15
Mar
11

Tax breaks and the deficit

There’s a lot of unmitigated horseshit wishful thinking going around about the U.S. federal deficit and how to fix it.  On the one hand, you get people who think we can make a few fairly straightforward cuts — foreign aid, NPR, and “fraud and waste” — and everything will be fine.  On the other, you get people who think we can repeal the Bush tax cuts and sock it to the Koch brothers and everything will be fine.  Well, no — but let’s take a look at tax-increase solutions anyway, because it’s for damn sure that we’re going to have to increase revenue somehow if we want to get debt-service payments under control before the shit hits the bond-market fan.

So let’s say we want to increase tax receipts.  We could cut nominal tax rates to increase growth, if we were in some sort of bizarre fantasy land (or the 1970s) where we’re far to the right of the Laffer curve‘s global maximum.  (Note however that this might actually work in some states, but we’re talking about the federal deficit.)  In the world we happen to live in, though, we could increase nominal tax rates — bearing in mind that we’re unlikely to get quite as much extra revenue as a simple linear equation would expect.  We could introduce a new tax, like a VAT — bearing in mind that there’s likely to be an enormous startup cost and any new tax is terrifyingly vulnerable to regulatory capture.

Or we could do my favourite thing, and clobber some targeted tax breaks.  We find this chart by way of the Off the Charts Blog:

This chart’s interesting in a number of ways.  For one thing, it shows the huge distortive effect that the federal tax code has on the economy (just over a trillion dollars, or about 7.1% of GDP).  For another, it shows that the simple answer of “get rid of tax breaks” is insufficient simply to balance the budget.  For a third, it shows that corporatist regulatory capture isn’t as big a deal — at least, when it comes to tax subsidies — as standard populist vote-buying.

But the infuriating thing about this chart is that it’s static.  It doesn’t take into account long-term cost predictions.  So while cracking down on tax breaks might pay for Medicare and Medicaid in 2012, presuming we could get the relevant legislation magically into effect by then, it’s vanishingly unlikely to do so in 2030 — and since clobbering tax breaks is well shy of being able to erase the deficit, our debt-service problem would just keep getting worse even if they were all converted by magic into filthy lucre for Federal coffers.  The OMB and CBO have tax-receipt predictions for the next seventy or eighty years; surely they have tax-expenditure predictions as part of those.

So while it’s unlikely to solve the problem by itself, I can certainly get behind a drastic reduction in tax breaks as part of an attempt to address the deficit.

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5 Responses to “Tax breaks and the deficit”


  1. 1 Dolan
    March 16, 2011 at 07:11

    Everyone forgets that charity payments are not authorized by the Constitution, charity to be defined as social security, medicare, medicaid, farm subsidies, welfare, foreign aid, disaster relief, business subsidies and other sacred cows I have neglected to gore. This should take care of up to 75% of our yearly budget, coupled with the abolition of unauthorized departments such as the education and health and human services and the elimination of all the myriad duplication of programs and unnecessary agencies (DEA, ATF, and other alphabet agencies).

    Get rid of all the above and then talk to me about downsizing the military.

    Dolan

  2. 2 aczarnowski
    March 17, 2011 at 05:32

    In theory I’m with you, diversification of strategies is a good thing. But, practically, .gov has proven that more money makes the problem worse. So I’m with Dolan. The only thing that’s going to work here is goring the shit out of some formerly sacred cows.

  3. March 17, 2011 at 15:15

    Okay, a few things.

    First off, the tax breaks I’m talking about cutting also come under the heading of “sacred cows” — things like the employer health insurance credit which largely enabled PPACA, and the mortgage tax deduction that gave us the 2004-2007 housing bubble. These are things that need to go anyway, and while I’d love to kick them off the boat in a revenue-neutral way, well, the deficit isn’t revenue-neutral.

    Second: I’ll cheerfully agree that sacred cows make the best hamburger. I posted about it a little while ago; I probably should’ve linked there to make it clear that there’s no way we can get out of this mess “merely” by nixing tax breaks.

    Third: The only thing that every politician in DC can agree upon is that messing with Social Security and Medic(are|aid) scares them shitless. The only way we’re going to get rid of those programmes completely is if the bond market turns T-bills into junk bonds and the government collapses. That’s not my preferred route to anarchotopia. The only way to deal with the spineless chickenshits in DC is to give them solid political cover for making deep entitlement cuts.

    • 4 aczarnowski
      March 18, 2011 at 07:30

      Of course, we’re on the same page generally. I hope that’s clear. I was just commenting harshly on this particular point in the fork. I’m sure if it was “us” sitting at the fixing-the-budget-table a la Dave we could hash out a compromise. I agree that spackling over some holes in the tax code would smarten up the place a bit. That’s right and good and fine.

      I’ve just lost all faith in DC. Covering fire is all well and good, but the guys you’re covering have to move to make hanging your ass out in the breeze worth it. I see a lot of cowards in those foxholes.

      • March 18, 2011 at 12:37

        I’ve just lost all faith in DC.

        Oh, definitely. And even if they do something halfway clever, like slash and burn part of the tax code rather than, say, impose a special 5,000% levy on imported luxury cars*, the moment they’re seen to be doing something about the deficit is the moment they’ll bask in the glow of acknowledgement and start shuffling off bits and pieces of that “budget-balancing revenue increase” to Big Causes With Their Names On Them.

        Small carrot, big stick. Eventually, debt-service payments and the bond market’s reaction to same will be a big enough stick to get anyone out of their foxhole, but by then we’re playing for pride rather than for victory.

        ——
        * Oh shit, are they listening?


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