In a mixed economy like that of the U.S. from the Depression until the 1980s, there is a division of labor among well-defined sectors. The government provides public goods -- sometimes directly, as in the case of public K-12 education, and sometimes indirectly, through "state capitalism," by making loans to college students or paying contractors to build roads and bridges. The private sector provides most other goods, from apples to Apples. A limited nonprofit sector made up of universities, hospitals and museums rounds out the mixed economy.
In the new "subsidist" economy that both parties have created in recent decades, the distinctions among public, private and nonprofit sectors are broken down. Government becomes unlimited in ends at the same time that it becomes rigidly limited in means. The means are always the same -- a tax credit that conservatives can describe to their constituents as a "tax cut" and that liberals can describe to their constituents as a spending program. But the ends are unlimited.
Does the annoying nanny-state left want to replace French fries with asparagus spears? Then call for an individual tax credit to encourage healthy eating, and label it a "nudge" in the manner of Richard Thaler and Cass Sunstein. Does the big-government right want to expand healthcare without paying for it? Then call for a tax credit for "medical savings accounts."
This is somewhat of fairy tale, since the growth in GDP share has been erratic, rather than explosive, as can be seen in this chart from the Tax Policy Center:
But it's accurate in terms of the logic involved, and how the use of tax expenditures has proliferated, even if their aggregate size has not always grown accordingly. The main problem, from my POV is that their use is deceptive in a number of ways, a seemingly "painless" way of doing policy that merely does a better job of hiding the costs it shifts behind the scenes.
A much cleaner, more focused critique could be found early this year in political scientist
Elizabeth Rigby's January 5 article at Huffington Post, "Tax Credits vs. Spending: Why Progressives Should Care How the Stimulus is Delivered". She cited five main points:
#1: Tax Expenditures have Hidden Costs... that "do not show up in the normal government budgeting and policy review process," providing an easy means to provide governmental benefits while appearing to reduce the size of government. Easier to enact, and easier to protect from later cuts.
#2: Tax Expenditures have Hidden Beneficiaries... which means they "typically come with little stigma of the sort attached to Food Stamp or unemployment insurance receipt. This feature explains the paradox of wealthy conservatives who express disdain for those accepting welfare while happily claiming their mortgage and employer health insurance tax deductions each year." It's also why you rarely hear anyone call for eliminating them.
#3: Tax Expenditures Bypass the Appropriations Process... which means they only have to go through half as many committees in Congress, half as many veto points where they could be killed. It also means they become a virtual entitlement program, since everyone eligible who claims the tax credit receives it-unlike programs that have only so much money appropriated for them.
#4: Tax Expenditures are Automatic Policy Tools... which means they use an existing administrative structure-the IRS. This means quick implementation, which is generally a good thing... unless of course, the policy is bad to begin with.
#5: Tax Expenditures are Indirect Policy Tools... which means there's a separation between the entity responsible for the spending (the federal government) and the entity responsible for producing the results. The downside of this is apparent in "stimulus" spending on tax cuts that go to pay off debt, rather than generate new spending in the economy, which is the whole point of the stimulus in the first place. In the long run, it also undermines public support for government solutions to universal social problems-such as health care. In this case, government subsidies for private pensions and health benefits have helped produce an infrastructure of opposition to universal health care.
Although she raised these points in the context of discussing the stimulus package, they are general points applicable across the board, which helps explain why they tilt so heavily toward helping those who already are doing quite well, thank you. As a reminder, here's the chart version of the table presented above the fold, which makes it strikingly clear that tax expenditures for the top quintile are nearly double the income of those in the bottom quintile:
And here's a more detailed breakdown from the Tax Policy Center, of how those percentages are sliced up:
[Click to Enlarge in New Window]
Okay. That should pretty much convince you that tax expenditures are a raw deal for most Americans. But that's not the worst of it, as CBPP noted in that same policy brief referred to above. The worst is that so-called "deficit hawks" are constantly demanding that we must slash programs like Social Security and Medicare in order to solve our long-term budget problems--all the while ignoring the enormous expense of giving so much to more affluent households through a wide range of tax expenditures. CBPP wrote:
Tax Expenditures Should Be Part of Long-Term Budget Solution
The United States faces serious long-term fiscal problems. If we maintain current tax and spending policies, expenditures are projected to rise significantly as a share of GDP over the next several decades while revenues will fall, driving federal deficits and debt to unprecedented levels that will threaten serious harm to the economy. Under current policies, the federal debt will skyrocket from about 46 percent of the Gross Domestic Product at the end of fiscal 2009 to about 280 percent of GDP in 2050, according to an analysis that the Center on Budget and Policy Priorities issued in December 2008. That would be more than two and a half times the existing record, set when the debt reached 110 percent of GDP at the end of World War II.
Policymakers will need to make tough choices to avert those large deficits. Given the magnitude of the problem, sacrifices will be needed on both the tax and spending sides of the budget. Closing the long-term budget gap entirely through program reductions, for example, would require the equivalent of an immediate and permanent 20 percent reduction in spending for all federal programs, including Social Security, veterans' benefits, environmental protection, education, health care programs, defense, anti-terrorism efforts, and assistance for the poor.
