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Tax Promises That Need to Be Broken

May 2nd, 2011 . by economistmom

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In an opinion piece I wrote for Bloomberg Government published last Friday (subscription-only access here), I elaborated on those “magical, mystery tax pledges” of both political parties that are getting in the way of bipartisan approaches to deficit reduction.  Those tax promises:

  • Republicans: “Don’t raise revenue above the 40-year historical average of around 18-19 percent of GDP.”
  • Democrats, including (and especially) President Barack Obama: “Don’t raise tax burdens on households making under $250,000 a year.”

What Republicans might not realize about how their political promise works against their own policy goals (from my Bloomberg column):

To those on the right holding fast to an 18-19 percent of gross domestic product revenue ceiling, here’s the paradox: Raising more revenue by broadening and leveling the tax base is actually consistent with “supply-side” economic goals. Raising revenue by reducing at least some of the $1 trillion a year in tax breaks and shelters — also known as tax expenditures — and adding on new, broadly defined tax bases would increase, not decrease, the supply of productive resources in our economy…

[Reducing tax expenditures would also] reduce [not increase] government’s role in the economy…

And the Democrats may be shooting themselves in the foot as well, if they really prefer revenue-raising approaches to reducing the deficit over deep cuts in spending:

To those on the left who are holding fast to the president’s promise not to raise taxes on households with incomes below $250,000 a year, here’s your paradox: Limiting the pool of households to tap for revenue increases means limiting the revenue-side strategy for deficit reduction.

It’s hard to reconcile wanting a significant portion of deficit reduction to come from higher revenues and wanting to avoid any increase in tax burdens for 98 percent of the population. Exempting that many people means that tax rates on those above the cutoff must be prohibitively high…

This doesn’t mean giving up on progressive policies that would ask the rich to bear a larger relative burden of deficit reduction. Reducing tax expenditures is an inherently progressive approach because these tax breaks disproportionately benefit the rich.

Now, I do recognize that on the face of it, the Republican pledge of “no new taxes” (i.e., revenue increases)–of any shape or form, at any time–seems a much bigger obstacle to deficit reduction than the President’s campaign promise to shield (just) most of us from increased tax burdens, which is not a universally-held conviction of the Democrats and is less mathematically-impossible.

But factoring in that: (i) the one Democrat most wedded to that promise is the President of the United States (the one ultimately “in charge” of our nation’s economic policies and the most powerful man in the world), and (ii) both sides are probably just looking for excuses to outright reject the other side’s ideas so they don’t have to walk on the common ground, which is still a political landmine of hard choices, I think it is the President’s promise–even if the less ludicrous promise of the two–that’s probably the binding constraint on both sides’ doing the right thing in terms of bipartisan deficit reduction.

So both of these “magical, mystery” tax promises need to be broken.

40 Responses to “Tax Promises That Need to Be Broken”

  1. comment number 1 by: Arne

    I think I agree. Obama admitting that we need to look to all citizens for whatever increase in revenue we need is more key than Republicans admitting we need to increase taxes.

    When people actually see the details of what gets cut, they will be more willing to raise taxes - even on themselves.

  2. comment number 2 by: Vivian Darkbloom

    I agree that eliminating or reducing many of the so-called “tax expenditures” currently littering our Tax Code makes good economic policy—-and even better tax policy. It would be good for reducing the deficit, too, if not coupled with higher spending elsewhere. And, Economist Mom is right that eliminating tax expenditures generally has the effect of reducing government’s role as central meddler of the economy and distributor-in-chief of political favors. Republicans should be on board here. But, I think Economist Mom needs to think a little bit harder about the following statement:

    “Reducing tax expenditures is an inherently progressive approach because these tax breaks disproportionately benefit the rich.”

