sketch it out and you’ll see, unless I’m missing something.

  22. comment number 22 by: Brooks

    Steve,

    Re: This is my point, you don’t want to discuss it practically, only conceptually.

    Ugh, please Steve. It really seems that you are grasping at any straw just to maintain some impression that you may have some legitimate disagreement with my point or that my point is not useful (and maybe you should at least pick which obviously invalid contention you want to stick with).

    Of course I want to talk about it practically, but if you aren’t even grasping (or are pretending not to grasp) the essential concept and if you can’t or won’t address the matter logically despite how simple the logic is, that is what keeps us from having a productive discussion.

    For some bizarre reason, you somehow still can’t see (or pretend you sincerely dispute) something that is really as simple as the substantive equivalence of (A) your handing me $1 and (B) your handing me $2 while I hand you $1. You keep insisting that A means we’re both spending less than in B in some substantive way — even that there is a fundamental difference, and indeed that they are opposites in terms of ideology and economics. How is a productive discussion possible when you persist with such an obviously absurd contention?

    And again, the practical issues I mentioned — mainly the fact that it would be administratively somewhat more complex to deliver a subsidy in one form vs. another — don’t change the essential nature of subsidies via the tax code.

    The only argument one could make — and it’s somewhere between weak and invalid — relates to the regressiveness of much of tax expenditure subsidy dollars (equivalent to government spending more to send bigger checks to people who in aggregate pay more in taxes, although on an individual level only sending the checks to those who bought Product X), but I won’t even bother with that.

    Re: you as much as told me that a reduction in tax expenditures was not equivalent to an increase in tax rates. But I’m glad you now agree.

    Steve, I must say, I don’t want to think you are being disingenuous, but it is very hard to believe you are sincerely confusing the point I’ve made with this silly misrepresentation you are putting forth. As you know, (1) I HAVE been saying that a reduction in tax expenditure subsidies is indeed substantively very different from an increase in tax rates. Tax expenditure subsidies incentivize and reward those who purchase Product X at the expense of everyone else. Reducing tax expenditure subsidies reduces those effects. Tax rate increases, by contrast, reduce the incentive and reward for work and investment. (2) I most certainly HAVE NOT and obviously WOULD NOT ever dispute in any way that anything that increases revenues by $X during some period has the same impact on the size of the deficit (in dollar terms) during that period (other things equal) whether it results from tax rate increase or reduction in tax expenditure subsidies or any other means — you know that if a - b = c, I wouldn’t ever dispute that anything that increases “b” by a given amount would reduce “c” by that amount regardless of what it was that caused that increase in “b”. So please stop with the baloney. You know the difference. It’s unbecoming for you to pretend otherwise, or to be so incredibly sloppy if you really did somehow confuse the two and think I would say something so nonsensical as to violate the simple mathematical definition of the deficit.

    Re: On the second point, the relevance is that the terms contradebit and contracredit exist. Were a contracredit equivalent to a debit, there would be no need for the concept of a contracredit.

    Yeeesh, Steve. I’ve tried repeatedly to get you to see the basic concept involved by simply saying what the incentive was and how each party is affected under a scenario in which a subsidy is provided via the tax code vs. substantively the same subsidy provided via explicit “spending”, and you either have a gigantic mental block or you just refuse to acknowledge simply, obviously valid logic. And now you throw out accounting jargon as if you are saying something conceptually meaningful.

    Just for the heck of it, I’ll try again, but you probably won’t answer, at least not with a real answer related to the actual question, with a real, relevant, logical explanation of your answer:
    If — hypothetically — under Scenario A you’ll get $Z reduction in your tax liability if you buy Product X, and under Scenario B you’ll get a check for $Z if you buy Product X (and assuming no timing difference in the net cash flow), is there a substantive difference between A and B? Is A conservative and B liberal? Is A reflective of “smaller government in the sense of lower taxes and lower spending” and B reflective of “bigger government in the sense of higher taxes and higher spending”?

    If you think there’s a substantive difference, how so, if the incentive is exactly the same and the net financial effects on all parties are exactly the same in either scenario?

    Go ahead, avoid the question once again, claiming you’ve given real answers before, or that my tone is too unpleasant at this point for you to want to answer, or give me some non-responsive non sequitur or answer to a completely different question like every time before, while claiming that I’m just unreasonably refusing to “agree to disagree” on some matter of opinion (as opposed to my being logical and you obviously illogical).

    Or you could just make a good-faith effort to reply directly, relevantly, and sensibly. But I guess you want to avoid that at this point because acknowledging the obvious would mean acknowledging that you’ve refused to do so all along.

    Re: On the third, we’ll have to agree to disagree. There’s no point in determining conceptual relevance without practical application.

    That’s just gobbledygook, as anyone should be able to see. There most certainly are practical applications. Here’s one, which I’ve been saying all along: It makes absolutely no sense for you and other conservatives to support tax expenditure subsidies on the basis that they reflect conservatism, small government, lower taxes and lower spending, when you’d oppose the same subsidies if they simply took an explicit “spending” form. And it makes no sense for you to seem tax expenditure subsidies as in the same family as tax rate cuts and as fundamentally different from (and opposite of in terms of ideology and economics) the same subsidies if they were in explicit spending form.

