Archives: 11/2010

There Ain’t No Such Thing as a Tax Subsidy, Either

I hit a nerve with my post, “There Ain’t No Such Thing as a Tax Expenditure.”  To recap: The federal tax code has credits, deductions, exemptions, and exclusions that reduce tax revenue.  By convention, budget experts call that forgone revenue a “tax expenditure,” a “tax subsidy,” or even “backdoor spending in the tax code.”  This is incorrect.  To claim that forgone tax revenue is a government expenditure implies that the money at stake actually belongs to the government, which is graciously letting taxpayers keep it, rather than to the people who earned it.  Government is not spending that money; it is merely not extracting that money from the private sector.  Statists deliberately use terms like “tax expenditure” precisely because that erroneous impression obscures their efforts to raise your taxes.

Less than an hour after posting, Matthew Yglesias of the Center for American Progress Action Fund called me “daringly inaccurate.”  (Why be timid?)  The Manhattan Institute’s Josh Barro devoted a very thoughtful 1,155 words to the topic at NRO.

Yglesias explains in an email:

I understand why you might want to object to the “tax expenditure” phrasing, but surely we can agree that there’s such a thing as a “tax subsidy,” right? If the government declares that fuel-efficient hybrid cars are now tax-deductible, that’s a subsidy to the makers and purchasers of Priuses.

I’m afraid I cannot agree to that.

  • The term “tax expenditure” is nonsense because not taking Peter’s money, conditional on Peter buying a Prius, is not the same as spending the same amount of money on a Prius.  The outcome may be exactly the same.  But no one can spend money that he doesn’t possess.
  • The term “tax subsidy” is likewise nonsense because a subsidy involves giving something to someone else.  Not taking Peter’s money, conditional on Peter buying a Prius, is not a subsidy to Peter.  The government is not giving Peter anything.  Nor is it a subsidy to Paul, even though he profits from Prius sales: the government is not giving anything to Paul, either.  Again, the outcome may be exactly the same as a government subsidy.  Notably, Paul’s income rises.   Yet it does not rise because Paul received a subsidy.  Paul’s income rises because the state used coercion in a different way: to alter, for Peter, the cost of a Prius relative to other uses of Peter’s income.
  • To see the absurdity, consider what it would mean to eliminate a “tax subsidy.”  All else equal, eliminating an actual government subsidy reduces the tax burden.  Eliminating a “tax subsidy” increases someone’s tax burden.  Which is the whole point, isn’t it?

Barro makes more of our disagreement than actually exists.

  • We agree targeted tax preferences are harmful.  (I argue, for example, that the tax exclusion for employer-sponsored health insurance operates more like a tax hike than a tax break because, among other atrocities, it denies the typical parent control over $10,000 of her earnings.)
  • We agree they expand government power.
  • We agree government should account for them.  (Along those lines, the Congressional Budget Office has developed a concept it calls the “federal budgetary commitment to health care,” which is the sum of all federal health spending and all tax revenue forgone due to health-related tax loopholes.  The CBO calls them “tax expenditures” –  grrrr.  I dislike “budgetary commitment” for the same reason: the government can’t commit resources it doesn’t possess. But the CBO is on to something. We need an aggregate measure of “federal budgetary interference in the economy.”)
  • Finally, Barro and I probably agree that Congress should simultaneously eliminate all such loopholes and reduce marginal payroll- and income-tax rates – perhaps to zero.

I reject the term “tax expenditure” – as distinct from the concept – because it is nonsensical and biases the debate toward more government control of the economy and our lives.   Barro asks what term I’d prefer. Until someone comes up with something pithier than “tax revenue forgone due to targeted tax preferences,” I’ll stick with that.

Sweden’s Voucher-Funded ‘Nazi’ School

They told me if we have school choice, there’d be Nazi schools. And they were right! Sort of.

I’m talking with one of the teachers and I ask why she left the Swedish state school system.

“Because of the chaos,” she says. “There is no discipline. The students do what they want. They listen to their iPods and mobiles in class.”

