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Who Are the Rich, and Why Should They Pay Higher Taxes?

April 16th, 2012 . by economistmom



Video streaming by Ustream

As we arrive at the federal tax filing deadline (this year on Tuesday, 4/17), it just so happens that Congress and the Administration have been thinking of different ways to raise tax burdens on the rich.  Last week I participated in a “Tax Day” event at the Tax Policy Center called “Should the Rich Pay Higher Taxes?” as one of the “four Ds” panel which also included TPC’s director Donald Marron, former CBO director and former McCain adviser Doug Holtz-Eakin (now president of American Action Forum), and economist rich guy (and a member of the “Responsible Wealth” coalition) David Levine.  The TPC has our handouts and a video of the event posted here.  (The video is also embedded above.)

TPC’s Howard Gleckman moderated the event (and blogged about it afterward, here) and at one point asked each of us “who is rich?”  I at first didn’t know how to answer that; “rich” is a relative concept that depends on one’s personal “baseline,” of course!  But then I circled back to the focus of the event–what the tax burdens of “the rich” should be–and I realized that in that context, all federal income taxpayers should be considered “rich,” in that we are all, all combined at least, paying too little in taxes.  Revenues as a share of GDP are far lower right now than the 18 percent historical average over the past several decades, which is too little anyway to produce economically sustainable budget deficits now and going forward (let alone enough to cover spending fully).  And although a lot of that currently-below-average level is because of the short-term but stubbornly persistent weakness in the economy (a cyclical phenomenon), projections show that even when the economy gets back to “full employment” and even when revenues/GDP recover back to and above the historical average (even under the policy-extended baseline, by the way), revenues are still not going to be enough to keep up with the growth in government spending–even if health reform (already in place and to come) successfully reduces the growth in Medicare spending.

So if “the rich” are defined as those who can afford and ought to be expected to pay higher income taxes, then “the rich” really has to be much more broadly defined than “people like David Levine” (who are multi-millionaires).  And if you watch the video of the TPC event, we all pretty much agreed on the premises that: (i) we need more federal revenue; (ii) “the rich” can manage higher tax burdens the best (and should be asked first); and (iii) David definitely qualifies as “rich.”  We had more differences in opinion over: (i) how much more revenue we need (and implicitly, what the right size of government is); (ii) how that revenue should be raised in terms of base-broadening vs. rate-raising reforms; (iii) what the right basis of taxation is–income or consumption; (iv) if David’s wealth comes more from his high productivity and hard work, or more from good luck; and (v) if raising tax rates on people like David will cause them to not work so hard, or if it just means they will not be as “lucky” in terms of their tax burdens.

David is practically begging to make him, and other millionaires like him, pay higher taxes, and feels the best (maybe easiest) way to do so is in the latest legislative version of the “Buffett Rule”–which basically imposes another “alternative minimum tax” to brute-force effective tax rates on the incomes of the rich to be at least 30 percent, without changing (improving) the definition of taxable income.  I and Donald agreed that David can afford to face a much larger tax bill, but that it would be better (more economically efficient and better for supply-side incentives) if his burden were raised by paring back the tax subsidies David receives via, for example, itemized deductions and the preferential tax rates on capital gains and dividend income.  Doug also agreed that the best way to raise tax burdens on the rich is to reduce tax expenditures rather than raise marginal tax rates, but he did not count the preferential rates on capital income as a tax expenditure (because he advocates consumption as the right basis of taxation), and also probably would not agree with me and Donald on how much revenues/GDP need to rise.  And all of us, being economists, agree that in theory and all else constant, higher marginal tax rates can discourage the incentives to increase the supply of productive resources (via working and saving) to the economy.  But if there’s one thing that economist and rich guy David made clear in telling of his own personal experience with wealth and taxes, it’s that even for really rich people, the economist-labeled “income effects” of taxes–the effects of having more or less after-tax income–are typically far bigger than the economist-labeled “substitution effects” of taxes–the effects of marginal tax rates on relative prices which cause people to substitute away from taxed or higher-taxed activities and into untaxed or lower-taxed ones.  I feel that conservatives (like Doug) who want lower marginal tax rates tend to over-sell the empirical significance of those substitution effects, yes, but liberals (even rich ones like David) tend to forget that as long as some substitution effects exist, it’s better to raise tax burdens by broadening the tax base (in a progressive manner) than by raising the top marginal tax rate.

So, the TPC event made clear that “yes, the rich should pay higher taxes.”  But it also highlighted where the challenges to achieving fundamental tax reform will be, in coming to agreement about who exactly is “rich,” and how exactly they will be made to pay more in taxes. We have far more work to do regarding federal tax policy than what is currently being debated–in a very narrow sense–about the “Buffett Rule.”

45 Responses to “Who Are the Rich, and Why Should They Pay Higher Taxes?”

  1. comment number 1 by: Brooks (Gordon)

    I haven’t watched the video yet (and for some reason I’m not getting sound), but one point re: your phrasing in the post (and in its title) …

    Re: “yes, the rich should pay higher taxes”

    I think that phrasing is unfortunate in that it is both (inadvertently) misleading and detrimental politically to the policy goal (which I share) of raising revenue via reducing tax-based subsidies (i.e., reducing “spending through the tax code” via “tax expenditures”).

