Archive for the 'spending' Category

How to end tax expenditures the right way

[by JSC5]

As per Ezra Klein in today’s Wonkbook, Martin Feldstein has a plan for decreasing the deficit: end tax expenditures.

Now, regular readers of the blog will remember tax expenditures from one of my old posts inspired by the craziness of Hawaii’s ‘Exceptional Tree’  tax deduction. The basic point to remember with tax expenditures is that they give people money through the tax code instead of by cutting them a check directly. In many ways, tax expenditures and direct spending are exactly the same: the net effect on recipients is the same (they get more money), and the net effect on the government is the same (it gets less revenue).

But tax expenditures come with a whole host of negative effects. By making Swiss cheese of the tax code, they make compliance overly complicated. They distort work and income incentives. They don’t need to be reauthorized, so they tend to persist for a long time without any legislator taking a look at them and making sure they’re still a good idea. Furthermore, most people miscategorize tax expenditures as tax cuts instead of spending, so they are easier to enact and harder to repeal than regular spending programs. Just about any economist would tell you that we should run spending programs through normal spending procedures while keeping our tax code standardized and simple.

So it’s unsurprising that veteran economist/conservative political operative Martin Feldstein has come out against tax expenditures. As a foe of tax expenditures myself, I heartily welcome the support. And yet I find it hard to really trust his plan. Let me explain.

Feldstein begins his argument for cutting tax expenditures by mentioning three areas in particular that rely on the tax code for spending: education, child care, and health insurance. One gigantic tax expenditure – the mortgage-interest tax deduction – doesn’t get a mention until the very end of the article, when Feldstein says it’s probably best to  slightly reduce (not eliminate) the deduction “to avoid economic disruptions.” Did you catch the pattern? Tax expenditures that liberals and Democrats support get the axe. Tax expenditures that conservatives and Republicans support are handled with kid gloves, since – gosh! – they’re particularly important!

The lesson I draw from reading Feldstein’s politically-opportunistic support for tax expenditures is this: if we’re really going to end spending programs through our tax code, then we need to do it all at once and for everything. If you take it issue-by-issue, then there’s always going to be a big lobby in support of that particular expenditure and a small minority whose primary concern is tax expenditures in general. Mr. X is a high income homeowner and votes yes on eliminating education tax credits and no on mortgage-interest deductions. Mrs. Y is a low-income renter and votes the opposite way. Nothing gets done.

My proposal is simple: pass one bill to eliminate tax expenditures as a way to run programs and automatically convert all tax expenditures into equally-sized direct expenditures. Everyone congressperson who dislikes tax expenditures as a tool of government can get on board — regardless of the actual content of any particular tax expenditure. Tax expenditures won’t get used as a political football by advocates with an axe to grind. Then we can leave decisions about actual levels of spending to a case-by-case review at Congress’s leisure.

We get the benefits of a vastly-simplified tax code, with easy compliance and standard, predictable incentives. And small government conservatives would still find plenty to like here. The calculus has changed: everyone now realizes that these are real dollars being spent, moving through the regular appropriations process.

That’s what real concern about tax expenditures looks like. And that’s why I doubt Professor Feldstein’s commitment to Sparkle Motion.

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Douthat: right policy, wrong politics

[by JSC5]

Ross Douthat’s column today presents a smart critique of the richboy subsidies and corporate welfare enshrined in current law, from the mortgage-interest tax deduction to agricultural subsidies and lack of means testing in Medicare and Social Security. It’s a broad, if not very definitive, endorsement of a more egalitarian state that doesn’t shovel quite so much money towards non-needy recipients each year. There’s a lot of good policy that could come out of Douthat’s vision, and it is heartwarming to have a voice of sanity on the right these days — even if he is (sadly) out of the mainstream of his own party and completely without influence over actual Republican decision-makers. So instead of offering the kind of backhanded compliment you just read in the previous sentence, I should probably be doing my bit to politely encourage engagement on the general principles Douthat lays down.

