Tax Cuts Equal Spending?

Great Debates
21

kesagiri

Seeing as how I’m not childless, obviously, no. You misunderstand even the personal deduction, which deducts $2800 from your income, not from your tax bill.

You do have a point, but you’re missing mine.

My point: Bush & Gore are debating targetted tax cuts for certain groups. If you take from one group, you have to get it from another, which is why these kinds of cuts are called tax expenditures. The revenue lost in one area has to be made up for by increased taxes in another area, exactly the same effect, from a practical point of view, as simply raising taxes to pay for something.
Thus, if you decide to give a deduction for mortgage interest, that means you have to make up for that money by charging those who can’t take that deduction (renters and people with paid-up houses) more. The buyer of a house is in effect being paid by someone else for buying that house. It’s as much a transfer payment as Social Security. There’s no moral reason that I can come up with for why we should do this, and on top of that, it raises the cost of compliance by complicating the tax code. The cost of complying with the code is at least as serious an issue as the level of taxes in and of itself. Make it simple so that complying with the law becomes simple, and cheap, and you will have gone a long way towards solving the problem.

Once it becomes simple, you can rationally debate the level of taxation overall. And point out that the terms of the debate get reversed by the language used in Washington.

22

In all of my readings of public finance I have never seen a tax cut referred to as spending. Like I said, you can define a car as a peanut butter and jelly sandwhich, but calling it spending is silly, IMO.

23

Only if you assume revenue neutrality will the money have to made up somewhere else. When the government spends money they either get goods (roads, bridges, etc.), services (military service) or a transfer of money to another person. These expenditures come out of the governments revenue. Now, if the government decreases its revenue, it is not like spending anymore than it is like spiritus mundi’s pay cut being equivalent to spending. He is not getting anything for that loss of $100. When the government decides to raise $100 less in revenue they get nothing for it. No goods, no services, and they can’t make any transfers.

Now your revenue neutral example, means that the government is going to stop taking as much money from one group and take more from another. Lets look at the logic of this.

Suppose there are two groups.

Group A
Group B

The government’s budget is $1000, and assume they spend all of it in ways I describe above (goods, services, and transfers). The total government expenditure is $1000.

Now, group A pays $700 dollars and group B pays $300. Now, a politician says, lets cut the taxes on group A by $100 and raise the taxes on group B by $100. Now according to the logic here in this thread, the government’s expenditures is now $1,100.

$1,000 on goods, services and transfers
$100 on the tax cut (remember it is now gov. spending).

$1,100 Total. And people thought Reaganomics was voodoo economics.

24

kesagiri, that doesn’t hold up. If group A is paying $700 in tax and group B is paying $300, the groups together pay $1,000, which is the government’s revenue. The government spends the entire $1,000 on “goods, services and transfers” (emphasis mine).

Now, have group A pay $600 and group B pay $400. Government revenue is the same $1,000. So are expenditures - it’s just that the $100 tax increase for group B went to a tax cut for group A - a transfer of funds, and thus a zero-sum game for the government.

You may not be reading the right public finance documents. Try the government’s budget - follow this link, and find Table 32-4

http://w3.access.gpo.gov/usbudget/fy2001/pdf/budget.pdf

Table 32-4 is a table of tax expenditures. These are exceptions to horizontal parity, or fairness. Say the law is that anyone earning $50,000 a year has to pay 30% of that in tax. Theoretically, everyone earning $50,000 would pay $15,000 to the government. Not that the money is theirs to begin with, but you’re buying services for that 30% - roads, armed protection, etc.

Now, the government passes a law saying that anyone with children can deduct from their gross income $2,500 per child. So someone with two children would have taxable income of $45,000, and would pay only $13,500. In order for the government to maintain its revenues, it has to make up this amount somewhere else. In effect, tax expenditures are transfers - a tax cut for some group is a tax increase for another, or else the government has to cut down on its purchase of goods and services.

