Your tax increase is my spending cut
I spent time digging through the federal budget this week, and I concluded that Republicans are right: There is plenty of spending to cut. For instance, we’ve got one government program that hands people money to buy houses that, in most cases, they would buy anyway. They get even more money if they buy a more expensive house. Over the next five years, that program alone will cost almost $500 billion. That can’t be the best use of taxpayer dollars.
Another federal agency will spend more than $400 billion to reward people for making money by investing and earning capital gains and dividends rather than by going to work and taking their income in wages. I like investors and I participate in the market, but is this really the sort of activity that requires a $400 billion subsidy?
Here’s one I can’t figure out: Why are we sending checks to employers who subsidize their workers’ transportation costs? Is there some reason we want transportation to be included in an employee’s compensation package? Do we want it to the tune of more than $20 billion between now and 2015?
And did you know that every time someone makes a charitable donation, the federal government transfers money into the donor’s bank account? Supporting shelters and museums and Doctors Without Borders is a good deed and all, but is it really something that taxpayers should reward with more than $200 billion in cold, hard cash?
There is tons of this stuff. The government pays employers $700 billion to offer health insurance to their employees, which no economist would say is a good idea. We’re subsidizing select parts of the energy sector, spending almost $2 billion, for instance, to subsidize “open-loop biomass” rather than simply pricing carbon emissions and letting the market work out the details, and we’re handing $4 billion to oil and gas companies that explore for new reserves.
Midway through my excavation, however, when I was really just getting warmed up, I realized I had made a mistake. I wasn’t looking at the federal budget — I was looking at the U.S. tax code. So cutting all those costly programs wouldn’t count as cutting spending to Republicans in Washington. It would count as raising taxes.
All those programs are tucked in the tax code, classified as “tax expenditures.” Like traditional government spending, the point is to achieve specific ends by throwing money at a problem. The only difference is that the beneficiaries don’t receive checks from the government, they simply have their tax liabilities reduced. The Center on Budget and Policy Priorities estimates that, in 2010 alone, tax expenditures cost the government more than $1 trillion — more than Medicaid and Medicare combined.
These tax expenditures have emerged as the central sticking point in budget negotiations. Democrats want new revenue to be part of the deal, but because Republicans adamantly oppose raising marginal tax rates, Democrats have instead proposed cutting expenditures by about $1 trillion. They thought that would be more palatable to Republicans, but thus far they’ve been wrong: Republicans say that increases in revenue are increases in taxes. It doesn’t matter whether the money comes from closing loopholes or raising rates.
Some of their brightest policy lights, however, disagree. Former Federal Reserve chairman Alan Greenspan says that tax expenditures are “misclassified” because they are identical to outlays. Gregory Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls expenditures “stealth spending implemented through the tax code.” You can’t find a serious economist on God’s green Earth who thinks the economy differentiates between cutting a government program that subsidizes health insurance and cutting an equally large tax break that subsidizes the purchase of health insurance.
The crude budget calculus that counts every dollar in spending cuts as a win for Republicans and every dollar in revenue increases as a win for Democrats is simply wrong — for both sides. There are tax expenditures that Democrats aggressively protect — like the Earned Income Tax Credit, which provides a huge lift to low-income Americans. And there are spending programs that many Democrats oppose, including quite a few run out of the Pentagon.
On average, tax expenditures are regressive. So if you’re cutting them across the board, you’re raising taxes in a relatively, though not exclusively, progressive way. Yet partisan negotiators in Washington aren’t likely to cut tax expenditures or taxes across the board. They will start with vague targets and eventually advance specific cuts and reforms. And that’s when we’ll know how much of the deal should be counted as spending cuts and how much as tax increases, and whether the tax increases actually favor Democratic priorities and the spending cuts actually achieve GOP ends.