    As discussed often here, reducing tax-based subsidies is more akin to reducing spending than to a “tax increase” in the sense of resembling a tax rate increase, in terms of incentives, effects on all affected, and bases for those effects.

    So what we are talking about is more like reducing spending on “the rich” than it is to “increases taxes” on them in the sense that people think of income taxes, which is essentially the government confiscating some portion of each dollar we earn.

    So we’d be reducing the “rich people’s” net of what they pay in taxes vs. what they get back in spending going directly to them (which is a subset of spending that benefits them generally), but we’d doing that, in essence, by reducing the latter, not increasing the former.

    So, for the sake of better communication of what it is conceptually and for the sake of its political prospects, I hope we avoid phrasing reducing tax-based subsidies as “increasing taxes”.

  2. comment number 2 by: AMTbuff

    it just so happens that Congress and the Administration have been thinking of different ways to raise tax burdens on the rich

    The proposals are varied and creative, including everything except increasing the explicit (statutory) tax rates.

    Why is a straightforward tax rate increase is off the table? Does every tax increase from now on have to be of the sneaky back-door variety? If so, what does that say about the state of our democracy?

  3. comment number 3 by: Brooks (Gordon)

    AMT,

    As I assume has occurred to you, notwithstanding the likelihood that relative sneakiness may indeed be a strong preference by the politicians, there are reasonable practical arguments (re: economic effects) for strongly preferring to raise revenue via reducing tax-based subsidies rather than increasing marginal tax rates. Again, I’m pretty sure you’re aware of this point.

    And, as cynical as I am regarding the motivations of politicians, I think it’s even possible that such practical (economic) advantages — in other words, the best interest of the American public the politicians are supposed to serve — are actually one of the reasons the politicians may favor reducing tax-based subsidies over raising tax rates.

  4. comment number 4 by: Brooks (Gordon)

    Diane,

    Just FYI, I get sound for the video using IE and Firefox, but no sound using Google Chrome browser (on either your site or Ustream, which I guess isn’t fully compatible with Chrome).

  5. comment number 5 by: Vivian Darkbloom

    “Does every tax increase from now on have to be of the sneaky back-door variety? If so, what does that say about the state of our democracy?”

    I guess it makes sense that these tax expenditures leave by the same door they came in.

  6. comment number 6 by: SteveinCH

    Except VD, that the largest of the tax preferences didn’t sneak in. People call the cap gain preference, health insurance deductibility and mortgage deductibility sneaking tax preference.

    Cap gains preference has been there since the code was established. Insurance deductibility since WWII and mortgage deductibility was left in the code when most other interest deductions were taken out.

  7. comment number 7 by: David Levine

    Just for the record, I don’t think the Buffett rule is “the best” (for the same reason I believe you don’t — it’s AMT-like-ness), although I do believe it’s been an effective way to frame the argument. I am actually hoping that if and when push comes to shove (and this will only matter if the Dems do better than expected in Nov) that they’ll simply convert it to my preferred solution (given the ongoing weakness of the economy, which keeps me from wanting to raise taxes even a little on anyone below 250K), that thy simply restore the Clinton-era tax rates above 250K and 380K-ish respectively and introduce at least 1 add’l bracket (2 would be better — how about 45% at 1MM and 50% at 10MM), for the extremely well off — oh, and get rid of the special treatment for qualified dividends. This would be a milder tax regime than we ever had (post WWII) prior to 1987.

    BTW — if $200 billion were raised in this fashion, my guess is it would injure consumer spending by less than $25 billion. Since I don’t want ANY such injury with the unemployment above 6% (let alone 8%) — I’d lower tax brackets at the lower end to compensate.

  8. comment number 8 by: Vivian Darkbloom

    Steve,

    I guess we would need to define “sneaky”. Not including something in the tax base in the first place might be the very best way to keep something under everyone’s radar. Also, the *value* of tax preferences tends to incease over time, just as attempts to reduce them (like the AMT) tend to increase in revenue raising effect over time. I see a certain symmetry here.

    Also, my comment was deliberately ambiguous. Of course, they “should” leave by the same door they came in through. Politicians tend to like to emphasize their tax cuts and play down their tax increases. That is a general rule of politics, I think.

    Apropos Brooks’ comment, when is the last time you’ve heard a politician bragging about his “spending increase” when pushing a new tax deduction or credit?

  9. comment number 9 by: AMTbuff

    I guess it makes sense that these tax expenditures leave by the same door they came in.

    VD, you are gem. You made me burst out laughing with that one while making an important point that I had overlooked. Thank you!

  10. comment number 10 by: SteveinCH

    Well Brooks and I sharply disagree on language so I would never expect a politician to make that case, nor do I think it should be made.

    When rules are passed with exceptions, both the rule and the exception in my view should carry equal weight. The entire discussion of tax preferences presupposes an alternative universe where the rule was passed without the exception. No such universe exists save in the mind of people who want to create the equivalence.