But I just can’t keep myself from pointing out a very weird moment in Douthat’s column:

“The trick is to channel those [pitchfork] impulses in a constructive direction. The left-wing instinct, when faced with high-rolling irresponsibility, is usually to call for tax increases on the rich. … [But] the class warfare we need is a conservative class warfare, which would force the million-dollar defaulters to pay their own way from here on out.”

So Douthat wants us to believe that leftwingers wake up every morning looking for a tax they can raise, while the conservatives are the adults in the room making sure the government doesn’t subsidize the rich? Pardon me while I scoff. Douthat’s error here is common, if not innocuous. All of us have the tendency to let tribalism infect rational political debate. But it’s still improper to identify a good set of policies and then assume that because (a) you like those policies, and (b) you usually see yourself on Team Red, then (c) those must be conservative policies. It seems to me that means-testing parts of the safety net, rolling back subsidies of McMansions and suburban sprawl, and cutting Big Agra’s welfare checks are all … not conservative policies. They’re broadly ‘liberal’ policies, with everyone from leftwingers like Ezra Klein and Matt Yglesias to libertarians like Tyler Cowen* signing up for the same general principles. To my knowledge, no such broad swatch of leading conservative intellectuals (besides Douthat) are ready to heartily endorse these reforms.

Now, to be fair, you’d be hard pressed to find actual politicians of either political flavor ready to sign on to these reforms. But at least they are operable ideas within the liberal realm of thought!

That said, I now retract my backhanded compliments to Douthat, replace them with forehanded compliments, and politely encourage more people from all political walks of life to seriously engage with the issues Douthat raises in his otherwise excellent column today.

—-

* My apologies for not providing links here. I’m just extrapolating from past posts I’ve read of each of their work. If anyone finds information to the contrary, please let me know and I’ll update.

Say what, Tom Friedman?

I don’t know why Tom Friedman is still a prominent public ‘intellectual’. The man has a really tough time coming up with an argument that doesn’t assume, as the old yarn goes, that the plural of story is data – as anyone who struggled through The World Is Flat will tell you. If, like me, you had to put his book down after the third OMG! anecdote involving a random CEO, a first class airline lounge, and a developing country, and you’ve been living in fear for years that everyone else on the planet thinks the book is actually good and only you hated it, then you’ll really, really appreciate these three brilliant Friedman reviews by Matt Taibbi.

With that as background, let’s look at Mr. Friedman’s recent opinion column in which he pretends like he knows something about political science. The core of his argument:

I want a Tea Party of the radical center. Say what? I write often about innovation in energy and education. But I’ve come to realize that none of these innovations will emerge at scale until we get the most important innovation of all — political innovation that will empower independents and centrists, which describes a lot of the country.

He goes on to advocate non-partisan redistricting committees as well as the Single Transferable Vote (STV). Bam, you’ve just been Friedmaned. But whereas a highly-paid, jet-setting columnist gets to disregard actual human knowledge in favor of pulling things out of his ass, we in the small-time blogging world of Joint Stock Company like to keep things a little classier. So here’s an evidence-based look at Friedman’s four key assumptions that make his argument work (or not):

  1. Independents and centrists make up “a lot of the country”
  2. Gerrymandering promotes partisanship
  3. STV reform would empower the center of the political spectrum and reduce partisanship.
  4. Moderates actually care about good governance, balanced budgets, debt reduction, and innovation.

Let’s go point by point.

First up, ‘Independents’. This one’s the easiest, since political scientists have been debunking the Myth of the Independent for over 20 years now. You can read up on some of the details on these posts from a great professional poly sci blog. The take-home lesson is that political independents aren’t actually very independent. Most are just partisans who prefer to call themselves ‘independent’ because it sounds a whole lot better. Who would you believe, the party hack, or the independent-minded bloke? Case closed. The fact is there are very few true Independents in our country. Most people are strong to mild Democrats or Republicans.

Next up, the much-maligned gerrymandering of districts. There’s actually been some academic research into the effects of gerrymandering on partisanship recently (pdf), and the researcher could not find a significant effect. This squares with arguments from policy wonk bloggers, who don’t think that gerrymandering is the source of partisanship in America.

