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Tax Credits = Government Spending

Bruce Bartlett explains why tax expenditures are just government spending in disguise. They have the same effect on the deficit as spending and should be treated as such. 

To see just how similar a refundable tax credit is to direct spending, imagine that instead of having the Defense Department pay $1 billion to Lockheed Martin for some spare parts for the Air Force, it instead gave it a $1 billion refundable tax credit that was tradable. If Lockheed Martin didn’t have at least a $1 billion federal tax liability, it could simply sell the unused portion to another company that did. Either way the company gets paid $1 billion and $1 billion worth of resources are extracted from the private sector for government’s use.

There’s not a tax expert on the left or the right who doesn’t recognize the illegitimacy, inefficiency and ineffectiveness of many tax expenditures. There is a desperate need to clean up the Tax Code, as Ronald Reagan and a Democratic Congress did in 1986. Unfortunately, Republicans now take the view that eliminating any tax expenditure constitutes a tax increase, and they oppose it because they oppose all tax increases for any reason.

If one wants to defend government promotion of a particular activity (or something like a military purchase), it should be defended on its own merits and in a cost/benefit analysis not some vague notion of wanting to have lower taxes or more tax breaks. The case for low marginal taxes and for promoting desirable behavior through the tax code are two different arguments. Until we can understand that we’ll continue to have a convoluted and inefficient tax code – and probably higher deficits too. 

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Dog Bites Man

March 19, 2010 Leave a comment

Bruce Bartlett shares results from a survey of Tea Partyers.  

In short, no matter how one slices the data, the Tea Party crowd appears to believe that federal taxes are very considerably higher than they actually are, whether referring to total taxes as a share of GDP or in terms of the taxes paid by a typical family. 

Tea Partyers also seem to have a very distorted view of the direction of federal taxes. They were asked whether they are higher, lower or the same as when Barack Obama was inaugurated last year. More than two-thirds thought that taxes are higher today, and only 4% thought they were lower; the rest said they are the same.

As noted earlier, federal taxes are very considerably lower by every measure since Obama became president.

Surprise! They don’t know much. Facts were never too suited to populism. Full Survey Here

Barlett on Ryan’s Budget

February 15, 2010 Leave a comment

At Forbes, Bruce Bartlett shares his thoughts on Paul Ryan’s budget. It seems that the major problem with Ryan’s budget according to Bartlett is its political infeasibility. I actually agree with that critique, but having a sitting politician offer a plan like this might push our other politicians to recognize the absolute necessity of reforming our entitlements. Bartlett is almost certainly correct that taxes have to rise at some point to deal with the coming fiscal reckoning – the Ryan plan is too idealistic on this issue.


Yet, I’d be curious if politicians and the media just pretended that it wasn’t impossible if something dramatic could happen. Why couldn’t a reform like this be structured so it didn’t affect voters close enough to retirement to care? Is the bill written like that now? Are that many people going to be against a similar plan to overhaul our entitlements (it doesn’t have to be the Ryan plan) if it doesn’t affect them? I’m naive. I know.

Sadly, it doesn’t seem that many are brave enough to get behind a plan like Ryan offers (despite what Krugman argues). Certainly the Tea Partyers are once again exposed as unserious about real governing and addicted the shallowest of platitudes.

In my opinion, support for the Ryan plan must be the minimum requirement for anyone who considers themselves members of the tea party brigade and any politician seeking its endorsement. If those like former Alaska governor Sarah Palin, the current darling of the tea party crowd, are unwilling to immediately and unequivocally endorse the Ryan plan or put forward something equally serious and comprehensive, then in my opinion they have no credibility on the budget and no right to oppose the sorts of tax increases that I believe are unavoidable.

Again, I’m pleased that a Republican has offered an earnest bill that can be criticized on its merits (not just the politics of it).

Workers would also likely see a sharp reduction in their health benefits as well because Ryan would abolish the tax exclusion for health insurance. In other words, workers would have to treat whatever their employer pays for health insurance as if it were cash income. Workers would instead receive a new tax credit not to exceed $5,700 per family. It is not clear whether the credit amount would be indexed to inflation. This provision would constitute a significant tax increase for many workers.

Keep the plans coming and maybe everyone will forget just long enough about the politics and actually govern as adults.

Stimulation Nation

December 4, 2009 Leave a comment

Andrew Sullivan alerts us to Bruce Bartlett’s new column in Forbes. He argues the stimulus package is working… and that the tax cuts were the least effective. In case you aren’t aware, Bruce Bartlett is a former Treasury Department and presidential advisor under Reagan.

The CBO also looked at the stimulative effect of various parts of the stimulus package. It found that purchases of goods and services by the federal government–such as for public works–had the largest bang for the buck, raising GDP by $2.50 for each $1 spent. Transfer payments had a lesser impact, but were still significantly more stimulative than tax cuts. Moreover, tax cuts of the sort favored by Republicans have the least impact. According to the CBO, tax cuts for low-income individuals raise GDP by as much as $1.70 for every $1 of revenue loss, while those for the rich and for corporations raised GDP by at most 50 cents for every $1 of revenue loss.

Lest one suspect the CBO of bias, private economists have also found that tax cuts are far less stimulative than spending under current economic conditions. Mark Zandi of Moody‘s (MCOnewspeople ) Economy.com, an advisor to John McCain last year, recently testified before the Joint Economic Committee of Congress that the Republicans’ favorite tax proposals–making all the Bush tax cuts permanent and cutting the corporate tax rate–would raise GDP by at most 37 cents for each $1 of revenue loss. By contrast, increased outlays for infrastructure, aid to state and local governments and extended unemployment benefits increase GDP by between $1.41 and $1.57 for every $1 spent.

If anyone is interested, I’m reading Bartlett’s new book The New American Economy which looks at all of these issues further.
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