    And no, I won’t comment further when Brooks tells me I’m wrong ; )

  11. comment number 11 by: AMTbuff

    The entire discussion of tax preferences presupposes an alternative universe where the rule was passed without the exception.

    Correct. It’s yet another case in which the real argument is over the choice of baseline. Each side chooses the most favorable baseline and hides that choice, pretending that the choice is obvious or that there is no choice to be made. It’s intellectually dishonest but people do it, so it must be effective in persuading the poorly informed.

    All these arguments from fantasy baselines will seem ridiculous in retrospect once the markets impose reality on government borrowing. It will be Greece without any external bailout funds.

  12. comment number 12 by: Vivian Darkbloom

    “When rules are passed with exceptions, both the rule and the exception in my view should carry equal weight. The entire discussion of tax preferences presupposes an alternative universe where the rule was passed without the exception.”

    Yes, I think we’ve covered that ground adequately. The above is an interesting perspective. But, I wonder: what would be your take on the situations in which the rule is first created, and then the exception later introduced? That seems to happen fairly frequently in the universe we now live in.

  13. comment number 13 by: AMTbuff

    In a a universe in which all exceptions were banned, the only alternative would be rate reduction. Therefore when Congress wanted to buy votes by reducing taxes, the tax cuts could not be targeted to favored voting groups. Congress would have to cut rates, whether only at the low end, only at the high end, or for all taxpayers. Alternatively, Congress could buy votes through increased spending, which could be targeted at favored voters. I assume that this would be their preferred approach if tax exceptions were constitutionally banned.

    The creation or expansion of an exception without changing rates therefore does not guarantee that rates would have remained the same if the exception had remained the same, but that (plus higher explicit spending) would have been the most likely outcome.

    All that said, the premise (an exception-free or exceptions-frozen tax code) is as far from reality as the baseline in which exceptions are endogenous and rates are exogenous.

  14. comment number 14 by: SteveinCH

    If the exception was passed alone without anything associated with it, I’d say it’s a fair point but in terms of the dollars in place, those situations are the exception rather than the rule.

    Take the MI deduction for example. It was originally passed with all interest deductions decades ago. It survived the 86 reform when many preferences were taken away while rates were lowered.

    One could tell a similar story about state and local taxes, HI, and most of the other big ones. So yes, there are lots of little exemptions but the big ones are not after the fact additions.

  15. comment number 15 by: Brooks (Gordon)

    Steve,

    I understand and appreciate your point that in the real political universe, tax rates were (roughly) set in conjunction with exceptions (either explicitly or in effect, a premise I’m accepting in the broad scope of evolution of fiscal policy), meaning tax deductions, credits and exclusions evolved roughly in conjunction with tax rates. (I’m staying away from different tax rates on investment income, as that’s a different animal than subsidies for purchasing or producing selected products). Your point is a substantive and worthwhile point to make as something that should be considered in the debate over whether or not to reduce the amount of tax-based subsidies for which high earners are eligible, mainly because it relates to arguments over “fairness”.

    But it is not really an argument against my characterization of reducing tax-based subsidies (for high earners or anyone else) as more akin to reducing spending than to raising tax rates. Neither of us has any interest in going through another tedious back-and-forth over this, but I will say again that if you look at the incentives, effects on all involved, and the bases for those effects, there is no difference between the government, say, offering to pay for 10% or $Z of your purchases of Product X vs. the government reducing your tax liability on that same basis. It’s a subsidy. By contrast, increasing tax rates means you are left (after taxes) with a smaller portion of each dollar you earn, which has fundamentally different effects on all involved than does a subsidy for purchasing Product X. I consider subsidies for purchasing or producing particular products more similar to spending than to tax rate increases. Apparently you do not.

    What we should be able to agree on is that, as I said, reducing tax-based subsidies reduces the net that the taxpayers in question experience in terms of what they pay in taxes less what they receive from the government (and of course, “reducing the net” can mean “increasing the size of the loss”). My point is just that when this net is reduced by reducing tax-based subsidies, it is more appropriately thought of as reducing the net by reducing spending that goes to those people than as something similar to raising their income tax rates.

    Put in terms of the real universe in which tax-based subsidies and tax rates have evolved together, we can say, in the case of high earners, that there was very roughly a deal , in effect, that they would get higher tax rates but would be compensated – albeit in a crude and suboptimal way from either an economic or fairness perspective – with more government spending in the form of subsidies for which they would be eligible (although would receive only in some proportion to how much they spent on or produced the products that the politicians chose to subsidize for whatever their political purposes were). Taking away their subsidies but leaving those higher rates that were politically achievable in the context (the “universe”) of those subsidies is thus imposing a sacrifice on them versus the status quo – reducing their net (I’d say increasing their loss) of what they pay less what they get from the government – and of course they could argue that their tax rates are “unfairly” high (given that they will now be getting less from government) or perhaps also make economic arguments, but that doesn’t mean that reducing those subsidies was more like raising their tax rates (than like reducing subsidy spending) in terms of how it incentivizes or affects them, others, the government, the economy overall, or the industries involved in the subsidies.