    I hope not to open a whole new discussion with Brooks; but, properly defined, tax expenditures are the functional equivalent of federal spending. The whole issue is properly defining what a tax expenditure is. The JCT has derived a somewhat more nuanced approach, but aside from those details, the JCT recently did a study to estimate the cost of various “tax expenditures” over the period 2008 to 2012. Here’s the top ten, according to my summary count (in billions):

    1. Exclusion of employer health care benefits $680
    2. Preferred rates on dividends and CG $668
    3. Mortgage interest deduction $443
    4. EITC refundable and non-refundable $330
    5. Exclusion of defined benefit contrib. plan benefits $341
    6. Deduction for state income and sales tax $242
    7. Exclusion of defined benefit pension plan $213
    8. Deduction for charitable contributions $205
    9. Exclusion for cafeteria plan benefits $201
    10. Exclusion of cap gains at death $168
    11. Real property tax deduction $112

    Of those listed, I would take exception to including the pension contribution exclusion/deduciton as “tax expenditures” because the benefits are taxed when received and in this sense the government shares in the appreciation of the pension assets. We should be happy that people are saving and expanding the future tax base. Likewise, the preferred rates on CG and dividends is closely connected to the issue as to whether such income has already been taxed at the corporate level. The exclusion of capital gains at death is connected to the estate tax (high value estates generally get one or the other, not both). Those aside, there is little question the rest of the items on the list are pure tax expenditures (the list ignores corporate ones).

    Given the complexity of the Tax Code and how one benefits from our various “tax expenditures”, it’s hard to keep one’s eye on the ball. That is a large part of the problem. Even EM seems to have lost sight of the fact that many tax expenditures disproportionately benefit the middle and lower income classes. So, eliminating them is not “inherently progressive”. She should take time to study the distribution analysis done by the JCT on these tax expenditures. Because of the Pease phase-out rules (due to re-enter into force in 2014), the benefit of many tax expenditures are enjoyed primarily by those earning under $200,000. Assuming a marginal rate of 35 percent, an 80 percent phase-out translates to a 7 percent effective benefit. And, the JCT scores the PEP phase-out for personal exemptions and standard deductions as a “negative tax expenditure” to the tune of over $200 billion. Many of the tax expenditures found in the Code are means tested—such as the EITC, exclusion of social security benefits, etc, and therefore disproportionately benefit the middle and lower classes. So, the answer as to whether eliminating “tax expenditures” from the Code would be “progressive”, depends on which tax expenditures on we are talking about.

    http://www.jct.gov/s-2-08.pdf

  3. comment number 3 by: Vivian Darkbloom

    Here’s another timely example from today’s (May 2) TaxVox demonstrating that reducing or eliminating tax expenditures is not “inherently progressive”. This one involves tax expenditures related to children (and does not even include the effect of future PEP rules).

    http://taxvox.taxpolicycenter.org/

  4. comment number 4 by: Underwriterguy

    Another benefit of reducing or eliminating some tax expenditures is that thus would be removed the incentives to carry huge mortgages and select “Cadillac” health plans from their employers.

  5. comment number 5 by: Shadowfax

    If we want to make significant progress in the next decade, revenues will be the main engine followed by defense spending cuts, as nobody is going to materially change Medicare or Social Security in the short-run.

    Folks have to get real about that; something that Krugman pointed out recently.

  6. comment number 6 by: Shadowfax

    The Economist magazine estimated the additional federal tax revenue generated from eliminating certain tax expenditures, for the 2013-2014 period.

    These included: income exemptions for employer-provided health insurance ($215 billion); and various income deductions such as mortgage interest ($147B), state & local taxes ($65B), capital gains on homes ($60B), property taxes ($33B) and municipal bond interest ($37B). These total $557 billion. All of these steps together would reduce the projected deficit at that time by nearly half.

    http://www.economist.com/node/14903024?story_id=14903024

  7. comment number 7 by: Jim Glass

    “Reducing tax expenditures is an inherently progressive approach because these tax breaks disproportionately benefit the rich.”

    Only if you define the upper middle class as “the rich”. The biggest tax expenditures, as others have noted: exclusions for health insurance, pensions/401(k)s, mortgage interest (not available to “the rich” due to dollar/income limits, AMT), etc.

    Look who has their income excluded. (Scroll down to chart.)

  8. comment number 8 by: Jim Glass

    Another benefit of reducing or eliminating some tax expenditures is that thus would be removed the incentives to carry huge mortgages and select “Cadillac” health plans from their employers.