My eyes open wide. “They have their mobiles out in lessons?”

She nods. “Yes. There is nothing the teacher can do about it. There are no punishments like detention in Sweden….”

I frown. “But here, it’s different, yes?”

She nods. “Oh yes. Here we’re all about order. They call us the Nazi school.”

This conversation, which took place in a voucher-funded private school, is illuminating. It illustrates a problem at the core of official state schooling: the enrollment of a child in a government school is not a mutually voluntary act.

All our (legal) interactions in civil society and within the free enterprise system are mutually voluntary. People choose their own churches, grocery stores, and clubs – and those organizations choose them. Fail to abide by the code of conduct of the establishment, and you’re out. Everyone knows this, and expulsions are rare as a result. We seek out others who share common goals or values because we all benefit from our interactions.

This is not the case under official state school systems. Everyone is compelled to pay for state schooling and so there is intense economic pressure to send one’s children to the state schools.  The state  schools, in turn, are constrained in the extent to which they can establish rules of conduct for attendance. State school attendance is not truly voluntary for either party.

Not surprisingly, this compromises the value of the interactions. State schools often can’t do everything they think is necessary to fulfill their mission, and parents often find the schools unresponsive to their needs and demands.

Moving education back toward the mutually voluntary sector, as Sweden has done with its private school choice program, has freed up each school to establish its own clear rules of conduct and has freed up parents to choose the kinds of schools best suited to their children. Some prefer permissiveness and others order and each family can get what it’s looking for without having to impose its preferences on others. The system isn’t perfect, but its advantages over the U.S. status quo are obvious.

New NAEP Scores Reveal Education Shell Game

Over the past two decades, the media and federal education officials have tended to focus on modestly improving test score trends of 4th and 8th graders. As my colleague Neal has mentioned, new 12th grade results were released today, and they once again call that practice into question.

Whether one looks at the fixed “Long Term Trends” series of national test results reaching back to the early 1970s, or at the ever-evolving “Nation’s Report Card” series, it seems as though student achievement has improved a little over time at the 4th and (to a lesser extent) 8th grade levels. By the same token, both of those data series show little or no improvement in achievement at the end of high-school over the past one, two, or four decades. Indeed the most recent 12th grade results show a small but statistically significant decline in reading scores since 1992.

High school graduates are no better prepared today than they were in previous generations, despite the fact that we’re spending 3 times as much on their K-12 educations. Some of what they’re learning they may be learning a bit earlier, but when applying to college it’s the K-12 academic destination that matters, not the journey.

And that destination suggests that the past four decades of so-called public “school reform” have done nothing to improve the academic preparation of high school seniors for college, life and work. Not ESEA. Not NCLB.

Perhaps government is not the best source of progress and innovation after all? Perhaps if we want to see progress and innovation in education we should allow it to participate in the free enterprise system that has been responsible for staggering productivity growth in every field not dominated by a government monopoly?

New NAEP Scores Confirm ‘F’ in Feds

The recent elections made one thing very clear: Americans want a cheaper, smaller, more effective federal government. Today we have powerful evidence that a terrific place to start giving them that is education. New National Assessment of Educational Progress – so-called “Nation’s Report Card” – scores are out, and despite years of massive increases in federal education spending, as well as nearly a decade of No Child Left Behind “accountability,” stagnation is what we’ve gotten. Reading scores for 12th graders – our schools’ final products – are lower than they were in 1998 and 1992. In math all we have is a slight bump between 2005 and 2009, and no data before that because NAEP changed its math framework, making today’s results essentially meaningless. Looking at other NAEP tests – notably the long-term trends exam that tracks from the early 1970s – overall math achievement is almost certainly as lifeless as reading.

The Constitution gives Washington no authority to govern or fund American education, which is reason enough to get the feds out of our schools. If that doesn’t do it for you, however, that federal meddling has produced nothing but expensive failure should clinch it: It’s time to listen to voters and get Washington out of education.