  16. comment number 16 by: Brooks (Gordon)

    Just to correct myself and clarify, when I said:

    reduces the net that the taxpayers in question experience in terms of what they pay in taxes less what they receive from the government (and of course, “reducing the net” can mean “increasing the size of the loss”)

    I should have reversed those elements and phrased that as “what they get less what they pay”, so it’s reduced (smaller positive number or larger negative number) for a given person or segment as tax-based subsidies for which they are eligible are reduced.

  17. comment number 17 by: Vivian Darkbloom

    “In a a universe in which all exceptions were banned, the only alternative would be rate reduction. Therefore when Congress wanted to buy votes by reducing taxes, the tax cuts could not be targeted to favored voting groups. Congress would have to cut rates, whether only at the low end, only at the high end, or for all taxpayers. Alternatively, Congress could buy votes through increased spending, which could be targeted at favored voters. I assume that this would be their preferred approach if tax exceptions were constitutionally banned.”

    AMT,

    This is a useful comment because while you come very close to admitting that certain types of “tax expenditures” have much income with certain types of spending, it helps focus on the key element of “favored groups”. In fact, I’m slowly coming to the realization that the distinction between taxing and spending is a complete red herring in this whole discussion. Properly defined, taxes do (should) affect all taxpayers proportionately (i.e., progressivity notwithstanding). A characteristic of “tax expenditures” and direct spending subsidies is that each favor special groups. That is one of the reasons Stanley Surrey did not include, for example, personal exemptions or standard deductions as “tax expenditures”, because of they are enjoyed by everyone. However, the word “subsidy” here is more key than “spending”. You seem to agree that, politically at least, tax expenditures are the next best thing to direct spending subsidies. And, here, you will note that Brooks is prone to writing “tax expenditure subsidies” rather than merely “tax expenditures” because the latter is not sufficient for his purposes. So, the key word should be “subsidy” and not “spending”, even though tax expenditures may resemble a certain *type* of spending.

    Does it make any more sense to say, for example, that the mortgage interest deduction is “spending” than that the food stamp program is not “taxing” for those who are not eligible? Federal defense spending may be closely analogous to the personal exemption because it benefits everyone more or less equally (although the international trade folks might disagree—no analogy is perfect, but I hope the general point is valid). The key here is that the policy, whatever you want to label it, favors one specific group over the other. In either case, the larger group it benefits, the less the subsidy effect and therefore there is, I think, a continuum of grey to black. It is unfortunate that Surrey got us off on the wrong foot by coining the term “tax expenditure” when I think it would have been much better for him to have used the term “tax subsidy” instead.

    What I think we should focus on is identifying whether a particular type of tax or spending provision is a “subsidy” and then ask:

    1. Is this subsidy economically distorting? (bad for an economy); and
    2. Is this subsidy overly opaque? (bad for a democracy)?

    The JCT seems to be moving in this direction with their proposed new taxonomy.

    Tax expenditures may sometimes be more efficient to administer, but they are almost always more opaque than direct spending subsidies. That’s probably why politicians (and those who benefit from them) prefer tax subsidies to direct spending subsidies.

  18. comment number 18 by: Vivian Darkbloom

    Steve,

    “Take the MI deduction for example. It was originally passed with all interest deductions decades ago. It survived the 86 reform when many preferences were taken away while rates were lowered.”

    That’s a good example. In fact, the MID is not only “decades” old, it has been there since 1913. The existence of the MID explains, in large part, the introduction of the standard deduction, which was meant to keep more people from relying on interest deductions. The TRA of 86 eliminated personal interest and “created” the MID merely by giving it a name. But, that Act also introduced the current $1 million (really $1.1 million) limit. This was not adjusted for inflation, and Reagan was quite aware of the effects of inflation on this type of thing. This is one of the reasons Reagan was a great President. Of course he both “cut” and “raised” taxes several times, but the effect was to reduce many of the distorting subsidies in the tax code. The maneuver on the mortgage interest deduction was particularly inspired because by giving it a name and ostensibly a limit that would be out of reach of everyone, he was able to reduce its effect over time.

    You see, “stealth” is not a tactic exclusively in the playbook of one party or ideology or the other. Taking things away and imposing things by stealth is one of the oldest tricks in the book.

    You may be aware of this, but there is an excellent article on the MID entitlted “The Accidental Deduction: A History and Critique of the Tax Subsidy for Mortgage Interest” by Dennis Ventry. I highly recommend it.

    http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1561&context=lcp

  19. comment number 19 by: SteveinCH

    Thanks Vivian I will look at it. I think my point remains. Calling the MID a tax subsidy must presuppose a tax code where the MID did not exist. To your point, there is no such tax code and therefore it cannot be a subsidy.

    Fundamentally for me it comes down to the question of whether the function of taxes is to raise x% of GDP in revenue for the government. If you believe it is, then it’s simply a question of how the government chooses to do that.

    I believe that should be the function of taxes and therefore the discussion of subsidies is a total red herring since any change in tax subsidies is simply about raising more money for the government. Perhaps its the difference between looking at cash flows and accounts.

