20
Jul
10

Tax, and spend

Earlier this year, I got in a bit of hot water over the idea that the health-insurance employer tax subsidy was a “subsidy” on behalf of the beloved feds rather than a “failure to steal”.  I justified the term by pointing out that all subsidies are distortive, and that giving certain tax breaks to one class of people (the comfortably employed) rather than to everyone is pretty damn distortive — and thus qualifies as a subsidy.  (Suppose the feds — as they do — provide tax relief to employers who buy health insurance for their employees.  That’s a “tax subsidy”.  Now suppose that the feds don’t do that, but instead give equivalent cash money to employers who buy health insurance for their employees.  That’s a “subsidy”.  Suppose further that they fold that subsidy into the company’s tax return.  Where’s the fundamental difference?)  What caught me particularly aslant is that (a) “tax subsidy” is a common piece of jargon and (b) I was quoting someone else.

I’m going to get in trouble again.

I’m quoting Greg Mankiw, who’s quoting Martin Feldstein at the WSJ:

Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. That’s why tax and budget experts refer to them as “tax expenditures.”

(Emphasis added.)

In budgetary terms, there’s not much difference between spending a few billion dollars on unicorn-fart grants to corn ethanol producers and implementing a few billion dollars’ worth of tax cuts for corn ethanol producers.  The first adds a few billion dollars to the “expenses” side of the ledger, while the second subtracts a few billion dollars from the “revenue” side.  Here or there, samey-same, amirite?

Well, not so much.  There are secondary costs involved, even within the federal apparatus.  Subsidies need to be applied for, evaluated, and distributed — which takes a certain amount of bureaucratic machinery (that which Clausewitz referred to as “friction”).  Tax rules need to be integrated into the larger tax apparatus, verified, and enforced — which takes a different kind of bureaucratic machinery.  The cost of the first wonk-wank may differ from the cost of the second.

While we’re at it, we should be careful to distinguish tax subsidies (“You may claim $foo on Line 27183 for each bushel of corn you grow for the purposes of conversion to corn ethanol; please fill out Form 31416 in triplicate”) from tax cuts (“Change the multiplier on line 7071 from 0.195 to 0.193.  Merry Christmas”).  In particular:

Alan Blinder asserts that opposition by tax-cut proponents to further increases in government spending is inconsistent (“Obama’s Fiscal Priorities Are Right,” July 19).  Not so.

Viewing reality through a Keynesian template, Mr. Blinder perceives tax cuts as “stimulating” the economy only in the same way that government spending does: by increasing aggregate demand.  In fact, though, the chief argument for tax cuts is not that they increase aggregate demand but, rather, that they increase the return to productive effort and risk-taking.

(Emphasis added.)

The single-year predicted budgetary expense (lost tax revenue) of the two may be equivalent, but Boudreaux’s cuts are vastly more likely to lead to actual, you know, growth.

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1 Response to “Tax, and spend”


  1. 1 aczarnowski
    July 21, 2010 at 10:46

    True story. We had new replacement windows installed in 2009. Part of the reasoning for that project was the (temporary) federal tax credit for same (save the environment with more efficient windows or some such). It being a credit, it came off the bottom line as a simple “you owe this much tax” subtraction. This simple scheme versus a tax deduction, with the deduction’s loops and dodges and multipliers and dividers and log tables, helped make the go decision for the project.

    So I think this is at least one example of how a reduction in bureaucratic friction does make for more actual, you know, growth.

    BTW: I still abhor that this kind of gerrymandering is possible. But my #1 goal is to keep as much of my money in my pocket as possible and so I gerrymandered.


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