Tag: tax cuts

If There’s a Grand Bargain, Taxpayers Should Get a Tax Cut Rather than a Tax Hike

The Washington metropolitan area has become America’s wealthiest region because trillions of dollars are taken every year from the productive sector of the economy and then divvied up by the politicians, bureaucrats, lobbyists, and interest groups that benefit from federal largess.

But there’s always an appetite in Washington for even more money. Former senator Kent Conrad (D-ND) just wrote in the Washington Post that “Our country needs more revenue to help us get back on track.”

I guess that means back on track to becoming Greece, though I suspect he would have an alternative explanation. All I can say for sure is that he probably wasn’t paying attention when I testified to his committee last year about pro-growth tax policy.

But it’s not just Democrats who are greedy for more of our money. Republican Congressman Tom Cole of Oklahoma joined the Charlie Brown Club by stating, “we’re willing to put more revenue on the table.”

If you ask politician why they want more revenue in Washington, they invariably state that America’s long-term fiscal challenges are so large that you need a “balanced” package.

But why should there be “balance” between tax hikes and spending cuts (which would merely be reductions in planned increases) when more than 100 percent of America’s long-run fiscal problem is because of a rising burden of government spending?

Does that sound like an exaggeration? Well, check out this data from the Congressional Budget Office’s 2013 Long-Term Budget Outlook.

To Spur Technology Innovation, Stop Pulling on the Rope

I spent the morning at The Atlantic’s Washington Ideas Forum. Before the big names were to do their spiels during the afternoon today and tomorrow morning, there were a series of breakout sessions, among which was one on “Technology Innovation.”

Our suggested “points to ponder” were:

  1. Can our nation regain our competitive edge through innovation?
  2. Will our knowledge and information-based workforce continue to offer cutting-edge technologies to improve the way we live and work?
  3. What measures can we implement to foster creativity and encourage companies to grow intelligently? and
  4. Will the paradigm of how people work, think and communicate be meaningfully transformed as a result of technology? Or is this another short-term trend, with no long term changes?

At least one of the other participants thought the summary of the discussion I gave in the latter half was pretty good, so I’ll share my takeaway here roughly as I did there—maybe sounding just a little more “Cato-y” here.

First, note the conspicuous use of collective pronouns in the first three discussion points. They obscure the goals and actors quite nicely, summarizing to: There is an undefined group out there that we want to have do an undefined set of things amounting to innovation.

I was reminded of the metaphor for spurring economic progress (if I recall, and I don’t recall where I first heard it): Spurring economic progress is like pushing a rope. You really can’t do it. Someone has to pull it, and the job of policymakers is simply to not pull on the wrong end.

In our brainstormy session, the ideas generally focused on pushing our end of the rope. “We” need more basic research and R&D. “We” need more and better education in science and technology. “We” need more inspired leadership, the spur of a new Sputnik.

These things are all probably inputs to innovation in some sense. None of them, I don’t think, will produce innovation as a matter of course. And nobody knows where to direct these efforts so that they do produce innovation.

A few other ideas emerged, ways that public policy can stop pulling on the rope. One was letting immigrants stay in this country—particularly the ones who have just earned advanced degrees—and welcoming them to stay. Another one was reducing the role of patent strategy in tech-business decision-making. Patents seem no longer to be primarily a spur to innovation, but a strategic arsenal used offensively or defensively by tech giants. A third idea that nearly surfaced was tax cuts, but its author in the conversation pivoted from what other countries are doing with tax policy to “national competitiveness,” never actually saying that U.S. tax cuts would spur business activity and innovation.

Arriving back at the office, I chanced to come across some thinking that would have contributed mightily to the discussion: NYU professor of economics Bill Easterly talking about the relationship of individual rights to economic growth, development, and innovation:

[I]ndividual rights is also a way to mobilize all the knowledge in society that we need to make the economy work. It’s the individual that has the particular knowledge so that they know how to run their factory, to employ people, to be a worker themselves, to start new businesses.