Given the current system as a baseline, it makes perfect sense for both candidates to talk about tax cuts as “spending” - not spending the government’s money, but spending yours. If the wealthiest 1% of the country gets a tax cut, someone else will have to have a tax increase in order for the proposal to remain revenue neutral from the government’s perspective. That’s why it can be considered “spending” - it’s spending someone else’s money.

The tax code is a great place to hide government payments to large corporate constituents - just create a tax expenditure (loophole) for a corporation with certain characteristics. Sometimes, there’s only one company in the country with those characteristics, and amazingly enough that company is in the Chairman of the Senate Finance Committee’s home state. It’s enough to make one cynical. sigh

Adam

25

I agree 100% that it’s just newspeak. I’m sure the Teeming Millions can see right thru such nonsense, but what about the rest of the electorate? I can see some little old lady listening to the debates on her radio thinking, “that Bush is a bad man, spending more on tax cuts for his rich friends than on Grandmas like me who really need it. That poor Barbara, to have such an ingrate for a son.”

I know it’s politics, and they’re playing to win, but I think it’s dishonest and I don’t like it.

Regarding our political dialogue over the past eight years, haven’t we had enough of this sort of thing? “Vast right-wing conspiracy”, finger-wagging “I did NOT have sex with that woman, Monica Lewinsky”, what the meaning of “is” is, and “no controlling legal authority”.

Why don’t more people call them up on it? (Specifically the tax cut=spending thing). Debate moderators, newspaper columnists, TV talking heads all seem to accept this without question. For that matter, why don’t the Republican candidates rebut this? When Al or Joe say that the Repubs are going to “spend more on tax cuts than on Social Security” why don’t George and Dick just say “No we’re not, a tax cut is not the same as spending, and here’s why?” Or are all politicians, regardless of party, that out of touch?

[/rant]

26

pantom:

Umm, no, you don’t have to get it from another, and no, you don’t have to make it up in another area. Just reduce taxes overall, what’s wrong with that?

27

Emphasis mine. Again, what’s wrong with that?

28

In this theoretical discussion, nothing’s wrong with that. But it answers the OP - you’re spending money on a tax cut while reducing spending on something else. The OP quoted the VP as saying that GWB’s budget “would spend more money on tax cuts for the wealthiest 1 percent than all of the new spending that he proposes for education, health care, prescription drugs and national defense, all combined”, and then asked how a tax cut could be considered equal to spending. Instead of buying goods and services, the government would be buying taxpayers. Er… well, I’m sure you get the picture.

The difference here is between people who believe that a government of the people, by the people and for the people has to be funded by the people, and those who believe that maybe government isn’t such a great idea after all, unless it’s invading your bedroom. Well, OK, maybe not, but you get the idea. I believe that the national government has a role to play, and needs funding in the form of taxes. If a tax cut is not going to be offset by a corresponding tax increase, then government will end up spending less on goods and services it provides its citizens. While I’d like to believe that the Pentagon would just stop buying expensive plumbing fixtures, I doubt that will be the case, just like Congress will continue to spend hundreds of thousands of dollars declaring one idiot day after another (National Brotherhood Week, e.g.). More likely, actual programs disliked by the Congressional majority (like Americorps, despite 49 state governors support) will get the ax, and the real waste will go unchecked.

But this is a different debate. I think pantom and I have answered the OP. The assumption you have to make is that the government is playing a zero-sum game (which, in many respects, it is forced to do by law).

Adam

29

[QUOTE]
*Originally posted by milroyj *
**

Well, IMHO that little ol’ lady has got her head right! I don’t see anything wrong with her way of looking at it.

30

Agin, the problem with this attitude is the assumption that the private sector had nothing to do with the creation of wealth. Yes, it helps to have a military, courts, etc. to conduct business and create wealth, but you have to remember, Jshore, these wealthy people were the ones doing the most to create this wealth in the first place.

Consider it this way, the Grandma gains the greatest relative to anyone else. She gets to cut her taxes by a full third instead of a full fifth like the richest of America. She gets a 66% better deal.