Some have suggested unbalanced proposals that would impose what could be austere limits on programs such as Social Security and Medicare without restraining the growth of tax expenditures. Such an approach would be unwise. Giving a free pass to the hundreds of billions of dollars in what is essentially entitlement spending delivered through the tax code would significantly weaken efforts to curb deficits.
Exempting tax expenditures from fiscal discipline also would be inequitable. As the TPC analysis shows, tax expenditures deliver their largest benefits to upper-income families. In contrast, Social Security and Medicare benefits are spread far more evenly across the population. Protecting tax expenditures while imposing significant cuts on other parts of the budget would likely favor the well-off at the expense of the broad majority of Americans. It also would necessitate even deeper reductions in other parts of the budget than would otherwise be needed to restore fiscal stability.
Because there are so many things wrong with tax expenditures, and because they are so rarely talked about, I have to give major credit to Lind for raising the issue. But there are a couple of problems, as I mentioned above. One of them concerns his claim that liberals are involved in some intellectual hanky-panky here:
To put that number into perspective, according to official figures the U.S. spends about 30 percent of its GDP on government at all levels -- well below the OECD average of around 36 percent and the EU average of about 39 percent. But add in the "dark matter" of tax expenditures, and federal-state-local spending goes up to around 36 percent of GDP -- close to the international average among developed countries and within range of European norms.
This is something that neither liberals nor conservatives are honest about. Liberals like to invoke official spending numbers to claim that the U.S. spends far less on social welfare purposes than other, similar industrial democracies. That implies that there is room for a massive expansion of federal spending on new purposes -- health, environment, education. But as Jacob Hacker has pointed out, when tax expenditures are factored in, U.S. welfare policies absorb far more of the U.S. economy already than many on the left want to admit. Though it is still short of the half of GDP taken by government in the Nordic democracies, the American public sector, when dark matter is included, is pretty close to Western European levels already.
When I read that passage, alarm bells immediately went off, which is why I called CBPP to talk to an expert. My initial concern was that adding tax expenditures to the government sector didn't seem kosher to me. Even though it makes sense at the micro level, since tax expenditures are no different in principle than other spending, that's money that never figures in government revenues. Add that to the very strong skew toward paying the already affluent, and the strong intuition that European welfare states had a fair amount of tax expenditures, too, and I just wasn't buying this particular line of argument from Lind.
I spoke with Jim Horney, who didn't agree with my first criticism, but did agree with me over-all. (In retrospect, I think my first point should have been brought to a welfare state scholar, rather than an expert in the nitty-gritty, but such is life.)
"There are other countries that have them, that have enormous tax expenditures," Horney told me, so Lind's assumption that one could just add 6% to US spending while adding nothing to the European average was without foundation.
As for trying to get figures that could be added in, Horney told me, "There are problems that are insurmountable," given the complexities and differences in tax codes between different countries.
"I think everyone who has looked at it has come up with there is no way to compare them," Horney went on to say, "I have never seen a serious analyst who has tried to add those together to do that sort of comparison. He's absolutely wrong."
There were other problems as well, which Horney discussed. But the biggest problem, of course, is that $18,713 in tax expenditures per household in the top income quintile does not qualify as social spending we're already doing by any sort of reasonable definition. That money very well could be used "for a massive expansion of federal spending on new purposes -- health, environment, education." The liberals aren't making a bogus argument here. Lind is.
My second problem with Lind's piece comes when he talks about what to do:
Defeating the Blob may require an alliance of both ends against the middle. When it comes to the subsidy sector, we have a four-party system. Neoliberal New Democrats, like the majority of personnel in the Clinton and Obama administrations, have preferred tax credits to honest spending programs, so they can claim to be in favor of limiting the size of government. Centrist Republicans like tax expenditures for the same reason. The opponents of the ever-expanding subsidy state are found among social democrats on the left and libertarians on the right. Social democrats would prefer direct government spending for public purposes rather than subsidies to rent-seeking middlemen bribed into doing things that the public sector does in better-governed countries. Libertarians -- at least the ones who don't care about being players in the Republican Party -- oppose corporate welfare in the name of the free market.
Social democrats and reasonable libertarians might consider uniting in a grand alliance against the bloated subsidy sector. As a rule, public goods should be provided by the government and private goods by the private sector, with a small contribution from a modest nonprofit sector. Most of the 6 percent or so of GDP that is now converted into the dark matter of tax expenditures needs to be divided between a restored public sector and a restored private sector -- with a rebuilt border between them. The principled left and the principled right can argue about where the border between the public sector and the private sector should be. But at least they can agree that there should be a border, and that the no man's land of the subsidy sector needs to be erased from the map.
Reasonable libertarians? Why not unicorns? Surely there are more of them than there are reasonable libertarians. See the Tea Baggers if you have any doubts about that. While I agree with Lind's point about clarifying the roles of the private and public sectors, a much more fundamental problem is simply the drastic tilt toward redistributing income upward. By focusing on that, we can broaden, deepen, and strengthen the social democratic political sector. A much better use of our time than chasing after mythical beasts that have absolutely nothing enchanting about them. |