    On a cash flow basis, tax subsidies are a null…no cash ever flowed. On an accounting basis, you could see them as a contracredit for the government. Even on that basis however, I’d have to point out that a contracredit and a debit are not the same thing even though they have the same impact on retained earning.

  20. comment number 20 by: SteveinCH

    Brooks,

    To your last point, your last paragraph is the crux of our disagreement. There was no higher tax rate plus compensation deal. There was simply a lower effective tax rate deal. The reason we could have a top marginal tax rate of 91 percent for so much fo the history of our country is because virtually nobody paid it. It wasn’t that they paid it but received something in return. They did not pay it. The money never left their paycheck or bank account. As I say, for me it’s a cash flow question.

    Let me make it more practical. The deal that you describe would never have worked historically because nobody would have agreed to pay a 91 percent tax rate if they got some of it back. The mere fact of a 91 percent tax rate (marginal rate of nearly 100% including state tax) would have had a massive impact on work. But it didn’t because people didn’t see the deal the way you describe. They knew that cash would never leave them so they didn’t worry about it.

  21. comment number 21 by: Vivian Darkbloom

    “Calling the MID a tax subsidy must presuppose a tax code where the MID did not exist. To your point, there is no such tax code and therefore it cannot be a subsidy.”

    I would disagree. Suppose we were to wipe the slate clean and start with an entirely new tax code. And, suppose that tax code allowed the mortgage interest deduction. I would still call this a “subsidy” because I think the essence of a subsidy is that it benefits one group of taxpayers over another. In this case, homeowners versus renters and other groups competing for the same money to spend or invest on other things.

    “I believe that should be the function of taxes and therefore the discussion of subsidies is a total red herring since any change in tax subsidies is simply about raising more money for the government.”

    Of course, eliminating tax subsidies raises revenues. So does cutting direct spending, including spending subsidies directed towards special groups. And, so does simply raising taxes by increasing rates across the board. The distinction I am trying to make is that a true “subsidy”, whether a tax subsidy or a spending subsidy, is directed towards a specific interest group.

  22. comment number 22 by: SteveinCH

    No cutting spending doesn’t raise money for the government. It lowers government’s need for money. Those really aren’t the same thing.

    If you want to define a subsidy as anything that benefits one group of consumers over another than I would be happy to argue that the graduated income tax is a massive subsidy to the poor. After all, they pay far less than the average tax rate while others pay more than the average tax rate because of the graduated rate system.

    That’s the problem with the notion of subsidy. It’s almost infinitely elastic. By the definition you want to use, total subsidies probably exceed total taxes by a substantial magnitude.

  23. comment number 23 by: Brooks (Gordon)

    Steve,

    I think you’re still missing the point. It’s as if you think there isn’t a fundamental difference (in incentives, effects on all involved, and bases for those effects) between (1) a lower effective tax rate simply via lower tax rate vs. (2) a lower effective tax rate via more subsidy dollars. There is of course a big difference.

    Re:
    There was no higher tax rate plus compensation deal. There was simply a lower effective tax rate deal. The reason we could have a top marginal tax rate of 91 percent for so much fo the history of our country is because virtually nobody paid it. It wasn’t that they paid it but received something in return. They did not pay it. The money never left their paycheck or bank account.

    Here’s what it (very roughly) has been: A high statutory tax rate was acceptable because it came along with eligibility for certain amounts of subsidies
    if one purchased or produced certain amounts of products specified by the politicians. It’s (very roughly) like the government said “We’re going to charge you this high income tax rate, but we’ll pay 10% of your purchases of Product X and we’ll send you $500 for each Product Y you buy (as long as these subsidy dollars don’t exceed your tax liability).”

    Do you think there is some substantive difference between government providing those subsidies by transferring money into your bank account vs. government allowing you to subtract the same amount from the amount you transfer from your account to the government?

    As I said to you many times, that’s like the difference between you handing me $9 vs. you handing me $10 while I hand you $1 (assuming no timing differences). Now, if your point is/were that there is indeed no substantive difference, but merely that so many people have a fundamentally conceptually confused view of this matter that one is politically acceptable and the other is not, then that’s a different question from whether or not there really is a substantive difference, and whether reducing such subsidies is actually more akin to spending reductions than to an increase in tax rates, but I don’t think your point was that others are confused, but rather that you think there is indeed some substantive difference (although it’s possible you eventually in some prior discussion acknowledged that there is no/little substantive difference) and you think reducing such subsidies is more akin to a tax rate increase than to a spending reduction.

    I don’t want to spend much/any more time on this if your point is still/again that there is some substantive difference between giving a cashier $9 vs. giving him $10 and getting $1 in change.

  24. comment number 24 by: Vivian Darkbloom

    “If you want to define a subsidy as anything that benefits one group of consumers over another than I would be happy to argue that the graduated income tax is a massive subsidy to the poor. After all, they pay far less than the average tax rate while others pay more than the average tax rate because of the graduated rate system.”

    Well, actually I would call that a subsidy. What is it otherwise? Why pretend it is anything else?