    And yet, in spite of the mortgage crisis, the FHA is *still* pushing “only3.5% down!” loans on its home page … and we remember how the unions said to Obama, “Over *your* dead body!*, when his health plan proposed taxing Cadillac plans, and how the Dems caved on that.

    So good luck getting the politicians to get rid of those incentives any time before the crisis comes.

  9. comment number 9 by: AMTbuff

    Diane, can we have a matching post on spending promises that need to be broken? Or are you clinging to Obama’s advisory board to provide a deus ex machina pain-free happy ending?

  10. comment number 10 by: SteveinCH

    So let’s talk about the incidence of deductions.

    State and local taxes effect everyone. Health insurance, mortgage interest, and cap gains on homes and propety taxes affect about 2/3rds of Americans and muni interest would just raise borrowing costs for state and local governments.

    Gotta love the we have to rely on tax increases mostly argument. As if a $500 billion annual tax inrease would pass the Congress. Then again if Dr. K were inncharge, it would be a trillion dollar tax increase so we could do more investment.

    On the general topic, both sides are pushing myths but, in my view, the President’s is more disruptive. He wants people to believe they can have theirs with no sacrifice. It leads to thinking like that from Shadowfax above. Taking a system that ridiculously favors the wealthiest cohort of our society and tilting it even more in that direction is a truly divisive idea

  11. comment number 11 by: SteveinCH

    Now AMT, be fmair to the President. It wasn’t only his spending proposals thatbwere unspecified, his tax proposals beyond the top end rate increase were unspecified as well. Unlike Ryan who could argue his were unspecified because he doesn’t lead Ways and Means, the President has no such excuse

  12. comment number 12 by: Curly

    I can understand the need to raise taxes under some conditions. And the rich might should pay a higher percentage than those making less income. How ever I cannot see passing out more unearned income to those who will not work. I have seen some who take advantage of pell grants by starting class and as soon as they get the grant the students quit going to class. What the government should be doing is to provide a climate that would help those who want to improve themselves to do so and those who feed on the system cut them off.

  13. comment number 13 by: Brooks

    Feldstein op-ed in today’s NYT “Raise Taxes, but Not Tax Rates” http://www.nytimes.com/2011/05/05/opinion/05feldstein.html?_r=1

  14. comment number 14 by: AMTbuff

    The AMT was devised as a way to give the government a second bite at income that managed to elude the regular tax. This second bite requires a second computation. Now MF proposes a third bite requiring a third computation. Where will it end? Not with a simple tax system, that’s for sure.

    These sneaky provisions promote the perception that the tax code is unfair. There is a better way to accomplish something similar: If a deduction makes sense, allow it in full. If it doesn’t make sense, repeal it.

    Honest taxpayers deserve an honest tax code.

  15. comment number 15 by: Brooks

    AMT,

    Sure, what you propose would be ideal (although it could be argued that a given individual shouldn’t receive more than some set amount of subsidies, if every dollar of every subsidy is not justifiable on grounds of positive externalities). But we have to consider what we can likely achieve, and if your ideal is a long shot and if something along the lines of what Feldstein proposes is more likely achievable, the question is then whether or not we are better off with that than without it. I think the answer is “yes”.

  16. comment number 16 by: SteveinCH

    Sure Brooks, let’s have a 5 tier tax system where you have to do massive calculus to minimize effective tax rates. That seems like a good approach.

    Help me understand why increasing complexity is a good idea.

    TBH, I’d rather just raise rates, the marginal effect isn’t demonstrably large and the deadweight loss of overpayment or tax preparation is.

  17. comment number 17 by: Brooks

    Steve,

    Hopefully I don’t have to explain to you that it’s often best to consider more than one dimension when determining if some policy is desirable or not.

    We look at multiple dimensions, trade-offs and matters of degree, and conclude whether or not it nets out as desirable.

    In this case we’re talking about what seems to be a very quick, simple calculation that wouldn’t present much trouble for someone filling out forms for himself, let alone someone using TurboTax or using any professional service.

    Weighed against that we have the very substantial magnitudes of badly-needed deficit-reduction (via reduction of subsidies) that Feldstein’s proposal would yield.