    To use one of my many illustrations, it’s like you own two stores and you praise one store manager for reducing the price of Product X by $1 at the cash register on the basis that he’s saving customers money, but you reprimand the other store manager for offering and providing an instant $1 back at the cash register because he is failing to offer customers a good value (and I’m not talking about irrational consumer psychology; I’m talking about substance). Or it’s like if one of your store managers accepts a $10 bill and gives $3 in change for a $7 item, and you reprimand him on the basis that he’s charging customers too much and he’s spending too much of the stores funds, but you have no problem another store manager who accepts exactly $7 from the customer because that store manager’s action has reflected lower pricing and lower store spending.

    Re: thank you for responding (mostly) in form

    I wish I could say that I felt you’ve made a good faith effort to respond to my actual questions, but unfortunately, I can’t draw that conclusion.

  23. comment number 23 by: Brooks

    [Below is a reply to AMT's comment on another thread at http://economistmom.com/2010/11/a-bipartisan-and-reality-based-way-to-cut-tax-rates-and-reduce-the-deficit-really/#comment-17301 That thread was closed for comments. I hope it's ok for me to post here, since the topic is being discussed on this thread as well]

    AMT,

    I was asking you to put aside the risk that the transfer of funds from the Treasury won’t actually take place as I describe. But it did seem that, in addition to introducing that extraneous assumption, you were also inappropriately meshing the assumption that there was significant risk of that transfer of Treasury funds not actually taking place (i.e., risk of “the store tricking you” out of the $3 it is supposed to send you) with the equally extraneous assumption that the store was more likely to change its policy if it started with one form vs. the other (of getting $7 net from you for the product).

    Let’s make a very important distinction between (1) the higher probability you assign to policy A changing in later years vs. policy B changing in later years (due to some aspect of the political process or irrational views of how A compares to B or whatever) vs. (2) the contention that policy A in itself is fiscally conservative (representing “smaller government”, “lower taxes”, and “lower spending”) and that B is liberal (representing bigger government, higher taxes and higher spending).

    Surely your not saying that 1 implies 2.

    Earlier I asked:
    #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?

    You said “no”.

    And I asked:

    #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”?

    And you eventually answered “no” (after taking us on a completely unnecessary detour for a while).

    So it seems to me:
    - You are acknowledging that IF there is no significant doubt about the funds coming from the Treasury in B during the period in question (e.g., one year), then there is no substantive difference between A and B, and therefore it is nonsensical for one to support A on the basis that it is, in his mind, conservative (smaller government, lower taxes, lower spending) and oppose B on the basis that it is liberal (bigger government, lower taxes, lower spending)…since again, there is no substantive difference between A and B. Everyone nets out the same under either A or B and based on the same behavior (some people buying Product X). CORRECT?

    (and please don’t resist saying “yes, correct” unless you’re going to give some explanation that is clear and makes sense, because as far as I can tell, I’m essentially just restating your answers to #3 and #4 from upthread, and I don’t want to travel away from logic on another unnecessary detour)

    - You are also saying that A is more likely to be reduced/eliminated in future years than is B. But this doesn’t change the nature of A and B (or one vs. the other), does it??? If A is no more conservative than B, then even if we accept your (questionable) premise that A is more vulnerable than B in future years, how would that make A all of a sudden conservative and B liberal when that wasn’t the case in the first place???

    Maybe your answer is “It doesn’t. I wasn’t implying that Brooks. A is still no more conservative than B because, as I’ve acknowledged Brooks, there’s no substantive difference, so obviously A can’t be conservative and B liberal”. That answer would make sense. RIGHT?

    Is your point unrelated to whether A is conservative and B liberal, but simply that it can make sense to favor A over B or vice versa because of one’s assessment of the political vulnerability of A vs. B?

    If that’s all you’re saying, then yes, certainly that can make sense, and I happen to have such a view. Because I generally oppose both, I would tend to prefer B over A because I think B is more vulnerable (more likely to be reduced/eliminated), as I’ve expressed in prior discussions we’ve had and in my last last paragraph in comment upthread at http://economistmom.com/2010/11/a-bipartisan-and-reality-based-way-to-cut-tax-rates-and-reduce-the-deficit-really/#comment-16571

    And by the way, I happen to think subsidizing purchases of particular products by individuals in either form is antithetical to conservative economics and conservative fiscal policy, which call for less tinkering by government with individuals’ purchasing decisions and for raising a given level of revenue with the least reduction in incentive to work and invest — i.e., the lowest tax rates, and for a given level of revenue, the more dollars the Treasure foregoes due to subsidies for individuals buying Product X, the higher tax rates have to be.

    But that would still leave us in agreement that, as long as there’s no timing difference in net financial impact and no significant risk that the Treasury funds won’t go to the purchasers of Product X, it is nonsensical for a conservative to support A (tax deduction/credit for buying Product X) on the basis that it’s conservative and oppose B (”spending” subsidy like voucher or whatever for buying Product X) on the basis that it’s liberal, CORRECT?

    As a note, you write:
    the whole point of making the change in the first place is to create that risk!

    We’re not even talking about the politicians changing the form of a subsidy from one form to another. We’re talking (for now) about whether or not A is conservative and B is liberal, and again, you’ve acknowledged that neither is more conservative or liberal than the other (and of course it would be silly for someone to think one is conservative and the other liberal when there is no substantive difference between the two, as you’ve acknowledged).

    Lastly, you didn’t answer the question in my November 23rd, 2010 at 11:33 pm comment. What’s your answer?