The ‘Public Health’ Confusion Again

The National Transportation Safety Board is calling on states to require motorcycle riders to wear federally approved helmets.

“Too many lives are lost in motorcycle accidents,” Christopher A. Hart, NTSB vice chairman, said in announcing that helmets had been added to the board’s annual “most-wanted list” of safety improvements. “It’s a public health issue.”

No, it’s not. Motorcycle deaths are not a public health problem. If motorcyclist A doesn’t wear a helmet, that has no impact on cyclist B. Riding a motorcycle without a helmet may be a bad idea, but it is an individual and non-contagious problem.

The meaning of “public health” has sprawled out lazily over the decades. Once, it referred to the project of securing health benefits that were public: clean water, improved sanitation, and the control of epidemics through treatment, quarantine, and immunization. Public health officials worked to drain swamps that might breed mosquitoes and thus spread malaria. They strove to ensure that water supplies were not contaminated with cholera, typhoid, or other diseases. The U.S. Public Health Service began as the Marine Hospital Service, and one of its primary functions was ensuring that sailors didn’t expose domestic populations to new and virulent illnesses from overseas.

Those were legitimate public health issues because they involved consumption of a collective good (air or water) and/or the communication of disease to parties who had not consented to put themselves at risk. It is difficult for individuals to protect themselves against illnesses found in air, water, or food. A breeding ground for disease-carrying insects poses a risk to entire communities.

The concern back in 2007 over a tuberculosis patient on an airplane raised public-health issues. You might unknowingly find yourself in an enclosed space with a TB carrier. But nobody accidentally rides a motorcycle without a helmet. And your helmetless ride doesn’t threaten me. That’s why riding a motorcycle without a helmet is not a public health issue, even though it may be a bad choice for an individual. As I wrote before,

Language matters. Calling something a “public health problem” suggests that it is different from a personal health problem in ways that demand collective action. And while it doesn’t strictly follow, either in principle or historically, that “collective action” must be state action, that distinction is easily elided in the face of a “public health crisis.” If smoking and obesity are called public health problems, then it seems that we need a public health bureaucracy to solve them — and the Public Health Service and all its sister agencies don’t get to close up shop with the satisfaction of a job well done. So let’s start using honest language: Smoking and obesity are health problems. In fact, they are widespread health problems. But they are not public health problems.

UPDATE: An astute reader asks: But what about the costs to the taxpayer if an uninsured, helmetless motorcyclist is injured? That’s still not a public health problem, and it’s not the claim NTSB is making. It might be a public finance problem, but libertarians have generally argued that a free market in health insurance is a better response to that problem than a smothering nanny state that bans all dangerous behavior on the grounds of socialized medical costs.

Another Tax-Hike Scheme from Another ‘Bipartisan’ Group of Washington Insiders

I’ve already commented on the proposal from the Chairmen of President Obama’s Fiscal Commission (including a very clever cartoon, if it’s okay to pat myself on the back).

Now we have a similar proposal from the so-called Debt Reduction Task Force. Chaired by former Senator Pete Domenici and Clinton Administration Budget Director Alice Rivlin, the Task Force proposed a series of big tax increases to finance bigger government. I have five observations.

  1. Notwithstanding a claim of $2.68 trillion of “spending cuts” during the 2012-2020 period, government gets a lot bigger during the decade. All of the supposed “cuts” are measured against an artificial baseline that assumes bigger government. In other words, the report is completely misleading in that spending increases get portrayed as spending cuts simply because government could be growing even faster. Interestingly, nowhere in the report does it show what total spending is today and what it will be in 10 years, presumably because the authors realized that the fiction of spending cuts would be hard to maintain if people could see real-world numbers showing the actual size of government now and in the future.

    This chart shows what it would actually take to balance the budget over the next 10 years – and these numbers assume all of the tax cuts are made permanent and that the alternative minimum tax is extended.