    I think the above nets out very positive (beneficial). If you disagree you really should do more than make an argument that sounds like you think that any policy proposal is clearly bad if it would bring any degree of one particular drawback on which you choose to focus. Needless to say, that’s very weak argumentation.

  18. comment number 18 by: Brooks

    Steve,

    I would add to my comment above that another plus for Feldstein’s proposed policy is insofar as it reduces the degree to which tax rates are (sooner or later) increased. I’d much rather reduce the deficit by reducing subsidies to buy Product X or Y than by increasing tax rates.

  19. comment number 19 by: AMTbuff

    Marginal rates have no incentive effect if nobody knows what they are due to phaseouts and other trickery.

    Brooks, given the post-1986 experience opponents of spending will not regard low rates on a broader base as an improvement. They know that such a deal is unstable and that in a very short time it will change to higher rates on a broader base.

    If a “low rates in exchange for base broadening” deal could be guaranteed to remain unchanged for 40 years, then it would be a win-win. I don’t see any way to achieve that. Do you?

    Or do you share supporters’ not so secret wish for subsequent rate increases on the newly broadened base? (Or, as you would add, for subsequent narrow tax breaks targeted to voters of a particular party?)

  20. comment number 20 by: Brooks

    AMT,

    Your framing is misguided. It reflects the same old invalid conceptual framework re: tax expenditure subsidies that I’ve been trying to set straight.

    I’m not talking about “low rates in exchange for base broadening”. I’m talking about no change in rates and base broadening via reduction in subsidies provided via the tax code, and such reduction in subsidies much more closely resembles a reduction in explicit spending than it does an increase in tax rates. (Anticipating your response, I refer you back to my response re: “gray area” at http://economistmom.com/2011/04/nothing-magical-or-even-sensible-about-an-18-19-percent-of-gdp-revenue-ceiling/#comment-37294)

    Reducing a tax expenditure subsidy is akin to reducing spending via a program of sending out vouchers to buy particular products (if the amount of benefit each person would get would be the same in either form). So your apparent objection to reducing tax expenditure subsidies unless tax rates were lowered is akin to your objecting to cutting at least some forms of explicit spending unless the savings went to tax rate cuts rather than kept as deficit reduction.

    Addressing our long-term fiscal imbalance will eventually involve (1) reducing projected explicit spending, (2) reducing tax expenditure subsidies, and (3) increasing tax rates. Economic efficiency, conservatism and libertarianism should lead one to favor deficit-reduction in that order, with #2 much closer to #1 than to #3 in level of desirability. And other things equal, the more deficit-reduction via #2, the less pressure for #3.

    Maybe it would help if you just start thinking of tax expenditure subsidies as the government offering to pay a given % of however much you spend on Product X. Then ask if you still agree with the point you’re about to make. Would you oppose reductions in such spending unless those reductions were accompanied by tax rate reduction?

  21. comment number 21 by: AMTbuff

    Brooks, I would agree to your version of tax reform in an instant if it were accompanied by a politically durable revocation of entitlement promises that will bankrupt the country in the not too distant future. No more Medicare or Social Security for the non-poor, no more expensive treatments for old people on Medicaid. Really painful cuts like that. Then you can have all the tax increases you need. Until then you are asking for the young middle class to pay money for the wealthier just because they are older or sicker.

  22. comment number 22 by: Brooks

    AMT,

    You are not addressing my point, at least not clearly.

    Are you saying you oppose cuts in types of spending that benefit primarily the young middle class unless such cuts are accompanied by spending cuts that benefit seniors?

    Or are you just missing (or disagreeing with) my point that reducing tax expenditure subsidies much more closely resembles cutting spending than it does raising tax rates?

    In other words, are you saying “Don’t cut spending that benefits the young middle class until you also cut spending on seniors” or are you saying “Don’t ‘increase taxes’ by reducing tax expenditure subsidies until you also cut spending on seniors”?

  23. comment number 23 by: Brooks

    …and by “increase taxes” I mean doing something that resembles tax rate increases more than it does spending reduction.