    Again, I would then ask:

    1. Is this subsidy economically distortive?

    The answer to that is, again, yes, but quite possibly acceptably so, depending on the degree of progressivity, etc.

    And,

    2. Is this subsidy clearly understandable to everyone?

    I think a progressive rate system, by itself, is acceptably clear.

    “That’s the problem with the notion of subsidy. It’s almost infinitely elastic.”

    The fact that the definition of “subsidy” might be comprehensive does not make it “infinitely elastic”. In fact, the definition is not elastic at all.

    And, yes, the tax code is full of subsidies. That’s not the problem with the definition of “subsidy”; it is a problem with the tax code.

    And yes, as to “raising revenues”, I should have written “reduces the deficit”.

  25. comment number 25 by: Brooks (Gordon)

    Just to emphasize a point in my last comment:

    Suppose the government said “We’ll cover 10% of your purchases of Product X and we’ll cover $500 for each Product Y you buy (as long as these subsidy dollars don’t exceed your tax liability).”

    Does anyone here NOT say those are subsidies for purchases of Product X and Product Y?

    Does anyone here NOT call that spending?

    Does anyone here say it is more similar to an income tax rate cut than it is to spending?

    Does anyone here believe that the answers to the questions above depend on whether the government covered portions of those purchases by reducing the amount you send in taxes vs. by sending you the money separately (or for that matter, sending the money to the seller based on your purchase), assuming no timing differences?

  26. comment number 26 by: SteveinCH

    Brooks,

    Your thinking entirely too hard about this. The point of view of the average person is shaped by two things…their average tax rate and their tax rate at the margin. The subsidies you see are part and parcel of the calculation and not what people look at.

    I’m not going to continue in this vein because we both know it’s pointless and you wouldn’t like my answers to you questions in comment 25.

  27. comment number 27 by: SteveinCH

    VD,

    I’m afraid I don’t find your two test compelling. Economically distortive to whom as an example? Over what time period? How much distortion is too much?

    The definition is so elastic that anything other than a flat tax on all forms on income is a tax subsidy. Not even Brooks would accept that definition of subsidy, at least I don’t think he would.

  28. comment number 28 by: Brooks (Gordon)

    Steve,

    Again, you can speak of “what people look at” while leaving it (perhaps deliberately) unclear whether or not you think such a (supposed) view makes sense, but as I said, I think you are saying you do think it makes sense and it is indeed your view, not just some misunderstanding on the part of other people. I’m challenging the validity of the view you’ve expressed, and it’s unhelpful for you to continue to simply refer vaguely to how people (supposedly) think while sidestepping the question of what you think is valid (what makes sense).

  29. comment number 29 by: Vivian Darkbloom

    Steve,

    Perhaps you can supply a better definition?

  30. comment number 30 by: SteveinCH

    That’s rather my point Vivian, I think the discussion is silly. On principle, I believe the code should be pretty much entirely free of exceptions, other than some sort of standard per head deduction.

    I’d be happy with a discussion about principles around taxation. I really only have 3.

    1. Keep it as simple as possible.

    2. Exempt income below a threshold (I’d choose the poverty line but others could be argued) but no other income regardless of source.

    3. Raise enough money to fund the government (on the assumption that someone is running the government with an eye to efficiency)

    That’s pretty much all I have. The result of those principles would, in my view, be a flat tax with a standard deduction and no other exceptions of any sort.

    Maybe my problem is this, arguing from what is to what people want encourages the invention of concepts to shape the discussion. That’s what tax expenditures are. They aren’t a pure concept. Your notion of preference comes far closer to that and I accept it definitionally. It’s when you try to distinguish “good” from “bad” preferences that I fall off the wagon.

  31. comment number 31 by: Brooks (Gordon)

    Steve,

    Leaving aside labels and conceptual characterizations, we’re still left with (at least) a couple of important questions regarding tax deductions/credits/exclusions for purchasing or producing products designated by the politicians.

    1. Is it desirable to reduce such provisions whether or not tax rates are reduced to yield overall revenue-neutrality?

    And if one’s answer is that it is only generally desirable if offset with lower tax rates, and if one wishes to be rational, he should ask if he’d say the same thing about reducing essential the same thing if it were in explicit expenditure form — i.e., if government transferred funds to taxpayers to share the cost of their purchases of the designated products, but limited to each taxpayer’s tax liability. Would one say that reducing this explicit expenditure is only desirable if the reduction in spending were offset by a tax rate reduction, or would it be desirable in itself?

    2. If we are going to raise more revenue by changing the tax code, is it generally better to do so by reducing those provisions vs. raising tax rates?

  32. comment number 32 by: SteveinCH

    Brooks,

    We don’t do what you describe so arguing it’s essentially the same thing doesn’t make any sense to me and that’s really my last word on this tired conceptual debate.

  33. comment number 33 by: AMTbuff

    Brooks,

    2. Yes.

    1. I answered this in prior discussions. The answer is No for broad-scope tax preferences, which operate similarly to rate reductions. The answer is Yes for those narrow-scope tax preferences that are not used to improve horizontal equity (i.e., improve the accuracy of measuring disposable income).