  2. The Task Force proposes a value-added tax, which is estimated to generate more than $3 trillion between 2012 and 2020. They call this new tax a “debt reduction sales tax” and I can just imagine the members giggling as they came up with this term. They may think the American people are a bunch of yokels who will get tricked by this language, but one can only wonder why they think making our tax system more like those in Europe will lead to anything other than more spending and less growth.
  3. The Task Force proposes to dramatically increase the scope of the Social Security payroll tax. Since this is something Obama called for in the campaign and also something endorsed by the President’s Fiscal Commission, this proposed tax hike should be viewed as a real threat. I’ve explained elsewhere why this is bad tax policy, bad fiscal policy, bad entitlement policy, and bad Social Security policy.
  4. To add “stimulus” to the package, the Task Force proposes a one-year payroll tax holiday. The good news is that they didn’t call for more spending. The bad news is that temporary tax cuts have very little pro-growth impact, especially if a tax cut will only last for one year. Unfortunately, the Task Force relied on the Congressional Budget Office, which blindly claimed that this gimmicky proposal will create between 2.5 million-7.0 million jobs. But since these are the geniuses who recently argued that higher tax rates boost growth and also claimed that Obama’s faux stimulus created jobs, those numbers have very little credibility.
  5. While the Task Force’s recommendations are unpalatable and misleading, there is a meaningful distinction between this plan and the Obama Administration’s fiscal policy. The Task Force assumes that government should get even bigger than it is today, but the Obama Administration wants government to grow at a much faster rate. The Task Force endorses massive tax hikes, but generally tries to avoid marginal tax rate increases that have especially large negative supply-side consequences. The Obama White House, by contrast, is fixated on a class-warfare approach to fiscal policy. One way of characterizing the different approaches is that the Task Force represents the responsible left while the Obama Administration represents the ideological left.

When The Government Is The False Advertiser

I had an op-ed in the Washington Times yesterday on government’s growing participation in public-health scare campaigns demonizing everyday foods that are fattening, salty, or thought to be bad for us in other ways. In particular, I singled out Mayor Michael Bloomberg’s New York City Department of Health, which has followed up one scientifically dubious ad campaign on sweetened soft drinks (“What can we get away with?” asked one official) with an even worse – in fact, grossly misleading and manipulative – attack on salt in processed foods:

It shows a can of soup bursting at the seams with table salt, whole mounds and piles of it. The city’s underlying point is not 100 percent off-base - healthful in most other ways, conventional canned soup is a relatively salty food - but the actual amount of salt in a can is more like 1 teaspoon, not the third of a cup or more depicted in the city’s ridiculously exaggerated photo. Not to put too fine a point on it, but the Bloomberg soup ad is built on a visual lie.

What would happen if a private advertiser tried to get away with imagery as misleading as this? Well, in 1970, in a case still taught in business schools, Campbell’s got caught manipulating the soup pictures in its ads; its photographers had put marbles at the bottom of the bowl so that the pleasing vegetables would be more visible on top. The Federal Trade Commission filed a deceptive-advertising complaint to make the company stop.

The FTC’s authority would not extend so far as to ordering New York City to cease its misrepresentations, and for various reasons (including the principle that states and localities ought largely to retain independence from federal dictation) we should be glad it doesn’t. But couldn’t we at least ask that the federal taxpayer not be made to subsidize the false advertising?

Last month, the federal Centers for Disease Control - headed by Bloomberg’s own [former health commissioner Dr. Thomas] Frieden - announced a $412,000 grant to assist the city in its anti-salt efforts.

The full piece is here. Incidentally, via the American Council on Science and Health comes word of a new Harvard study finding that Americans’ intake of salt is almost exactly the same as it was 50 years ago; it also seems that international studies find that people in other countries tend to pursue and attain very similar levels of salt intake. If accurate, that would cast doubt on two key themes of public health alarmism, namely that America is experiencing some sort of epidemic of exposure to salty processed foods, and that such an epidemic underlies rising hypertension rates (which, as the article explains, may owe more to obesity than to salt intake). I could not resist a chuckle at the name of the press outlet reporting the results of the new study: Bloomberg Business Week.