  24. comment number 24 by: Arne

    Brooks,

    Passing money through the seller is a red herring and caused you to mistate the problem. The seller ends up with the same amount. The buyer gets the product for $750 less. The supply curve is unchanged - the demand curve shifts. The new equilibrium is more units at lower cost.

    If something is subsidized, more will be sold.

  25. comment number 25 by: Brooks

    Arne,

    I know the seller ends up with the same amount. I said so in my first reply (”involving the auto company — having them receive and expend the same $750″).

    But I think you’re wrong and you’re not thinking it through as I encouraged you to do.

    Initial equilibrium is at, say price of $10,000 and quantity of 100,000.

    After the $750 subsidy, which is passed through to the buyer, the supplier is now willing to supply 100,000 at a price of $9,250.

    But if you recall, buyers are willing to buy 100,000 at a price of $10,000. So, assuming a downward sloping demand curve as is generally the case, buyers are willing to by more than 100,000 at $9,250. So there is disequilibrium: Buyers are willing to buy more at $9,250 than suppliers are willing to supply at $9,250.

    To reach equilibrium they must meet somewhere between a price of $9,250 and $10,000 and somewhere above a quantity of 100,000. The excess demand over supply at a price of $9,250 will drive up the price to, say $9,700, at which price suppliers are willing to supply the same quantity that buyers are willing to buy (say 110,000).

  26. comment number 26 by: Arne

    Ouch. I have spent so long working for a natural monopolist that I can no longer set up a classic micro problem correctly.

    I suspect that the hybrid car market is similarly atypical, but I should have seen your analysis was correct given your assumptions.

  27. comment number 27 by: AMTbuff

    >We’re talking (for now) about whether or not A is conservative and B is liberal,

    It depends. One is the status quo and one is a first step toward change. The change might be pro-conservative, pro-liberal, or neither. Mathematically they are equivalent but politically they are not.

    Now to your 11:33 question: If Product X is universally bought, then the rebate is a universal tax cut. If Product X is bought by only a few taxpayers, then the rebate resembles a spending program. In between these extremes the answer is a mixture.

  28. comment number 28 by: Brooks

    AMT,

    It seems you want to go around in circles, apparently backtracking to a response that you gave earlier and which it seemed I eventually got you to see was illogical, and which forced us on an unnecessary detour, after which you finally just gave me a straight “no” to my #4 on the other thread. http://economistmom.com/2010/11/a-bipartisan-and-reality-based-way-to-cut-tax-rates-and-reduce-the-deficit-really/#comment-17171

    Now, your backtrack is in response to a different question (my 11:33), but I don’t see the purpose in that answer unless it’s to backtrack on your answer to that question #4.

    Anyway, although I’m really not interested in being led around in circles like some Abbot And Costello “Who’s on First?” routine any more than I’m interested in spending a great deal more time trying to force you to answer my actual questions and do so in a way that makes some sense (as opposed to your repeatedly throwing out assorted irrelevancies and non sequiturs), I’ll try again.

    So here goes, and I’ll number my questions, even though they are somewhat redundant, because I want you to answer each one — and if you dispute my “CORRECT” questions, PLEASE provide some explanation of the reasoning behind your answer, and the same for your answer to my question #2 below, if you are going to dispute my point

    To recap, you have (eventually) correctly acknowledged that:

    - 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. (This was from your correct answer to my question #3 on the other thread)

    - Therefore, 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”. (This was from your eventual correct answer to my question #4 on the other thread, after taking us on a completely unnecessary detour by erroneously claiming that, for some reason, the answer depended on if everyone, no one, or some portion of people bought Product X.)

    Then, above on this thread, I essentially just reiterated what you’ve already acknowledged, as follows:

    So it seems to me:

    - You are acknowledging that IF there is no significant doubt about the funds coming from the Treasury in B during the period in question (e.g., one year), then there is no substantive difference between A and B, and therefore it is nonsensical for one to support A on the basis that it is, in his mind, conservative (smaller government, lower taxes, lower spending) and oppose B on the basis that it is liberal (bigger government, lower taxes, lower spending)…since again, there is no substantive difference between A and B. Everyone nets out the same under either A or B and based on the same behavior (some people buying Product X). (1) CORRECT?

    - You are also saying that you think A is more likely to be reduced/eliminated in future years than is B. But this doesn’t change the nature of A and B (or one vs. the other), does it??? If A is no more conservative than B, then even if we accept your (questionable) premise that A is more vulnerable than B in future years, (2) how would that make A all of a sudden conservative and B liberal when that wasn’t the case in the first place???

    Maybe your answer is “It doesn’t. I wasn’t implying that Brooks. A is still no more conservative than B because, as I’ve acknowledged Brooks, there’s no substantive difference, so obviously A can’t be conservative and B liberal”. That answer would make sense. (3) CORRECT?

    But that would still leave us in agreement that, as long as there’s no timing difference in net financial impact and no significant risk that the Treasury funds won’t actually go to the purchasers of Product X, it is nonsensical for a conservative to support A (tax deduction/credit for buying Product X) on the basis that it’s conservative and oppose B (”spending” subsidy like voucher or whatever for buying Product X) on the basis that it’s liberal, (4) CORRECT?

    I’ll probably get back to my question 11:33, since your answer apparently does not make sense, but since it’s hard enough for me to get you to give straight confirmation of what you’ve already said (explicitly or implicitly by obvious logic), I’ll just ask for your answers to the above.