Considering that they already pay close to one third of what that grandma lives on if she lives on the government because she either chose not to or could not save becasue of the SS tax, perhaps she should not villanize the people that work hard to create wealth that permits her to have a better life.

31

In Bush’s plan, Bill Gates gets a 100 million tax cut. I get a $100 raise in my federal taxes. That is how tax ‘cutting’ is spending.

32

I agree as well.

The question becomes what the role of governmnet should be.

For the most part, I don’t have a problem with state & local taxes, because it’s obvious the benefits one receives in relation to the costs.

For example, police/fire/ambulance, schools, roads, water service, libraries, hospitals, parks, etc.

But Federal taxes are much higher, and the return is less. What do I get for my taxes? National Defense (great) Court system to resolve differernces, (great), Federal highways (ok), and TRANSFER PAYMENTS!

As you can imagine, it’s the last that I’m opposed to.

33

At the risk of putting words into pantom’s mouth, I think there is a confusion here between tax credits and deductions that are targeted toward achieving some social or economic purpose and a generalized tax rate cut.

The first (deductions for charitable contributions, mortgage deductions) are commonly referred to as tax expenditures because the government is paying for the program through tax breaks and not out of general revenue. Credits especially fit this description. There is no difference between a tax credit and a government expediture.

Let me give a direct definition out of The MIT Dictionary of Modern Economics:

“tax expenditure. A term used to describe the various allowances which may be used to reduce tax liability…Example include tax relief on payments of mortgage interest and dependents allownaces. Tax expenditures are so called on the grounds that they should be seen as analagous to direct payments or subsidies provided by the government. This is said to be so in three ways; first the granting of tax allowances increases the recipient’s income just as a direct payment would have done, second, the existnece of a tax allowance will influence the pattern of expenditure, and third, granting a tax allowance reduces government’s revenue and thus alters the government’s net deficit or surplus in the same way as would an increase in expenditure…”

You could reasonably argue that a tax cut is not that far removed from these other kind of allowances. Having said that, I think this is a defintion that is not meant to be used in a coloquial (sp?) way for public discourse. I think it is misleading in the context and is really meant to contrast the efficacy of tax allowances like credits and deductions versus other general revenue programs with similar goals in an analytical setting.

Gore/Lieberman are using this terminology as a brush to paint too broadly in my opinion.

34

Just to chime in as someone who teaches Public Finance (although not in the US).

As has already been pretty clearly shown, the concept of a tax expenditure is well established in the field. Any departure from taxing income (or consumption as the case may be) at the same rate regardless of source, use or form is known as a tax expenditure. Two points: ul Clearly this is different from a tax cut.

(2) There is a strong presumption that tax expenditures are bad policy, for two basic reasons:

list Even when there are legitimate reasons for subsidising the activity encouraged by the tax expenditure, there are almost always cheaper and more effective ways of doing it;

(ii) Tax expenditures are hidden subsidies: it is frequently difficult - particularly for average citizens - to work out who benefits and by how much from these programmes. Public Finance economists typically are pretty keen on transparency.[/ul][/list]

Just a quick comment on generational accounting. Working out what the “real” government deficit or surplus is is very difficult. There are some very nasty measurement issues involved. Some respectable economists believe that the US debt is much smaller than currently measured, once inflation and the appropriate treatment of capital versus current expenditures is taken into account. Others believe that it is substantially larger. A group including some Nobel Prize winners believe that government debt doesn’t matter at all. The economist mentioned by kesagiri (Kotlikoff) is concerned by the current accounting for unfunded liabilities of “social insurance” programmes, essentially believing that with changing demographics (ie ageing of the population) and exploitation of the “fiscal commons”, that current spending levels are unsustainable. A worthwhile point of view, but just one of many on this issue. Given that his research programme is all about generational accounting, it is not surprising to see him spruiking it and saying that taking notice of his method would make a huge difference to the way we see policy questions.

picmr

35

I am not saying that the private sector has nothing to do with the creation of wealth. I agree that it has quite a lot to do with the creation of wealth. I’m just saying that these people are doing so in the context of a greater society. They are already getting great reward for it (the money)…and with that reward comes a certain obligation to pay back the society that they have clearly been able to thrive in so successfully. Besides which, as kimstu has pointed out in the past, it is in the wealthy people’s own self-interest to share the wealth to some degree…unless they want to lock themselves in gated communities with a private police force.