    I can’t make this any more clear than I did in the previous discussion. I realize that you disagree, but I wish you had absorbed enough of my posts that you would know what my answer would be. I’ve read enough of your posts that I believe I can accurately predict your opinion on any of these questions. Ditto for Steve and Vivian and Diane.

    One entertaining way to improve one’s understanding of another point of view is to attempt to make the argument in favor of that point of view. Try writing your best argument in favor of Steve’s view, for example. You might experience some surprising insights. Or you might not because you already know enough to impersonate him online!

  34. comment number 34 by: Brooks (Gordon)

    Steve,

    There’s really no reason to reject that illustrative question on the basis that particular subsidies currently offered via the tax code are not offered via explicit expenditure. So it seems you just wish to avoid answering the question. I’m saying that if you say “A is not desirable unless X also happens”, then if you want to be logical, you have to also say either that “B is not desirable unless X also happens” and/or “A is substantively different from B”. And you’re replying “Well, we don’t do B (in the particular cases in which we do A) so it wouldn’t make sense to say they are substantively the same.” No, what doesn’t make sense is that response.

    But I’m glad to leave our dialogue at that if you have no further comment.

  35. comment number 35 by: Brooks (Gordon)

    AMT,

    My vague recollection is that you and I eventually had a productive discussion on this topic, and part of that was that I acknowledged there is a matter of degree involved, meaning, for example, (just to start at the extreme) that a universally provided tax credit of an equal amount for all (up to the amount of each person’s prior tax liability) for purchases that everyone would make anyway (even if there hadn’t been that tax credit) would be essentially like a tax rate cut, and if such a tax credit/deduction were very close to that sort of universality, it could still be closer to a tax rate cut than to “spending”.

    As I think I explained way back then, where we differ is that I think the resemblance to a tax rate cut drops off very rapidly as we move away from that extreme and toward less universality (in distribution and amount per person) and involving changes in purchasing choices (vs. what would happen without the subsidy).

    These provisions are cost-sharing by the government. The government is saying something like, “Send me this specified percentage of your income, but if you make purchases of Product X and/or Y, I’ll cover a specified percentage of your spending on them (or cover a specified dollar amount of your purchases), up to the amount of your tax liabiilty”.

    Do you dispute that the above is substantively what is going on? After all, there is no substantive difference between the government requiring you to send it $10,000 while the government sends you $1,000 in cost-sharing funds (reimbursement or vouchers or whatever) vs. the government just saying you can subtract the $1,000 from what you would otherwise send us, and thus send us $9,000. Right?

    Now, if, say 60% of the population purchases both products, but 40% do not, and even among the 60% there is a very wide distribution in how much each person spends on those products — and thus on how much the government is, in effect, covering via this cost-sharing — I suppose you’d call that a broad -scope tax preference and say it is like a tax rate cut, whereas I’d say it’s more akin to spending in terms of it’s incentives, effects (on individuals who purchase, those who don’t, the Treasury, the economy, allocation of resources and thus standard of living), and the basis on which all of this happens — mainly purchases of those products the politicians selected).

    And I’d say that it’s generally undesirable because I consider government subsidies for particular products generally undesirable (because of adverse effects in the areas mentioned above, as well as from a fairness perspective), except when there is a clear strong case of positive externalities. To me this view doesn’t change just because 60% (or even some larger majority) purchase some (but widely varying) amount of the designated products, only some of which was spending on those products they would have chosen anyway. Apparently that’s enough of a difference for you in terms of both desirability and seeing greater similarity to tax rate reductions than to “spending”.

  36. comment number 36 by: AMTbuff

    Yes on similarity to rate reductions, but I never addressed desirability since it’s irrelevant to the similarity. I agree with you on the basic economics that incentives create economic loss, but that’s a separate issue from similarity to rate reduction. With that clarification, I think you understand my position more than adequately. We differ on where to draw the line on similarity, that’s all.

  37. comment number 37 by: Brooks (Gordon)

    AMT,

    Oh, I thought you were answering my question re: desirability (which was my #1) as well as discussing the nature of such provisions when you said:

    1. I answered this in prior discussions. The answer is No for broad-scope tax preferences, which operate similarly to rate reductions.

    I’m not sure what in my #1 (including the follow-up question within it) your “No” was an answer to. It seems it wasn’t an answer to my #1 but rather an answer to a different question: Are such provisions more similar to spending than to a tax rate reduction? My follow-up in #1 didn’t ask that; I was addressing anyone who considered reduction of such tax provisions undesirable unless accompanied by equal reductions in tax rates (yielding revenue-neutrality on some basis), and asking if that person would say the same thing about reducing the same subsidy if it were delivered via explicit expenditure.

    If one is saying that “A without X” is undesirable but “B without X” is desirable, one has to believe that there is a substantive difference between A and B.

    So what is your answer to my #1?

  38. comment number 38 by: Brooks (Gordon)

    AMT,

    If I may, I’m going to go ahead and presume that your answer is that, for whatever you consider “broad-scope” tax credits/deductions/exclusions for buying (or producing) designated products, you would consider it undesirable to reduce those subsidies (that governmental cost-sharing) unless “offset” by tax rate reductions. Correct?