  29. comment number 29 by: AMTbuff

    >IF there is no significant doubt about the funds coming from the Treasury in B during the period in question (e.g., one year), then there is no substantive difference between A and B, and therefore it is nonsensical for one to support A on the basis that it is, in his mind, conservative (smaller government, lower taxes, lower spending) and oppose B on the basis that it is liberal (bigger government, lower taxes, lower spending)…since again, there is no substantive difference between A and B. Everyone nets out the same under either A or B and based on the same behavior (some people buying Product X). CORRECT?

    Correct. Your “IF” is the crucial question, and once we set that aside, the answer must be yes. Now where would you like to go with that answer?

  30. comment number 30 by: Brooks

    I’ve asked you to answer each of my questions. Please do.

  31. comment number 31 by: AMTbuff

    Brooks, I no longer have enough time or patience to read 500+ word posts that are contentious to boot. If you value my feedback even half as much as I value my own time, you need to be much more concise. If you can’t say it in 150 words, your point is not sufficiently focused.

    I have let you lead the way here out of curiosity as to where you would take it. However even now I don’t know where you are going and you refuse to tell me.

    So it’s my turn to insist on answers. Weeks ago I asked you to explain whether and why you consider the personal exemption to be a tax expenditure. Your answer may get us somewhere.

    Here are the answers you demanded:

    1. Correct

    2. Incorrect. The foreseeable evolution (intended by their advocates) of A and B may not be equally conservative or liberal, even if A and B are equivalent in their current-year effects. This is Politics 101.

    3 and 4. N/A given my answer to 2.

  32. comment number 32 by: Brooks

    AMT,

    Here’s why my comments to you have grown long:

    I start with a reasonably short statement containing such simple logic that one would think no one would dispute it, or a clear, simple question with an obvious answer.

    You reply with non sequitur(s), answers to completely different questions, and other irrelevancies.

    I think spell out my logic step-by-step, and break down the questions to show the logical progression. I explain why your responses didn’t answer my question(s) or didn’t do so logically and ask you to answer my new questions.

    You respond, again and (with each iteration) again with more of the same, and I keep trying to somehow spell it out a rather simple thing even more clearly and to get you to at least be consistent with yourself and to respond to my actual questions.

    And so on, until I am tediously laying out long comments taking things step-by-step and including repetition that I would think unnecessary, but which turn out to actually be insufficient to get you to even be logically consistent across your responses.

    And now your most recent reply contains more of the same, and I too have no more patience, at least for now, to pursue a response from you that is relevant, shows your reasoning with some clarity, and makes sense.

    As for where I’m taking it, what’s the mystery? I’ve said from the start that my point is that it’s nonsensical for conservatives to oppose subsidies for buying Product X on the basis that they are “liberal” and represent “big government, high taxes and high spending” while they would support the same subsidies if provided via tax deductions or credits on the basis that the latter are “conservative” and represent “smaller government, lower taxes (and in the same family as tax rate reductions) and lower spending).

    As for your question, I’m sure I did answer it so you really shouldn’t pretend I didn’t.

    I don’t know if I’d consider the personal exemption a “tax expenditure”, nor do I care much about what label something has, nor have my point and my questions related or depended in any way on labels and definitions.

    The only (very loose, and fairly worthless) relevance to anything I’ve been saying is that you may think it fits your (worthless) scenario in which literally everybody buys Product X, which, although obviously completely unrealistic, wouldn’t even support your answer for that scenario, because it would require that everyone spend the same amount on Product X, and other conditions, so it’s unrealistic to some exponential power, and not even useful conceptually.

    But again, what does it matter what label it has? That’s a rhetorical question. Feel free not to answer, since I’ve lost patience on this topic with you. I’d say getting relevant, logical responses from you on this topic is like pulling teeth, but it’s worse — the teeth just won’t come out no matter what.

  33. comment number 33 by: AMTbuff

    Brooks, I think I understand the problem we have: Many people other than you have described the mathematical equivalence of providing a tax break or providing a cash payment. Every one of them appeared to advocate reducing the tax break, in some cases by replacing the tax break by a differently targeted spending program. In other words, change is the motive. I had assumed that your motive was the same, but perhaps I was wrong.

    My assumption explains my desire to skip to a discussion of the pros and cons of changing particular provisions (e.g., the mortgage interest deduction). Had my assumption been correct, such a discussion could have been very interesting.

    Even if you don’t have an ulterior motive for restructuring tax breaks as expenditures, everyone else does. So although A=B to you, political operatives will always prefer the version that better positions them politically, even if the only difference between A and B is the name (the label). Politicians love euphemisms.

    Try this one: Suppose your employer decides to print “Gift” on your paycheck. You know it’s not a gift, but you wonder whether your employer has a plan to discontinue this “Gift” in the near future. However it’s just a label, so why should it matter? A: The label matters because it betrays an intent to change the game.

  34. comment number 34 by: Brooks

    You’ve touched upon (and exhibited persistently) perhaps the greatest obstacle to productive (and interesting) discussion/debate in the political blogosphere. People don’t really make a good-faith effort to answer questions they are asked, because hey think the questioner is building toward an argument for a policy choice with which they (the respondent) disagree.