  24. comment number 24 by: AMTbuff

    If you look at current federal outlays and revenue, as conventionally measured, then older people are recipients and younger people are payers. You might say that we are spending money on the younger people by allowing them to deduct mortgage interest, but that is only true relative to a baseline where the younger people are even more disadvantaged relative to older people.

    I claim that baby boomers have been promised a deal that will bankrupt the younger generations. That’s not fair and it needs to be changed in a very major way. Do you agree with that?

    Second, please either accept or give me a CONCISE argument against my contention that a mass-market tax break inherently resembles a tax rate reduction more than it does a spending program.

  25. comment number 25 by: Brooks

    I only have time right now to address the request in your last paragraph — b/c I already have addressed that contention. Again, see my comment at http://economistmom.com/2011/04/nothing-magical-or-even-sensible-about-an-18-19-percent-of-gdp-revenue-ceiling/#comment-37294

    As you can see per that comment, I’m not disagreeing with your contention regarding your hypothetical (or more precisely, an appropriate refinement of your hypothetical) of universal, equal benefit without any of the beneficiaries doing anything differently than they would have done without that provision (i.e., not spending more on Product X than they would anyway). Rather, I’m saying that your hypothetical is far from the reality, even in the case of your closest candidate among the set of tax expenditure subsidies, let alone the weaker candidates.

  26. comment number 26 by: AMTbuff

    I contend that the mortgage interest deduction and even the health insurance exclusion are closer to rate cuts than spending because of their broad application. Do you agree?

  27. comment number 27 by: Brooks

    Yes, I disagree, mostly because their “broad application” is far from the hypothetical of everyone getting the same size benefit (or same degree relative to the size of their tax liability in some way) for doing nothing differently than they would otherwise.

    I’d also point out that even if we were close to that hypothetical, although its nature would be akin to a lower tax structure in some way, it would mean a tax system that applies one structure to most people, but penalizes some minority by applying to them a higher rates (or rules for taxable income or whatever) simply because they didn’t buy products specified by the politicians (or in the case of health insurance, if they purchased it themselves rather than getting it from an employer)

    In any case, again, we are far enough from that hypothetical that I view reduction of even those tax provisions as much closer to spending cuts than to tax rate increases.

    And as I’ve said before, raising tax rates reduces incentives to work and invest (and reduces rewards for doing so), while reducing tax expenditure subsidies reduces incentives (and rewards) for buying particular products the politicians choose.

  28. comment number 28 by: Brooks

    meant to say “No, I disagree…”

  29. comment number 29 by: AMTbuff

    we are far enough from that hypothetical that I view reduction of even those tax provisions as much closer to spending cuts than to tax rate increases.

    I understand your viewpoint. Similarly, the lower tax rates on the first dollars of income could be considered equivalent to spending on people of lower incomes.

    My viewpoint relies on the common sense notion that if tens of millions of people each have to send an additional $1000 or more to the IRS, that’s a tax increase. If only 10,000 taxpayers are affected by removing a tax break, that’s much easier to categorize as equivalent to a spending cut.

    Do you see why the percentage of taxpayers affected makes a difference? Hint: the tax system seen by a majority of taxpayers is the public consensus baseline. The public will never see a tax system which has never existed as a valid baseline.

  30. comment number 30 by: Brooks

    Obviously I understand why the percentage of taxpayers makes a difference. That’s why I’ve been saying what I’ve been saying re: how far the reality is from that pure hypothetical of everyone being affected (and being affected to the same degree in some way, and without doing anything differently than they would without the incentive). As I indicated on that other thread, in that pure hypothetical situation a tax deduction or credit could indeed be seen as akin to a tax rate reduction of some sort. And the same would apply whether it took the form of a tax deduction/credit or explicit spending form, such as a voucher or the government sending money directly to suppliers of Product X to pay some portion of each purchase, which would be called “spending” even though it would closely resemble a tax cut due to the universality and uniformity.

    It should be noted, though, that all such subsidies will shift the demand curve out and result in higher prices for the subsidized products and higher quantity purchased, so there’s an inherent flaw in the assumption that people will not do anything differently than they would have without the subsidy.

