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What Do John Boehner and Jon Stewart Have In Common?

May 10th, 2011 . by economistmom

Thanks to Len Burman’s latest insight on his brand-new, awesome blog on Forbes.com, what was otherwise going to be a pretty ordinary complaint about a pretty dull yet aggravating speech by House Speaker John Boehner (which has already gotten lots of spot-on criticism, including this column by Ruth Marcus), is now a post where I get to point out a much more entertaining Jon Stewart video!

Apparently, John Boehner and Jon Stewart have this in common:  they both don’t understand how special preferences in our tax code are just a different form of government spending, and hence how reducing such “tax expenditures” would reduce both the budget deficit and the size and scope of government.

As Len explains in his “Dear Jon” letter:

For 40 years, tax geeks like me have been trying to explain that there’s a boatload of spending programs masquerading as tax cuts, and they’re multiplying.  Their number increased by almost 60 percent between 1987 and 2007.

The fact that pols can claim credit for “tax cuts” (good) rather than “spending” (bad) has made them irresistible to legislators of both parties. Never mind that the IRS doesn’t have the budget or expertise to effectively administer a couple hundred spending programs (sorry, tax cuts) or that many of them make no sense.  The tax code’s cluttered with this junk.

Finally we get the president of the United States to acknowledge this and you drill him a new one.

You don’t believe there’s spending in the tax code???  Here’s a real life example:  the chicken-s**t tax credit.  Really, section 45 of the Internal Revenue Code.  You can look it up

It’s spending, Jon.  Often really dumb spending.  And when we’re talking about cutting food stamps, nutrition programs for mothers and infants, and environmental protections to save money, those spending programs in the tax code should be on the table too.

Tax subsidies add up to more than $1 trillion per year.  That’s not chump change, but, until recently, it’s been off limits in any bipartisan budget negotiations in Congress because Republicans have been unwilling to consider anything that might be labeled a tax increase.

I’ve said before that a tax reform that broadens the base by reducing some of these “dumb” tax expenditures would raise revenue and reduce the deficit in a progressive way while keeping marginal tax rates (and economic distortions) low–and this is a reason why politicians and policy wonks on both the left and the right should love this way of being fiscally responsible.

But instead, it seems both Jo(h)ns are in denial about it.

As Len concludes, this is “not helpful.”  Amazingly, before Len pointed out Jon Stewart’s take on the issue to me, I was going to blog only about the Boehner speech with the title “Not Helpful.”  Really!  No joke.

15 Responses to “What Do John Boehner and Jon Stewart Have In Common?”

  1. comment number 1 by: SteveinCH

    Foregone rate increases add up to even more. It’s just the same post over and over again Diane. To quantify “tax expenditures” requires assuming a counterfactual tax code. Once you admit that, the concept becomes on conceptually meaningful.

    I would be happy to get rid of the preferences in the tax code and do it in a revenue neutral way. Then we can raise rates transparently as needed.

    Anything else is just playing hide the peanut.

  2. comment number 2 by: Brooks

    Steve,

    Uph (or is it “Ugh”?).

    You really shouldn’t blame Diane for trying repeatedly (as I have in comments) to correct people on this very important (and harmful) conceptual error. Maybe someday she’ll get you to understand. But based on my own experience, that will take a miracle.

    I won’t try again, except just to say that there is absolutely no need to contemplate “baselines” or “assume a counterfactual tax code” to realize that there is no substantive difference (let alone the fundamental ideological and economic difference you imagine) between (1) a “spending” form subsidy to purchase Product X in which the government covers $Z of your purchase of Product X, versus (2) the same subsidy in tax expenditure form that does exactly the same thing and affects everyone (you, the Treasury, and other taxpayers) the same way and degree on the same basis. All you can do is repeatedly point to the non-substantive difference cash flows (like the difference between your handing me $2 vs. your handing me $3 while I hand you $1) and repeatedly assert erroneously that some assumed baseline is necessary to see the obvious equivalence I’m describing (I don’t need to assume you will or should give me a net $2 to realize there’s no substantive difference between your handing me $2 and your handing me $3 while I hand you $1 — it’s just simple algebra: x + y - y = x. No values of x or y need be presumed.)

    I’d say that bringing up a particular, very important point is at the very least forgivable if one is correct. Diane’s commentary on this issue passes that test. Your responses don’t. I think if you continue to criticize her for making this important point that you’re just not getting, you’ll feel a bit embarrassed if someday you realize your error.

  3. comment number 3 by: Brooks

    And when you say you oppose reducing tax expenditure subsidies unless accompanied by tax rate reductions (which is what you must mean by “revenue-neutral”), it’s like saying you oppose cuts in spending on subsidies unless accompanied by tax rate reductions.