On to voting reform. I’m actually a big fan of the Single Transferable Vote, but I don’t think it would do what Friedman seems to think it would do.  As Yglesias noted on his own Friedman response: ” The dynamics of a political system that features a President, along with a congress, creates incentives for politicians to try to fit themselves into one of the two major parties. That’s at least part of the reason why the Blue Dog group in the House has preferred to organize itself as a party faction rather than a free-floating centrist party. Moving to an STV system might push more moderate legislators in the direction of trying to run as third parties, or it might expose those legislators to third-party challenges from the left.” Or perhaps what STV would actually do would be to empower the extreme right and left (as happens often in multi-party parliaments in other countries, as DiA notes). In other words, if you’re looking for a slam-dunk path to reducing partisanship, STV ain’t it. [Though STV is great for many, many other reasons].

Finally, the actual politics of the center. Friedman wants the center to be the sober, responsible political group that will cut spending, raise taxes, and invest in education, energy, and business innovation. I sympathize, because I, too, yearn for many of Friedman’s goals. But I don’t see much reason to believe that the center of the political spectrum is where I’m likely to find like-minded individuals. Why? This one’s harder to argue on evidence than the previous 3 points (because there’s just not much data on it), but my strong hunch is that people in general love government spending when they and people like them are net recipients, and tend to dislike it when they aren’t. That’s how you get welfare state farmers complaining about spending health care reform, and Medicare recipients bashing food stamps. It’s the simple ethnocentric formula we’ve always had as a species: in-group = good, out-group = bad. For an interesting read on ethnocentrism and support for various types of government spending, see this interesting book and blog post. Are we to expect that somehow the people in the center are magically exempt from what look like general trends for the rest of the population?

In summary, Friedman is right in that he political process is hyperpartisan, but that’s because we as a people are hyperpartisan (contra Friedman). Creating a non-partisan redistricting process may be a good thing to do, but there’s no reason to think it will change the partisan nature of our politics. STV is great on its own merits, but there’s no reason to think it would increase or decrease partisanship either way. The smart way to handle modern partisanship is to realize that it’s here to stay. The idealized bipartisanship of the past was a result of political parties that were riven by race, and only after decades of ideological re-sorting following the Civil Rights Act and the Voting Rights Act did we finally arrive at a modern, ideological party system in the 1990s. Putting Friedman’s ignorance of the evidence to one side for the moment, the bigger problem with his column is his quixotic quest to 1) pretend that magical people in ‘the center’ are not partisan, and 2) empower them. Why not take people as they are, and change our naive institutions so that they can function in our brave, new, partisan world? Ending the filibuster, anonymous holds, and unanimous consent in the Senate would be a good start, and eminently more practical than waiting for the Godot of a reasonable, policy-oriented, Independent movement.

Leviathan on hold

The Affordable Care Act (ACA) is now law, and as much as this is a big victory for 30 million people without insurance and anyone else who will get sick in the future and need insurance, it’s also a victory for Executive power. “I believe this commission is the largest yielding of sovereignty from the Congress since the creation of the Federal Reserve,” says administration budget director Peter Orszag, via Ezra Klein. And given how ineffective Congress is these days, that may actually be good thing.

Orszag is specifically referring to the Independent Payment Advisory Board created under ACA. The Board’s job is to propose cost-saving measures for Medicare to keep cost inflation no higher than the average 5-year GDP growth rate plus 1%. And the Board has a great deal of power. Here’s Ezra explaining:

If Congress approves the board’s recommendations and the president signs them, they go into effect. If Congress does not vote on the board’s recommendations, they still go into effect. If Congress votes against the board’s recommendations but the president vetoes and Congress can’t find the two-thirds necessary to overturn the veto, the recommendations go into effect. It’s only if Congress votes them down and the president agrees that the recommendations die.

My guess is that the political equilibrium will be for the Board to make proposals and for the Congress and President to ignore them and thereby allow them to go into effect without being personally responsible. That gives the IPAB quite a bit of actual power to cut costs in what will soon become the largest item in the federal budget. And who decides who will be on the IPAB? The President, with the advice and consent of the Senate. The Board’s 15 members will all have 6-year terms, renewable once.