The question comes down to how much the rich owe, of course. I don’t have a good answer to this myself, but I can very safely say that I feel that they owe more, not less, to society than they are paying now…In this country the wealth dichotomy between the “haves” and “have nots” has grown quite obscene.

36

In Bush’s plan, tax rates are reduced across the board. The 15% goes down to 10%, the 28% goes down to (what, 25%? I don’t have the numbers in front of me). Likewise, the 36% and 39% drop down a few points also.

It’s Gore’s plan that singles out individuals for tax cuts, provided they jump through the correct hoops. Bush’s plan is for everybody that pays taxes. How do you end up paying $100 more if your bracket rate drops? Is there some deduction being phased out? It’s a serious question.

37

I’m not sure exactly what capacitor was referring to, but let’s put this “Bush’s plan is for everybody that pays taxes” in some perspective. According to Citizens for Tax Justice, those in the bottom 20% of income get a tax cut of $47 a year…in close to a week, they would have enough saved up to buy an extra candy bar. Those in the top 1% get an average tax cut of $46,000…that’s enough to buy a very spiffy new SUV each year. Yup, everybody gets something! You gotta love it.

38

The $47 ‘tax cut’ is negated by the increase in Medicare tax to pay for increased coverage.

39

Also, just to make my point even clearer, it is true that Bush is proposing what on the surface looks like a tax cut. But, Bush not only is not assuming revenue neutrality, he is proposing to spend more, in two areas:

1 - Medicare, with his own prescription drug plan, (as Capacitor just pointed out) and
2 - Defense, where he makes the usual Republican accusations about defense being neglected.

Obviously, his across-the-board cut is nothing of the kind, since the above will have to be paid for by somebody. Given his right-wing philosophy, it won’t be those with the ability to pay - which we can see already by the effect of his “across the board tax cut”. We may even wind up in the same position as we did with Reagan, whose extravagances we’re still paying for. Finally, his proposals do zip to simplify the tax code.
Meanwhile, Gore is proposing a bunch of targetted tax cuts. These are far more obviously tax expenditures, and someone will have to pay for them. But Gore is a lot clearer, and makes no bones about his proposals involving spending. That he doesn’t want to simplify the code is a big knock against him, in my book.
Nobody seems to care about simplification, as long as they get their priorities paid for.

As I’ve tried to say, as far as I’m concerned, the way to go is to simplify the code by eliminating deductions and reducing the number of brackets and the top rate on the highest bracket, exactly the kind of compromise we hammered out back in '86 and that has since been stomped on to the point of being unrecognizable.
As for new programs or new spending: shelve 'em 'til the debt is gone.

40

If your medicare contribution exceeds your income tax cut, count yourself lucky, you will actually get more out of MediCare than what you put into it.

There is no ceiling on Medicare anymore, as there is for Social Security, so at an annual salary of $1,000,000, the person pays a whopping $29,000.00 a year in Medicare. That is before any MediCare increases, at today’s 2.9% rate. Meanwhile, if you make minimum wage you pay only $331.76 per year and when you and the rich person retire, you both get the same benefits.

The rich should benefit most from any tax cuts, they are paying the majority of the revenue that allows the government to slash taxes. They will STILL pay a higher percentage, not to mention a higher dollar cost in taxes than the middle class or the ‘poor’.

MediCare and Social Security are separate social programs than income taxes for very good reason. They should stay that way and remain perceived that way.