    If you understood the point Diane is making, you’d realize that a conservative who dislikes big government would see reductions in tax expenditure subsidies as a good thing in their own right, just as a conservative would view reducing such subsidies if they were in explicit subsidy form like some kind of voucher or if government were paying suppliers of Products X, Y, and Z, etc. (products chosen by government for this special treatment) some percentage of what the taxpayer spent on each of those products.

  4. comment number 4 by: SteveinCH

    Brooks,

    You misunderstand me again.

    1. Quantifying the specific amount of tax expenditure does require assuming a counterfactual tax code. Otherwise, there is no possible quantification. I’ve never debated your conceptual point and you’ve never convinced me the counterfactual isn’t required. Nor will you.

    2. As to your second comment, you explain exactly why we disagree. Your focus on tax expenditures is distributional. That is why every example you use focuses on the distributional effects on a particular consumer. My focus is systemic. The systemic affect of a reduction in tax expenditures is an increase in government revenue, no more and no less.

    3. In point of fact, I strongly support revenue neutral tax simplification. I think deductions and exemptions are inefficient and I oppose them on those grounds. I simply feel that calling a tax increase something other than a tax increase is disingenuous.

    I don’t want to engage in another distributional debate with you. If you’d like to debate quantification or systemic affects, that’s fine by me. If not, we’ll just let it go again.

    Have fun

  5. comment number 5 by: AMTbuff

    On the substance, my opinion lies between the Burman and Stewart. I believe that a narrowly targeted tax benefit is similar to spending, whereas a broad-scope benefit is similar to a rate reduction.

    Unless I missed something, the main reason to use the term “tax expenditure” is to count removal of tax breaks dollar for dollar as equivalent to reductions in government outlays. Taxpayers who have to send more dollars to the IRS simply are not going to see it that way. They will not accept a hypothetical no-deduction tax code, a code which has never existed, as the legitimate baseline from which to measure tax expenditures. Neither would they accept a baseline in which the government takes 100% of all income, making everything left over a tax expenditure.

    This debate centers on what is a reasonable baseline. The only two baselines widely accepted today are current policy and current law. (They differ from each other due to sunsets and other chicanery.)

    Len and other wonks have missed the important practical challenge that a pure baseline does not exist and has never existed. In the public’s mind, the baseline is what they paid last year. More tax than that is a tax increase. If advocates want to count “tax expenditures” as fully equivalent to spending, they need to set out a proposed baseline and convince the public that it is superior to current policy, which is the only baseline the public knows.

    My opinion would never win public approval due to its complexity, but I see most tax breaks as a mix of rate reduction and spending equivalent. I would classify the personal exemption a rate reduction and most narrow refundable credits as spending. In between these extremes I would count removal of a tax break as partly rate increase and partly spending reduction. One could argue endlessly about the correct fractional split for each tax break.

    For example, the exclusion for employer-provided health insurance is inequitable, but is it spending? That particular provision benefits most taxpayers, and the benefit tends to flatten out at higher incomes. It’s very much like a tax rate cut for the many or a penalty for the fewer. Revoking that break and pocketing the extra revenue will never be seen as anything other than a tax increase. Pocketing 20% of the extra revenue and using the other 80% to reduce rates might be seen by the public as legitimate revision of the baseline rather than as an excuse for a revenue grab.

    I fully agree that if the public wants to increase revenues, revoking tax breaks that do not improve horizontal equity is the best place to start. Agreement on this issue does not require agreement on the “tax expenditure” labeling for mass-market tax breaks. However I believe that the public will only agree to large revenue increases after spending has been cut dramatically and those cuts have been fully felt. Governments at all levels have no remaining credibility to claim that disaster will ensue if revenues do not increase.

    The recession has affected the private sector much more heavily than the public sector. The public sector is in no position to claim poverty until major salary reductions, layoffs, and benefit cuts occur, including drastic means testing of government-funded health and pension benefits as other countries have done. A bond market crisis will force all this and more, so politicians should not pretend that they can prevent deep spending cuts or major tax increases.

    Once the public can agree on the proper scope of government, then and only then will it make sense to close the gap with new revenue. Adding more revenue without flattening the spending curve enables further dithering on this crucial issue. Band-aid “solutions” are a dereliction of our duty to put the country on a sustainable course.

  6. comment number 6 by: Vivian Darkbloom

    AMTbuff,

    Good post. As I said many, many posts ago, the entire issue with respect to “tax expenditures” is defining them. Once that is done, the rest is easy. It’s spending. And, to make matters worse, there are probably itemsin the Tax Code that contain elements of both taxing and spending.

    The JCT has struggled with this for quite some time. Whlle their definitions have become more nuanced, they still are not satisfactory and probably never will be. And, to make matters worse, the simplisitic accounting convention we use for “spending” counts only refundable credits (i.e. refundable credits to the extent actually refunded). (See comment to recent TaxVox blog entry).