    Usually they offer ostensible answers to the questions that are not really answers to those questions, or they are deliberately vague or opaque with regard to their reasoning. Sometimes they respond this way deliberately, in bad faith, because they fear the questioner will build a good argument (they fear this out of some combination of ideological partisanship and personal ego/insecurity). So they offer up endless straw men, non sequiturs, irrelevancies, etc.

    Other times the respondent is just so unshakably fixated on other questions and assertions of the broader policy debate (often where they think the questioner is heading) that he has a strangely persistent, effective mental block. But of course, the longer the questioner persists and the clearer he makes his questions, the harder it is to believe that a respondent persisting with non sequiturs, irrelevancies, opacity, etc. is reflecting anything other than bad faith. (and I say “bad faith” rather than just being unwilling to play along, since the respondent is representing his responses as actual answers to the questions asked, which they aren’t).

    Needless to say, sometimes a person is just unable to understand something, yet erroneously (and ironically) believes that he gets it, and that the questioner doesn’t get it. That’s not bad faith, but the simpler the question, the more obvious the answer (particularly as a matter of simple logic — i.e., not believing contradictory statements to both be true), and the more the respondent seems otherwise intelligent, the harder it is to believe one is not witnessing bad faith.

    Re: My assumption explains my desire to skip to a discussion of the pros and cons of changing particular provisions (e.g., the mortgage interest deduction).

    What are you talking about? I never wanted to have any such discussion, nor have I ever indicated such a desire.

    Re: Even if you don’t have an ulterior motive for restructuring tax breaks as expenditures, everyone else does.

    Are you going to ask me next why I beat my wife? I’ve never suggested in the slightest that I want tax breaks restructured as explicit expenditures.

    Re: the employer “gift”, obviously such a label would matter if it affects the likelihood of a particular policy change, just as labels obviously matter when they are being used in political debate or for that matter any marketing. But your answers to my question 2 in my 4:06pm is still nonsensical, and apparently you don’t understand the question or are choosing to answer a different question. But I’m too tired to explain.

  35. comment number 35 by: Brooks

    Oh, and when I implied that it wasn’t important whether or not one applies the label “tax expenditure” to the personal exemption, I meant just that the label isn’t important for assessing what its effects are, whether it’s more liberal or conservative than some other policy, or whether one thinks it’s good policy or not. It is what it is. A rose by any other name would smell as sweet or as foul or whatever.

  36. comment number 36 by: Brooks

    Just realized I forgot to open my two comments above by addressing AMT. Both my comments above were addressed to AMT, not to Diane’s post.

  37. comment number 37 by: AMTbuff

    >the label isn’t important for assessing what its effects are, whether it’s more liberal or conservative than some other policy, or whether one thinks it’s good policy or not.

    That’s correct. The label doesn’t change the facts, even though it often hints at the motives of the labeler. Best to avoid labels, and to avoid baselines too for the same reason. They cause more trouble than they are worth.

    >I’ve never suggested in the slightest that I want tax breaks restructured as explicit expenditures.

    I accept that too. I have a feeling that we don’t actually disagree on anything substantial here.

    >I never wanted to have any such discussion, nor have I ever indicated such a desire.

    That’s disappointing. I believe that an abstract discussion is essentially pointless. I have learned over the years that it is much more productive to generalize from specific concrete cases than to try to start by constructing a complete abstract framework. YMMV.

    >Just realized I forgot to open my two comments above by addressing AMT. Both my comments above were addressed to AMT, not to Diane’s post.

    The readers here are definitely intelligent enough to figure that out! Thanks for the replies.

  38. comment number 38 by: Brooks

    AMT,

    Re: That’s disappointing. I believe that an abstract discussion is essentially pointless. I have learned over the years that it is much more productive to generalize from specific concrete cases than to try to start by constructing a complete abstract framework. YMMV.

    First of all, you are really mixing things up. First (before) you implied, falsely and without any basis whatsoever, that I’ve been seeking a discussion about something I haven’t given any indication of any interest in discussing: the pros and cons of changing particular tax deductions to explicit expenditures. I point out to you that I have no interest in such a discussion, and you respond by quoting me out of context saying “I never wanted to have any such discussion”, and then implying that I had just made a case for starting with an abstract framework for the point I was actually making and questions I was actually asking (which have nothing to do with the pros and cons of changing subsidies from tax deduction form to “spending” form). That’s a pretty strange non sequitur. Maybe you still don’t get that you just imagined that I’ve been pushing for a discussion of that topic, even though I’ve said absolutely nothing that would give one that impression.

    But since you bring it up, yes, my mileage definitely varies regarding starting with an abstract framework. Very often it is better to start with a simplified example, hypothetical or real, to discuss concepts and principles one believes are fundamental to the practical, real-world issue, without getting distracted from the start (and often getting absolutely nowhere) by a host of extraneous variables associated with a particular real-world example. That’s not always the case, but quite often.

    It is particularly useful to take a step back and start with a discussion of basic concepts when there is a large, fundamental conceptual misunderstanding that is driving complete confusion regarding the real-world issue, as is the case with the point I’ve been making. If people are nonsensically imagining a fundamental difference between two types of policies where there is no substantive difference (or at least no difference in essential nature), and when they are supporting one on the basis that it reflects conservative ideology and economics and opposing the other on the basis that it reflects liberal ideology and economics, we really have to step back and start with a simplified example and work from there. Of course, if people won’t engage in good faith, that won’t work, but neither will any other approach.