We’ll talk later about examples—like the guy in Rwanda, who stumbled upon a very unexpected success. He figured out—this is not something anybody would have predicted—that Rwanda could prosper by exporting gourmet coffee, which you can find in New York’s best coffee shops.

One reason that worked so well for Rwanda, is they have a tremendous infrastructure problem. It’s very hard to get heavy stuff shipped abroad because they are landlocked, they’re surrounded by countries with lousy roads, lousy ports. But gourmet coffee is something that you can create with lots of labor, which Rwanda does have a lot of, and it has very high value-to-weight ratio. So you just put it on the airplane, and ship it to New York.

So, there was no expert economist that flew in and told Paul Kagame, the autocrat of Rwanda, “Here’s the plan: Identify gourmet coffee as the growth industry worldwide. That’s the recipe.” None of that happened.

These successes are always a surprise. That’s why the expert top-down plan doesn’t work. You need the entrepreneur, you need the consumer, you need the market feedback, you need the democratic feedback, and all of this is built on this large edifice at the bottom of individual rights.

Defend people’s rights to own and use their property, however they might imagine to do that, then watch them deliver their surprises. That’s innovation policy. Stop pulling on the rope.

As If Gov’t Spending Had Nothing to Do with It

This is how a front-page story in this morning’s Washington Post portrayed the cause of this year’s $1.5 trillion deficit:

Record U.S. Deficit Projected This Year
CBO forecasts tax cuts will push budget gap to $1.5 trillion

The still-fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday.

Federal spending and federal tax revenue play equally important roles in creating the federal budget deficit.  Yet the Post blames the deficit only on inadequate tax revenue.  Federal spending isn’t too high, the Post implies, tax revenue is too low.

This may not be an example of media bias.  But it is an example of why supporters of limited government believe that major news organizations like the Washington Post are biased toward bigger government.  At a minimum, the Post has some explaining to do.

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.

The Deficit Commission: A Good Try That Falls Short

My colleagues, Dan Mitchell, Jagadeesh Gokhale, Michael Cannon and Chris Edwards have already provided their thoughts on the chairman’s mark released yesterday by the bipartisan deficit reduction commission.  A few additional thoughts:

The commission provides a good-faith look at the magnitude of the problem we face, and the magnitude of cuts necessary to bring spending down to even 21 percent of GDP (and it really should be far lower).  In doing so they show just how unserious Republicans are in proposing a paltry $100 billion in spending cuts.  And the commission makes it clear, unlike Republicans, that both entitlements and defense spending must be on the table.

The commission also starts the debate in a useful direction by implicitly acknowledging that their need to be some limits to government spending—that government cannot consume an ever-increasing proportion of GDP.  (Without a change in policy, the federal government will consume 43 percent of GDP by 2050.)

But ultimately the report falls short because it fails to address the proper role of government.  In fact, it tacitly accepts the idea that government should be doing everything it is doing now.  It even acquiesces to the new health care law.  As a result, it fails to reduce the size of government sufficiently to avoid tax hikes, let alone permit tax cuts in the future.

Moreover, because the commission leaves the basic structure and role of government intact, it raises questions about the future viability of its proposed mix of spending cuts and tax increases.  History demonstrates that it is far too likely that tax hikes will be permanent, while spending cuts will last as long as the next year-end emergency appropriations bill.

As the commission moves toward a final report on December 1, members would be advised not to focus just on the details of these proposals, but to have a serious and deliberative discussion of what the federal government should and should not be doing.

Obama’s Fiscal Commission: The Good and Bad

The co-chairs of President Obama’s National Commission on Fiscal Responsibility and Reform released a draft report yesterday on how to reduce federal budget deficits.

Despite the liberal savaging the report is taking as some sort of conservative plot, its proposals are really center-left in orientation. That said, there is some good stuff in the report, which will be useful for incoming Republicans looking to tackle the budget mess.