    The only satisfactory solution to the problem is to eliminate as many as possible of the deductions, credits and exemptions in the Code that do not directly constitute business deducitons (i.e. expenses needed to arrive at economic income in a real sense). I would keep personal exemptions and deductions without the ridiculous PEP rules. That’s about it. The rest should be dealt with through direct spending appropriations.

    The Democrats and Republicans now seem to agree that reducing “tax expenditures” is good policy. The problem is that Republicans insist it be revenue neutral, which is a good step forward but untenable as a policy to reduce the deficit significantly, and the Democrats insist that only those “tax expenditures” that are “progressive” be eliminated (note that that requirement slipped into EM’s post). The problem with the latter approach is that it tends to salvage items that truly are spending and keep in the code those items that are closer to increases in taxes. That, to my mind, is intellectually dishonest if one’s purpose is really to identify tax expenditures and eliminate them. That is consistent with the large ideological divide between the parties: i.e., a “tax expenditure” becomes what tends to support your vision of how income should be distributed in this country. So, don’t expect anyone, outside of a few places like comments to this blog and the JCT that the issue will receive any measure of objective analysis. Again, you see, it is a question of definition.

  7. comment number 7 by: Gipper

    Guys, Gals,

    Focus on percentage of GDP collected in revenues and expenditures. Those 2 numbers have to be equal at some point in the future.

    The answer to, “How many angels dance on the head of a tax expenditure pinhead” is a sideshow, and a distraction.

    Boehner is not going to concede on tax expenditures without a reduction in rates. Why? Because he’s focused upon the percentage of GDP collected as tax revenue. That is the Tea Party’s measuring stick, and they’re not going to get sucked into the inside-the-Beltway obfuscations Diane is trumpeting to buy a tax revenue increase.

  8. comment number 8 by: Vivian Darkbloom

    “Focus on percentage of GDP collected in revenues and expenditures.”

    I agree that this is an important measure, but it is far too simplistic given our current system of taxing, spending and accounting.

    Your measure sidesteps the other important issue here, perhaps the most important as far as politics are concerned, and that is do we make those two items match by cutting spending or raising taxes? And, if there really is a lot of spending running through the tax code, doesn’t your measure distort that? In other words, under current government accounting conventions, the amount of spending that does run through the code counts as reductions of tax revenues rather than increases in spending (a double distortion). The issue is “do we reduce spending or increase taxes”? How can this ever be a sensible measure if we can’t agree on what taxes revenues are and what spending is, respectively?

    My contention, therefore, is that we get rid of almost all the deductions, exemptions and credits in the Code that don’t relate directly to the production of income and replace those that we consider desirable spending to be dealt with by direct spending appropriations. Only then would one be able to make any sensible comparison of what we take in in “tax revenues” and what we “spend”. And, yes, the two should match.

  9. comment number 9 by: Brooks

    Steve,

    Unfortunately I have to say that your comment indicates you are still confused. The difference between what you and are are saying isn’t a “distributional focus” vs. “systemic”, it’s between my pointing out that there is no substantive difference between two equivalent subsidies due to simply to different forms (tax deduction/credit vs. explicit “spending”), and your insistence that the non-substantive difference in cash flows due to different forms amounts to some substantive (even ideological) difference.

    I’ve explained this a million ways to you already, so let me just ask this: Do you at least agree with AMT that “a narrowly targeted tax benefit is similar to spending” ?

  10. comment number 10 by: AMTbuff

    To a pure economist, tax breaks are equivalent to spending to the extent that they influence behavior. From that perspective it doesn’t matter whether the behavior is influenced by direct subsidy or by tax breaks.

    To a taxpayer, removing a mass-market tax break for something they are in the habit of doing would be a tax increase. Taxpayers are not going to look at this the way economists do. Ain’t gonna happen.

    The only way to align these two different perspectives is to establish a credible baseline tax code free of provisions that do not improve horizontal equity. That can be accomplished in a revenue-neutral way at first, then the rates can be increased to the extent that the public agrees that more revenue is needed.

    Incidentally, I still contend that most tax breaks do not influence behavior as much as direct spending would, for reasons including the inscrutability of the tax code. I believe that most tax breaks are only partially equivalent to spending, and that counting removal of $1 of tax breaks as $1 of spending reduction is incorrect.

    Also, if we consider every tax expenditure as the equivalent of spending, does that mean that the federal government is now spending 30% of GDP rather than a mere 25%? Or, if we choose a baseline of 100% confiscation of income, is the government now spending 100% of GDP?

  11. comment number 11 by: Brooks

    AMT,

    In your earlier comment and the 3:03 one above, your references to what “a taxpayer” will think makes it at least a bit unclear if it’s something you are contending or if if it’s something you think most taxpayers will incorrectly perceive.