    That’s why economics, philosophy, and all sorts of other stuff are taught by starting with simplified, hypothetical models and working from there to greater complexity and practical application.

    And I don’t see what would be the great gain if I had started by substituting for “a subsidy for buying Product X” a specific, actual tax deduction or tax credit for buying a particular product.

  39. comment number 39 by: Brooks

    AMT,

    Re:I have a feeling that we don’t actually disagree on anything substantial here.

    I don’t know if by “here” you mean my central point, but tonight I’ll try to very simply, in fairly short, clear, logical steps, lay out once again what I’ve been saying, and we’ll see if you agree or can produce some clear, sensible reason to disagree.

  40. comment number 40 by: AMTbuff

    >I don’t know if by “here” you mean my central point

    If you can state your central point in 2 sentences I will definitely tell you if I agree or not.

    I do agree that it is possible to construct a spending program that is mathematically equivalent to virtually any income tax break. I disagree that such a transformation would be POLITICALLY neutral, but mathematically there is no question.

    I agree that some tax breaks are essentially equivalent to spending programs. Others are much more similar to commonly accepted adjustments needed to measure economic income accurately. Most tax breaks are in the gray area between these extremes. Part of my problem has been my resistance to black and white abstract statements when I know that the reality is very gray.

  41. comment number 41 by: Brooks

    AMT,

    Re: I disagree that such a transformation would be POLITICALLY neutral

    Again, I’m not (nor have I ever been) talking about any “transformation” from tax deduction to explicit spending. I thought I made that very clear.

    Re: Other [tax breaks] are much more similar to commonly accepted adjustments needed to measure economic income accurately.

    Well, sure, the most obvious being expenses of a business, or (a bit fuzzier in some cases) personal expenses that are work related. That’s why I explicitly excluded those cases from what I was talking about. As I’ve said repeatedly, I’m talking about deductions for an individual and not related to a business or even work-related expenses.

    But the above is not what I planned to write per my reference in my 8:56am comment. I’ll do that when I get home.

  42. comment number 42 by: Brooks

    AMT,

    ok, there’s really no way to keep this short and have any chance at all of holding you to logical responses, so this is longer than I originally thought it would be.

    My point has been quite clear (and often repeated) all along: It is nonsensical for conservatives to support and defend subsidies in the form of tax deductions and credits on the basis that they are “conservative” and representing “smaller government, lower taxes and lower spending” if they would – and they indeed would – oppose the same subsidies in explicit spending form on the basis that they are “liberal” and represent “bigger government, higher taxes, and higher spending”.

    I want people to approach our fiscal policy choices rationally, not nonsensically, so I try to get the above point across to people suffering from that confusion regarding the nature of these types of policies. Unfortunately, however simple and obvious the logic, my efforts to get people to understand are sometimes fruitless.

    Now then, let’s see if I can get you to respond directly, relevantly and logically to some questions. And you’ll have to forgive me if, after all the difficulty I’ve had getting you to follow and employ simple logic, I break this down into small pieces and take you through it step-by-step.

    I’ve presented two hypothetical policies:
    Policy A: Everyone who buys Product X gets a tax deduction.
    Policy B: The Treasury sends a voucher or check to everyone who buys Product X in the same amount each of them would have saved on taxes under Policy B.

    Assumptions I’ve asked you to make: Again, I’m talking about policies pertaining to individuals purchasing a Product X that is unrelated to a business of theirs and not even a work-related expense. I’ve also asked you to assume no timing differences in net cash flows between Policy A and Policy B, and I’ve asked you to assume that the government will indeed carry out either policy rather than welching on the subsidy.

    1. First, just generically: If x = y and y = z, then x = z, and you can’t say that x is different from z, let alone say that x is substantively different in a way that reflects different ideology or economics. Correct?
    (If you dispute this, please find me and just shoot me.)

    2. You’ve acknowledged that there is no substantive difference between Policy A and Policy B. Correct?

    3. You’ve acknowledged that there is no difference in ideology or economics between Policy A and Policy B (which should be obvious, given that there is no substantive difference). Correct?

    4. Therefore, Policy A in itself (i.e., not speaking of what difference there may be in the political sustainability over the years between the two forms) is no more conservative than Policy B. Correct?

    5. Generally speaking, Policy B is not fiscally conservative and representative of smaller government, lower taxes and lower spending. Indeed, Policy B is generally better characterized as bigger government, higher taxes and higher spending. Do you agree?

    6. And if you agree, and since Policy A in no more conservative than Policy B, then you would say the same thing (Statement #5) about Policy A. Correct?

    7. You believe A is more politically vulnerable than B – i.e., A is more likely than B to be reduced/eliminated in future years. (I disagree with that assumption, but let’s assume your assumption is valid for the sake of argument) You seem to be contending that, for some reason, the greater likelihood that A will be reduced/eliminated means that it makes sense for a conservative to favor A over B. I asked you – and I’m asking you again – why would a conservative prefer A over B on the basis that A is more sustainable if A is not more conservative than B? Why would preserving a policy that is no more conservative than the other be a rational reason for a conservative to prefer the former? (If/when you respond to this rhetorical question, if you dispute my point, please spell out your reasoning — not vague, opaque, one-liner or two — and please try to make sense)

  43. comment number 43 by: Brooks

    Actually, I think I messed up my #7 a bit. Wait a sec.