    Anyway, getting back to reality vs. that hypothetical, no, you seem to conveniently overlook the fact that there is more than one dimension here: you focus only on what portion of the population benefits from a given tax deduction, but ignore the wide variation in how much different individuals benefit based on how much they spend on Product X. And I’d add that even tens of millions of people is still far from universality if 70 or 80 million people pay income taxes.

    By the way, if the government were directly paying the suppliers, say, 20% of the price each person paid for Product X (i.e., if the subsidy took the form of explicit “spending”), and then that program ended, would you call that equivalent to a tax increase or equivalent to a spending cut? (If you want, you can assume somehow the government will pay either that 20% or the purchaser’s tax liability, whichever is smaller. That way it’s not like a refundable tax credit.)

  31. comment number 31 by: AMTbuff

    I agree that the size of the distortion (how much different the behavior is from what it would have been otherwise) matters. I don’t think the distortion is very large for the mortgage interest deduction or the health insurance exclusion. Higher income people would still buy more expensive houses.

    If there is no distortion, a tax break is equivalent to a rate reduction. Therefore it makes no sense to arguing that the mortgage deduction is spending rather than a tax reduction merely because the benefits are uneven. There has to be distortion as well. For a mass market tax break to be equivalent to spending, the distortion has to be overwhelming, which it’s not for these two breaks.

  32. comment number 32 by: Brooks

    Even if we assume the distortion of behavior by those tax breaks is not too great for our purposes (a debatable premise, but not implausible), I think we do still have to consider the substantial differences in degree of benefit as a function of how much of Product X one consumes (in the case of a tax deduction or tax-exemption). If Person A has the same pre-deduction taxable income as Person B, but A ends up paying significantly more in taxes (even over time) simply because he spends less on some Product X that the politicians have chosen to subsidize, I find that hard to equate with a reduction in income tax rates.

    As an aside, your argument would apply to any cash benefits to people with a tax liability. So, to take the strongest example, any expenditures on Social Security that go to people who pay taxes should be considered tax cuts for those people (at least up to the amount of taxes they pay in cases where they receive more in benefits than they pay in taxes).

    And the same for Medicare expenditures, which are, in effect, like cash benefits. I suppose we’d total all cash benefits and you’d say they count as a tax cut up until they equal the amount of taxes paid by the individual.

  33. comment number 33 by: Brooks

    I should have noted in my last two paragraphs that the assumption would be that such benefits are nearly universal over each person’s life, not at the moment, although even at the moment (current beneficiaries with tax liability) I’d guess it would satisfy your “tens of millions” criteria.

  34. comment number 34 by: Brooks

    And of course we’d have to net out the taxes they pay on the SS income.

  35. comment number 35 by: AMTbuff

    If Person A has the same pre-deduction taxable income as Person B, but A ends up paying significantly more in taxes (even over time) simply because he spends less on some Product X that the politicians have chosen to subsidize, I find that hard to equate with a reduction in income tax rates.

    Your logic is sound for one person vs. another person, but you still need to start from some baseline. If 80% of the public is in category A and 20% is in category B, I see A’s tax rates as the baseline and B as paying a penalty rate. With A as the baseline the “tax expenditure” description violates common sense. Where 90% of the public is in category B, you won’t have much dispute with describing the provision as a tax expenditure.

    The fact that a large minority of B’s pay a penalty rate does not in itself change the natural baseline from A’s rate to B’s rate.

  36. comment number 36 by: SteveinCH

    And of course, most of the larger tax expenditures affect more than 50 percent of the population (MI, HC, S&L taxes). Not all the smaller ones do but AMT is right, the entire debate presupposes a counterfactual baseline and the “right” baseline cannot therefore be determined.

    In addition to options A and B that AMT identifies above, there are infinitely many options between A and B. Some would even argue there are options outside of the range A to B but you don’t need more than infinity to make the point.