    Re: To a taxpayer, removing a mass-market tax break for something they are in the habit of doing would be a tax increase. Taxpayers are not going to look at this the way economists do. Ain’t gonna happen.

    If a taxpayer will lose a subsidy that for him amounts to $X he saves on his purchase(s) of Product X, he’s out that $X whether the subsidy was via tax credit/deduction or via explicit expenditure. Whether or not he would perceive the two forms differently, there is actually no substantive difference due to which form the subsidy takes (assuming the dollar amounts and timing were the same under either form).

    Also, how they influence behavior is only one element (the incentive and the distortion of markets). The other is simply who ends up with more or less money as a result of someone purchasing Product X and the existence of the subsidy.

    Is there anything above that you dispute?

    Re: your question of spending as % of GDP, my point is that that’s not as meaningful a metric as some make it out to be. Even you would apparently say that if narrowly targeted tax expenditure subsidies amounted (hypothetically) to 5% of GDP, then that should be considered as spending. And you’d say that there is then a gray area (a bit broader targeting) in which the money involved isn’t clearly “spending” or not. (As a note, I explained on that other thread that you overstate how close even your best, broadest examples are to what would be necessary to call a tax expenditure subsidy clearly equivalent to lower tax rates or something similar, and you also overlook the impact major subsidies have on prices, but I’m focusing here on what you seem to have acknowledged, not what you dispute.)

    Your baseline obsession is a non sequitur. I long ago (and repeatedly since) noted that one could apply the term “tax expenditure” so broadly that it ceases to have much meaning, as in some tax rates being lower than others (or for that matter, some tax liability amounts even at a flat rate).

    And even you would, I presume, say that if everyone got a voucher from the government for $1000 to spend on something they would have spent that much on anyway — which would be considered “spending” — this would be equivalent to a tax credit (and if it the dollar amount were limited to one’s tax liability, it would be equivalent to a non-refundable tax credit). In other words, you’re not disputing that the form a subsidy takes — tax expenditure or explicit expenditure — doesn’t amount to a substantive difference (leaving aside any differences in administrative costs you think would necessarily vary by form). You’re argument pertains to breadth of recipients in either case (either form), so even something categorized as increased “spending” you’d call a tax cut if it mean the government sending cash to a large enough portion of the population, and even a tax expenditure subsidy that you considered narrowly targeted you’d say is equivalent to spending.

  12. comment number 12 by: AMTbuff

    If the government gives a tax break to one person, it’s spending. If the government gives this tax break to every person, it’s a tax reduction. If you prefer, a tax break for everyone is the kind of spending nobody wants to cut: It benefits everyone and stopping it would take money away from everyone.

    This is why I say that mass market tax breaks are more similar to rate reduction than they are to spending. The scope of the tax break matters.

    Economists seem to have trouble with this because their mathematics on this issue is linear. If you assume a fixed baseline that excludes a tax break, the economists are right. However a broad-scope tax break changes the baseline. That’s why the conventional linear mathematics fails.

  13. comment number 13 by: Gipper

    Vivian,
    The term “tax expenditures” is used by liberals who are ashamed to use the words “tax increase.” Instead, they think that they can get away with fooling others into believing they are for spending cuts.

    Let’s be plain and use the accounting definitions of expenditures and revenues. “Tax expenditures” reduce the potential revenues collections. Eliminating them increases revenues, it doesn’t reduce expenditures.

    When Boehner talks about spending cuts in exchange for debt limit concessions, he’s not talking about tax exenditures. When you hear Democrats screaming, then you know you are talking about real cuts in expenditures.

  14. comment number 14 by: Gipper

    In accounting, expenditures are debit entries (left side of journal) and revenues are credit entries (right side of journal).

    A “tax expenditure” is a rule for calculating your tax liability that affects the size of the credit or revenue entries into the government’s accounts. Capice?

    When we discuss fixing the deficit, there are debits and credits, expenditures and revenues. Let’s be plain spoken and stop the obfuscation.

    The common way of normalizing the measurements of these debits and credits is to assign a percentage of GDP to each. I am utterly amazed at the amount of space devoted to philosophical issues meant to sow confusion about what is truly a simple problem.

    Enough, already, with tax exepnditures.

  15. comment number 15 by: Carl Davis

    It may be true that John Boehner denies the equivalence between tax expenditures and spending when it is advantageous for him to do so, but it’s certainly not accurate to say he doesn’t “understand” this equivalence. Here’s a quote of his from last August:

    “…we need to acknowledge that what Washington sometimes calls ‘tax cuts’ are really just poorly disguised spending programs that expand the role of government in the lives of individuals and employers.”

    http://johnboehner.house.gov/News/DocumentSingle.aspx?DocumentID=203967