    If so, please answer my follow-up question within my Question #1. Would you say the same thing if the subsidy were the same in every substantive way, but were offered and provided via explicit expenditure — e.g., voucher or reimbursement, but assuming no timing differences vs. tax provision form)? Would you say that reducing those subsidies in explicit expenditure form is undesirable unless accompanied by an equal dollar amount of reductions in tax rates?

  39. comment number 39 by: Brooks (Gordon)

    One more note: As I tried to emphasize from the start on this threat with my reference to the “net” of what a segment receives from government (directly or indirectly, the latter of course being more amorphous and subjectively calculated) less what one pays to the government, reducing tax-based subsidies for only higher earners would reduce their fiscal policy “net” (I’d say making it more negative), meaning making overall fiscal policy more progressive. This is fairly obvious, but I state it because, to acknowledge that such a move would make overall fiscal policy (the tax side and the spending side) more progressive does not require one to insist that such a move would be more akin to a tax rate increase on high earners than to a reduction of spending on them, and I consider it more akin to the latter.

  40. comment number 40 by: Vivian Darkbloom

    “It’s when you try to distinguish “good” from “bad” preferences that I fall off the wagon.”

    Steve, I didn’t try to distinguish “good” preferences from “bad”. Clearly, all are “bad”. Essentially, what I’m saying is that some might be necessary evils.

  41. comment number 41 by: AMTbuff

    Brook, yes that’s correct.

    Your hypothetical is probably impossible, but the answer is Yes to the extent that the situation is truly equivalent: namely that the taxpayer sees the same net cash flow at the same time, with the net result presented directly to the taxpayer and not obscured.

    In other words, as long as the taxpayer is informed that this explicit expenditure is simply a tax break in expenditure disguise (call it “tax reduction entitlement spending”) everything will be as it should be.

    As long as you don’t assign any semantic significance to the new form in which the net cash flow from the taxpayer is achieved, I have no argument with your hypothetical. However assigning semantic significance was the point of the transmogrification, wasn’t it? In that case I contend that the purported equivalence has been negated by bad faith.

    By analogy you can say that a theory of vacuum repelling vacuum is mathematically equivalent to a theory of matter attracting matter (gravity). Yet one form is semantically correct. It’s the natural structure. The other is mere mathematical self-stimulation in which the bizarre representation has no semantic relationship with the underlying reality.

    That kind of nonsense is what you get when you change an income measurement tax break (a deduction) into an explicit expenditure. Bizarrely structured expenditures are easier to oppose than logical tax deductions. That’s why opponents created the transmogrification thought experiment. There’s no other reason for it. Your hypothetical is not a value-neutral mathematical transformation if its result is not simpler and more logical than the original structure.

    On a related topic, there is a time dimension here too. Deficit spending levies a tax of unknown form on future taxpayers or on bondholders if it leads to default or higher inflation. Increasing current taxes even in a non-progressive way might yield a progressive result when this dimension is considered.

  42. comment number 42 by: SteveinCH

    Vivian,

    Forgive my imprecise language. I disagree on whether we can distinguish necessary from unnecessary evils since the criteria you propose are inherently subjective (as is, for the most part, the notion of a necessary evil).

  43. comment number 43 by: Vivian Darkbloom

    Steve,

    I tend to be a pragmatist on this sort of thing. Eventually, most choices involve some measure of subjectivity. I’m all in favor of taking “objectivity” as far as it will take us. But, I think that it is best to admit that there are limits and recognize when a decision is made at least in part on subjective choices and not pretend (and yes, it is largely pretending) that we are relying on objective criteria. I don’t have enough faith in economics to trust that the answers it gives are always objective, particularly when those answers are most often conflicting.

    One of the main problems I have with modern economics, and to some extent this includes “tax policy economics” is that most of the players are dressing up their subjective preferences as objective science.

  44. comment number 44 by: SteveinCH

    That’s fair enough Vivian.

    I’d assert that we’d be better off talking about things without the encumbrance of what is. I think we could probably have a good discussion about what preferences ought to exist (in my view almost none) and what the rate table ought to look like if we would get away from defining things relative to some arbitrary baseline.

    It’s rather hard for me to imagine a tax preference that would clear the hurdle of a necessary evil. As I’ve said before, after exempting a certain level of income (we could debate the number), I’d argue one rate on all income regardless of source is the way to go. In part I believe this on principled reasons (we don’t need to subsidize capital formation at this point in the world’s history). In part, my preference is wholly pragmatic. The simpler the system, the fewer things the folks in DC can mess with.

  45. comment number 45 by: Brooks (Gordon)

    Steve,

    Just a note re: your discussion of one tax rate. Even such a flat tax (and even without exempting some initial earnings) is still progressive and still means high earners are subsidizing lower earners (as well as non-earners), because the more one earns, the more he/she pays in taxes.

    The only way to avoid such a condition is if everyone paid the same amount in taxes (which of course isn’t pracital).