  37. comment number 37 by: Brooks

    AMT,

    Apparently what you are saying, in effect, is that we have a different tax rate structure for each individual depending on how much he consumes of Products X, Y, Z, etc. (products which the politicians have chosen for this purpose), or you are saying that our tax rate structure is that which would apply to individuals who consume the maximum deductible amount of Products X, Y and Z, and everyone who does not max out on consuming these particular products must pay a “penalties” of varying sizes for not purchasing as much of each of those products. Is that how you view our tax structure (or lack thereof)?

    Also, you didn’t answer a question I asked, so I’ll ask again:
    If the government were directly paying the suppliers, say, 20% of the amount each person paid for purchase(s) of Product X (i.e., if the subsidy took the form of explicit “spending”), and then that program ended, would you call the ending of that program closer to a tax increase or to a spending cut? (If you want, you can assume somehow the government will pay either that 20% or the purchaser’s tax liability, whichever is smaller. That way it’s not like a refundable tax credit.)

    And another question you didn’t answer:
    If we assume for the sake of argument that almost everyone will get some amount of Social Security and Medicare benefits during his life (meaning almost universality of the benefit*), wouldn’t your argument apply to any expenditures on Social Security and Medicare that go to people who pay taxes, meaning those benefits should be considered more like tax rate cuts for those people (at least up to the amount of taxes they pay in cases where they receive more in benefits than they pay in taxes) rather than spending?

    * And as I noted, my guess would be that even currently the number of taxpaying recipients of SS and/or Medicare is in “tens of millions” which was your criteria.

  38. comment number 38 by: AMTbuff

    If the government were directly paying the suppliers, say, 20% of the amount each person paid for purchase(s) of Product X (i.e., if the subsidy took the form of explicit “spending”), and then that program ended, would you call the ending of that program closer to a tax increase or to a spending cut? (If you want, you can assume somehow the government will pay either that 20% or the purchaser’s tax liability, whichever is smaller. That way it’s not like a refundable tax credit.)

    That would look like more a spending cut unless the purchases of Product X closely resembled my hypothetical. That is to say, the current structure (tax break or explicit spending) has a dominant effect on what the public will consider to be the real baseline.

    On your second question, I doubt that a majority of SS and Medicare recipients pay current year income taxes anywhere close to the amount of benefits they receive. Whatever your point is, perhaps the final sentence of the preceding paragraph provides the answer.

  39. comment number 39 by: Brooks

    AMT,

    Re: the first question you answered (ending program of govt sending 20% directly to the suppliers), yes, I want you to assume that the government is doing this for — to use your standard — “tens of millions” of people. So, would you call the ending of that program closer to a tax increase or to a spending cut?

    As for the SS and Medicare, I’ll try again. Let’s assume, for the sake of argument, that “tens of millions” of recipients of SS and/or Medicare have some tax liability (not even including taxation of their SS benefits). Wouldn’t your argument imply that a portion of each such recipients’ benefit amount — the amount equal to the tax liability — was more like a tax rate cut than to spending? In case that’s not clear, if Joe gets $20,000 in SS benefits but also has other income on which he pays taxes of $5,000, wouldn’t your argument say that government is only spending $15,000 on his SS benefits, and the $5,000 is really akin to a tax rate cut?

    Lastly, I hate having to ask questions again, but you didn’t answer, so I’ll paste this again:
    Apparently what you are saying, in effect, is that we have a different tax rate structure for each individual depending on how much he consumes of Products X, Y, Z, etc. (products which the politicians have chosen for this purpose), or you are saying that our tax rate structure is that which would apply to individuals who consume the maximum deductible amount of Products X, Y and Z, and everyone who does not max out on consuming these particular products must pay a “penalties” of varying sizes for not purchasing as much of each of those products. Is that how you view our tax structure (or lack thereof)?

  40. comment number 40 by: Brooks

    I would add to my last paragraph that your apparent view — that everyone who doesn’t purchase the maximum deductible amount of Products X, Y, Z, etc. is forced to pay a penalty (your word) that increases according to how much less of those products he purchases — reminds me of the controversy over whether or not it is appropriate or even constitutional to require people to buy health insurance and to make them pay a penalty if they don’t.

    Apparently you think it’s fine (and consistent with conservatism) to make people pay penalties for not buying — even for not buying the maximum deductible amount of — a whole set of various products the politicians have chosen.