Good Ideas and Positive Directions

The report provides a menu of possible spending cuts for incoming Republican members of Congress to consider, particularly Tea Party members, who proposed to cut the budget during their campaigns.

The report proposes to reduce spending from 25 percent of GDP currently to 21 percent over the long run. That’s a good start, but we need to pursue deeper cuts, as discussed on www.downsizinggovernment.org. After all, federal spending was just 18 percent of GDP in President Clinton’s last two years in office.

I like that the report suggests a broad array of budget cuts, including defense, nondefense, and entitlement programs. Everything needs to be cut, including programs traditionally defended by both liberals and conservatives.

The report proposes to cut $200 billion from discretionary spending by 2015 from Obama’s proposed spending that year of $1,309 billion. That’s a 15 percent cut. However, the word “cut” needs to be qualified because discretionary outlays were $1,041 billion in the pre-stimulus year of 2007, and they were just $615 billion in the pre-Bush year of 2000.

The report recommends an array of Medicare and Social Security cuts. That’s great, but the report doesn’t include the fundamental structural reforms—such as Social Security individual accounts and Medicare vouchers—that are needed to reduce costs and provide benefits to the broader economy, such as boosting savings and improving health care quality.

The direction of the proposed tax reforms is positive. The co-chairs propose to reduce or repeal narrow deductions and other special tax benefits, while reducing marginal tax rates. The idea to treat capital gains and dividends as ordinary income, however, reveals a faulty understanding of the proper tax treatment of capital.

The report proposes to cut the corporate tax rate from 35 percent to 26 percent, while moving to territorial treatment for foreign investment. It suggests making “America the best place to start and run a business and create jobs.” That’s a laudable goal, but to fulfill it we need to bring the rate down to, say, 15 percent.

The report’s goal of reducing the damaging buildup of federal debt is laudable. Government overspending is the nation’s primary fiscal problem, but spending financed by debt creates an array of problems that are additionally troubling.

Bad Ideas and Shortcomings

The report proposes to raise taxes by $1 trillion over the next decade. But the federal budget crisis is caused by overspending not undertaxing. The election results showed that most Americans understand that, but the message hasn’t penetrated the beltway yet.

The report’s discretionary spending cuts are timid. For example, farm subsidies are cut by just $3 billion, just a fraction of their annual cost of about $20 billion. Farm prices and farm incomes are at high levels these days, so now would be a good time to repeal farm subsidies completely.

The report characterizes tax deductions and exemptions as “spending in the tax code.” That is becoming common parlance in Washington, but it is incorrect. Yes, the mortgage interest deduction and other narrow benefits distort the economy and ought to be abolished, but they also reduce the flow of revenues to Washington, which is a good thing.

The report makes faulty and naïve arguments often heard from centrists about government “investments.” While we need to cut spending, we also need to “invest in education, infrastructure, and high-value R&D” the report says. But why does the federal government need to be involved in education? Why can’t we privatize infrastructure investment? If certain R&D is so “high-value,” wouldn’t the private sector do it?

Along the same lines, the report calls for the creation of a “Cut-and-Invest Committee” to move spending from “outdated” programs to “high-priority long-term investments.” That’s just naïve. The government will never be an efficient allocator of resources, and that’s why we need to shrink it, not just make it run better.

Finally, the commission should have placed more emphasis on fundamental restructuring of government, and not just spending trims. This is true with the entitlement proposals. But also with areas such as infrastructure spending—we don’t need higher gas taxes and government spending for infrastructure, we need privatization.

Monday Links

  • Harvard economist Jeffrey Miron: “Economists find weak or contradictory evidence that higher government spending spurs the economy. Substantial research, however, does find that tax cuts stimulate the economy and that fiscal adjustments—attempts to reduce deficits by raising taxes or lowering expenditure—work better when they focus on tax cuts.”