  44. comment number 44 by: Brooks

    CORRECTION TO MY #7:

    You believe A is less politically vulnerable than B – i.e., A is less likely than B to be reduced/eliminated in future years. (I disagree with that assumption, but let’s assume your assumption is valid for the sake of argument) You seem to be contending that, for some reason, the lower likelihood that A will be reduced/eliminated means that it makes sense for a conservative to favor A over B. I asked you – and I’m asking you again – why would a conservative prefer A over B on the basis that A is more sustainable if A is not more conservative than B? Why would preserving a policy that is no more conservative than the other be a rational reason for a conservative to prefer the former? (If/when you respond to this rhetorical question, if you dispute my point, please spell out your reasoning — not vague, opaque, one-liner or two — and please try to make sense)

    And another question: if you think B is inconsistent with fiscal conservatism, why wouldn’t a conservative prefer B on the basis that it’s more likely to be reduced/eliminated?

  45. comment number 45 by: Brooks

    Actually, the more I try to recall and check a couple of your past comments, I’m not sure what your point was regarding one being more political vulnerability than the other, but for some reason you were making some point as if that point prevented you from answering my questions in a logical way. So you tell me: what was your point?

    And I should have deleted the part about my disagreement in my revised #7. I think a subsidy in explicit spending form is more likely to be reduced/eliminated. That’s why I consider form A (tax deduction) to be even worse (because it’s more politically sustainable, and I don’t like such subsidies in general, with some minor exceptions).

  46. comment number 46 by: Brooks

    And please do answer the question in #7 regardless — why would a conservative prefer either policy over the other on the basis that it is more sustainable, if one is no more conservative than the other anyway?

  47. comment number 47 by: AMTbuff

    >My point has been quite clear (and often repeated) all along: It is nonsensical for conservatives to support and defend subsidies in the form of tax deductions and credits on the basis that they are “conservative” and representing “smaller government, lower taxes and lower spending” if they would – and they indeed would – oppose the same subsidies in explicit spending form on the basis that they are “liberal” and represent “bigger government, higher taxes, and higher spending”.

    I completely agree with your proposition as stated.

    I also concur with you on items 1-6. On item 7:

    >You believe A is more politically vulnerable than B

    I think you meant to write “B is more politically vulnerable than A” here, so I will assume that and continue.

    >why would a conservative prefer A over B on the basis that A is more sustainable if A is not more conservative than B?

    Because A is more conservative that the expected future version of B.

    If one assumes that B is immutable, than there would be no reason to favor A over B. But under that assumption there would be no reason for anyone to favor changing A to B. The fact that someone wants to change from A to B indicates that B is a step on a path to something else that its advocates prefer to A.

    I believe that we are in agreement now.

  48. comment number 48 by: AMTbuff

    >if you think B is inconsistent with fiscal conservatism, why wouldn’t a conservative prefer B on the basis that it’s more likely to be reduced/eliminated?

    Yes, in that circumstance a conservative will prefer B on this basis. For example, a conservative would likely prefer hybrid tax credits be handed out in cash rather than as tax credits.

  49. comment number 49 by: Brooks

    AMT,

    I’m unclear on what you’re saying, but let me check.

    Are you saying that B (the subsidy in explicit spending form) is more likely to be reduced/eliminated than A?

    If so, I agree.

    And are you saying that the subsidy in either form (A or B) is generally not conservative?

    If so, I agree.

    And are you saying that, although A and B are not different in terms of ideology or economics, since neither is conservative, it can make sense for a conservative to prefer B because it is more likely to be reduced/eliminated? In other words, it can make sense for a conservative to prefer that a non-conservative policy be in the form that is less sustainable?

    If so, I agree, and that’s why I think such subsidies in tax deduction (and tax credit) form are even worse than would be the same subsidies in explicit spending form, not that I’d want either (with minor exceptions when there are clear, sufficient positive externalities or hardship, or if the alternative is for government to simply provide the products or services).

    But I’m not interested in shifting tax expenditures to explicit expenditures as some strategy along those lines. I’d just like to see most subsidies eliminated in either form. And for tax deduction/credit subsidies, that means getting rid of them, which, although it would technically mean higher tax revenue, would really have the same effect as would a reduction in explicit spending: the Treasury has more money as a result and the deficit is smaller.

    And that’s one of the (many) things Steve gets stuck on with this issue. He says basically, if you get rid of tax expenditure subsidies, the government will have more money it can spend, so it’s better to keep the tax expenditures than to make people pay more in taxes. What he misses is that the same thing can be said about eliminating subsidies in spending form: the immediate result is more money in the Treasury and a lower deficit. That money could be spent on something too, rather than staying as deficit reduction. Either way, all the effects of eliminating the subsidy (in either form) are the same: the people who used to have the subsidy end up with less money than they’d have with the subsidy, the Treasury has that money, and the deficit is lower.

  50. comment number 50 by: Brooks

    AMT,

    You may have read and remember my “translation” of Obama’s last State of the Union speech segment in which he boasted about all his “tax cuts”, then turned to the Republicans and said “I thought I’d get some applause on that one”, upon which the Republicans applauded the “tax cuts”. It reflected an irrational — indeed asinine — view of the nature of subsidies through the tax code.

    I’ll do a slightly different version of the translation here, but the same idea.

    Obama said, with ellipses mine:

    we…passed 25 different tax cuts.

    Now, let me repeat: We cut taxes. We cut taxes for 95 percent of working families. (Applause.) We cut taxes for small businesses. We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. (Applause.)