Another big win for executive power in the ACA is the role given to the Secretary of Health and Human Services, currently Kathleen Sebelius. The text of the Affordable Care Act says that the secretary shall define, determine, or create 1,697 things. New powers accruing to the Secretary include the ability to define specific benefits and regulate insurance options on the exchanges.

There are two lessons here. First, for Republicans: this is what happens when you adopt a complete rejectionist strategy instead of negotiating to improve the bill. Certainly many liberals were never interested in bipartisanship, but House Blue Dogs and Senate centrists like Baucus, Landrieu, Lieberman, Lincoln, and Nelson were dying for some bipartisan cover. Left to negotiate amongst themselves, Democrats came up with a bill that expands the discretionary powers of the presidency over the congress and the states. Presumably some authentic conservatives may have liked to avoid this situation. So next time, Republicans, try playing the game instead of taking your ball and going home.

Second, this may just push the Democrats to reform Senate procedure. As Prof. Bernstein has been saying since ACA passed, Republicans are likely to start blaming every single problem in the health care system on the newly-passed law, much like they blamed Obama and the stimulus for every economic problem after January 2009. That gives the administration and its party a large incentive to make sure the law is implemented as professionally as possible. The problem is that all the key figures for implementation (the Health Secretary, dozens of other sub- and assistant-secretaries, and the IPAB) are administration appointees, and the appointment process is broken. At this point in his presidency, Obama has had far fewer of his nominees approved by the Senate than his predecessor. Because of arcane Senate rules like unanimous consent and the anonymous hold, staffing up a modern administration turns out to be very, very difficult in a climate of partisan obstruction. The administration and the party have clearly been annoyed by this for a while, but the need to implement the ACA should give them an extra push to do something about the problem at the beginning of the next congress.

Taxes, exceptional trees, and government waste

April 15 is just around the corner — a mere 1 month away! — and that means it’s time to break out your abacus and legal dictionary, and start reading the fine print. I’m always amazed at how unnecessarily complicated the US’s income tax system is. One irate taxpayer compiled this funny list of all the various esoteric tax breaks in state tax codes across the country. My favorite is the Exceptional Trees Deduction in Hawaii, which applies to state tax form line 17:

Exceptional Trees Deduction: You may deduct up to $3,000 per exceptional tree for qualified expenditures you made during the taxable year to maintain the tree on your private property. The tree must be designated as an exceptional tree by the local county arborist advisory committee under chapter 58, HRS.

First, there’s the obvious question: what kind of tree is so exceptional it needs up to $3,000 in maintenance each year?

But more importantly, why on earth is this in the tax code in the first place? If the good people of the state of Hawaii decide that they want to incentivize private property owners to maintain and protect what must be some really awesome trees, cool. Apparently the state already has a system of local arborists, so why not have the arborist team up with the treasurer of the local government to cut people checks for taking care of their fabulous trees?

Because that would be evil, evil ‘government spending’, which is a big no-no in the modern political climate. So instead, we’ve turned to the tax code for a big chunk of our policy implementation. The end result is the same — more money in the hands of people who care for exceptional trees — but instead of directly spending the money by cutting a check, we use tax expenditures. We reduce the dendro-samaritan’s tax burden from what it normally would be and then necessarily keep everyone else’s taxes just slightly higher than they’d need to be, in order to pay for the original tax expenditure. And this is just one of a million other examples: mortgage write-offs, health care benefit write-offs, business investment write-offs, dependent write-offs, blind person write-offs, etc., etc., etc. .

I’m actually a fan of robust government, and I think it’s a net positive thing to incentivize people to do good things they wouldn’t otherwise do enough of, like investing and create new jobs, or providing health insurance to employees. But our myopic and infantile politics means that if we do this by cutting people checks, then we’re socialists. But if we do it through tax expenditures, we’re just good pragmatic capitalists.