    I thought I’d get some applause on that one. (Laughter and applause.)

    Would Republicans (conservatives) have applauded if Obama had said the following instead?

    we…spent a lot of money on many different subsidies we politicians chose.

    Now, let me repeat: We increased spending on subsidies. We increased spending on subsidies for 95 percent of working families…We spent more money to subsidize first-time homebuyers. We spent more money to subsidize parents trying to care for their children. We spent more money to subsidize 8 million Americans paying for college.

    I thought I’d get some applause on that one.

  51. comment number 51 by: AMTbuff

    >Are you saying that B (the subsidy in explicit spending form) is more likely to be reduced/eliminated than A?
    Yes.

    >And are you saying that the subsidy in either form (A or B) is generally not conservative?
    Yes, but generally but not always. In some cases the “subsidy” serves horizontal equity (fairness). For example, the casualty loss deduction.

    >it can make sense for a conservative to prefer that a non-conservative policy be in the form that is less sustainable?

    Yes. And the same is true if you replace “conservative” with “progressive”.

    >that’s why I think such subsidies in tax deduction (and tax credit) form are even worse than would be the same subsidies in explicit spending form

    Most people who use the term “tax expenditure” do so for this reason.

    >I’d just like to see most subsidies eliminated in either form.

    And they agree with you on this as well.

    >that means getting rid of them, which, although it would technically mean higher tax revenue, would really have the same effect as would a reduction in explicit spending

    Here is where Steve and I diverge with you. The tax break flows into the economy one way, but revoking the break and spending the money some other way would have a different effect on the economy. It might be better, or it might be worse. Being a cynic, I would expect worse.

    Here’s an example of where it might be worse. Everybody gets a personal exemption. Revoke that and you have increased everyone’s taxes. Not by an equal amount, but if you prefer equal we can discuss California’s personal credit which is equal. Now suppose the government takes that money and spends it on adding dental coverage to Medicare. Is the economy better off or worse off? I claim the economy would be damaged.

    This is definitely a case by case evaluation of the specific tax increase vs. the specific spending of the funds. Progressives tend to assume that all government spending is more beneficial than private spending, and conservatives tend to assume the opposite. That’s why they disagree on the equivalence of 20% tax revenue plus 5% tax breaks vs. 25% tax revenue plus 0% tax breaks.

  52. comment number 52 by: Brooks

    AMT,

    Re: Here is where Steve and I diverge with you. The tax break flows into the economy one way, but revoking the break and spending the money some other way would have a different effect on the economy.

    That’s not at all what I was saying. I wasn’t saying it wouldn’t matter if that money were spent in some other way. I was saying that one of the ways in which Steve is confused is that he doesn’t see that the Treasury ends up with more money if the subsidy is reduced regardless of whether the subsidy was in the form of a tax deduction/credit or explicit spending, and from that point government can use that money for any of the possibilities (spending on something else, lowering tax rates, deficit reduction, or some combination) in either case. The result is the same whether, in one case, the Treasury ends up with more money because it is now getting money the subsidized folks would have kept, or in the other case the Treasury ends up with more money because less it is sending out less as these subsidies.

    Obviously if a subsidy in either form is eliminated and the additional funds the Treasury then has are spent on something else, that could be good or bad, conservative or liberal, etc. — it’s just saying shifting spending from one area to another.

    Re: Progressives tend to assume that all government spending is more beneficial than private spending, and conservatives tend to assume the opposite. That’s why they disagree on the equivalence of 20% tax revenue plus 5% tax breaks vs. 25% tax revenue plus 0% tax breaks.

    You seem to be mixing apples and oranges, or at least being unclear about what you are referring to. We’ve been talking, in effect, about the equivalence* of, say, (1) 25% tax revenue with 5% spending on subsidies and no tax breaks and (2) 20% of tax revenue that would have been 25% if not for the fact that 5% tax revenue was foregone due to subsidies in the form of tax breaks.

    It’s an entirely different comparison if you are comparing different forms of spending, or if one prefers the tax break form of subsidies (or prefers the spending form of subsidies) because they are generally regressive in practice.

    Anyway, unless you dispute or want to question something I’ve said above, if you’d like to move on by asking me any questions on this general topic, feel free.

    And I’m glad I finally got all those straight, logical answers from you. I wish it hadn’t taken so much time and effort, but it’s also nice to see that a discussion that seems hopeless can end up getting somewhere.

    * “equivalence” assuming the conditions I stated, which generally wouldn’t be the case. That doesn’t affect the validity of my point; it just involves other issues, most notably the regressivity of tax breaks generally.

  53. comment number 53 by: AMTbuff

    >the Treasury ends up with more money if the subsidy is reduced regardless of whether the subsidy was in the form of a tax deduction/credit or explicit spending, and from that point government can use that money for any of the possibilities (spending on something else, lowering tax rates, deficit reduction, or some combination) in either case.

    Yes, I agree this is correct.

    >Obviously if a subsidy in either form is eliminated and the additional funds the Treasury then has are spent on something else, that could be good or bad, conservative or liberal, etc

    Correct again.

    Have a good weekend!

  54. comment number 54 by: Brooks

    You have a good weekend too.

    I want to be sure you don’t feel I end the discussion once I’ve gotten answers to my questions, so again, feel free to ask anything you want (or not, whichever you prefer).