When choosing between direct spending and tax expenditures, the net social effect is exactly the same. But which one we choose matters, because the result of our love of tax expenditures is a hodgepodge of refunds, exemptions, write-offs, exclusions, that even forces experts to use TurobTax when they file. Americans now spend a total of 6.6 billion hours and $194 billion every year just to file their taxes. Clearly it’s better for all those normal, non-exceptional-tree-owning, Hawaiian tax payers to not have to waste their time reading through the rules about Line 17 deductions, and to just have the local arborists cutting checks while everyone else gets on with their lives. But I wouldn’t hold my breath waiting for that socialist utopia.

“The greatest moral challenge of our day”?

I promise this is the last post on David Brooks — at least until the next one. Overall, I think his point in today’s column is worthwhile and pretty much correct. He argues that ideologues on the left and the right fundamentally misunderstand President Obama, and calls the president “still the most realistic and reasonable major player in Washington” and a pragmatic progressive. He concludes:

In a sensible country, people would see Obama as a president trying to define a modern brand of moderate progressivism. In a sensible country, Obama would be able to clearly define this project without fear of offending the people he needs to get legislation passed. But we don’t live in that country. We live in a country in which many people live in information cocoons in which they only talk to members of their own party and read blogs of their own sect. They come away with perceptions fundamentally at odds with reality, fundamentally misunderstanding the man in the Oval Office.

I think Brooks right. But in the course of being right on his overall point, he makes an error that is just plain weird. He says that “the $9.7 trillion in new debt being created this decade” is “the greatest moral challenge of our day.” Huh?

OK, if you own a lot of capital and are invested in T-bills, then I think there are rational reasons for you to be very, very worried about the national debt. It may even be your number one policy issue. No problem there. And if you’re young (like me), then you have every reason to be angry at how the system is set up such that we’ll be left holding the bag for the last 30 years of fiscal hypocrisy. I know I am. That means that dealing with the future debt crisis is high on my list of priorities.

But “greatest moral issue of the day”? Puh-leaze. Economic development, education, scientific progress, health, justice, security, happiness, freedom — aren’t these more likely candidates for “greatest moral issue of the day”? Sure, our unsustainable fiscal outlook makes addressing each of these things harder, but the only reason to care about the debt is because you care about the effects of the debt on other, real policy concerns. Otherwise, you’re just looking out for the parochial interests of bondholders as a defining “moral interest”. I have no problem with looking out for the parochial interest of bondholders, by the way. I just don’t pretend it’s a moral issue.

People need to stop turning “things I care about” into “great moral issues”.

Update: It seems to me that people are tempted to show their tough-nosed pragmatism and centrist tendencies by discussing the overriding importance of the deficit and the debt. I guess it makes other people think, “Wow, this person sure does think a lot about numbers and esoteric topics. I bet s/he is really smart, unlike those bleeding hearts who worry about things like peace, development, and happiness.” It’s a sort of fad contrarianism designed to signal intelligence, independence, and realism. But to me it seems utterly devoid of moral motivation and reads more like a political ploy than a declaration of principles. I’ll say it again: the only good reason to care about the debt is the devastating impact it is likely to have in the future on other things that matter.

David Brooks: *still* an alien

Brooks is back, and so is his misunderstanding (unintentional or otherwise) of American politics. In today’s column, David Brooks’ main argument is that Democrats are too emotional on the issue of health care reform and are therefore insufficiently committed to deficit and debt reduction. Here’s Brooks:

For the Democrats, expanding health care coverage is an emotional hot spot. … There is something morally impressive in the Democrats’ passion on this issue. At the same time, it’s interesting to compare it to their behavior on other issues in which they have no emotional investment.

Now I’d like to go point-by-point through the rest of Brooks’ argument and evaluate his claims. Quotations from the column will be indented block quotes. My responses will be normal text. It’s longer than my usual post, but Brooks’ argument is just that bad.

Continue reading ‘David Brooks: *still* an alien’


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This is a group blog. JSC5 currently writes from the US. JSC7 writes from behind the Great Firewall of China.

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