Poll:Deficit Commission Recommendations

[Alan]

From what I read/heard.... in the UK the Prime Minister and the Cabinet make the budget... it is NOT voted on by the Parliment... so much easier to do what you want...

Now, if you do something that is so horrible... then they can have a vote of no confindence and 'collapse' the gvmt.... not exactly sure how this works.... just some of the things I heard when there.... Parlimentary gvmt is a lot different than what we have...

You are correct. However, a vote of no confidence is really only possible in a minority government, and there have only been one or 2 of those in the past 50 years and they never survive long. A minority government is possible in systems with more than 2 parties. At the last election no one party had more votes than all the other parties combined so it was possible for the Tories to form a minority government, but they knew that they could always be out-voted on contentious issues, and were vulnerable to a vote of no-confidence, so instead they formed a coalition with the Lib-Dems so that the government cannot be outed before the next election unless they have a great many defections.

 

[SunsetSail]

The problem is that we are talking REAL MONEY... sure, they did not 'spend' the money as it is defined... and in fact it does not even show up as spending on the Federal books...

So the $8K tax credit for buying a new house is not 'spending', but the $4K cash for clunkers is... but if I had bought a house, I would have $8K in my pocket... if I bought a new car with a clunker... I would not... I just would have paid less for the car...

So, which is spending and which is not

Definition of Spend: to use up or pay out. If the government pays for something it is spending. If the government reduces the tax base in some way it is revenue reduction.

The critical difference in the end result is that for spending the government must pay administrative costs to collect revenue, allocation dollars, etc. there are much fewer administrative costs for revenue reduction.

Reducing tax base exclusions, tax code simplifications, etc. are good and I support them, but not to the extent of calling them something they aren't.

 

[samclem]

So the $8K tax credit for buying a new house is not 'spending', but the $4K cash for clunkers is... but if I had bought a house, I would have $8K in my pocket... if I bought a new car with a clunker... I would not... I just would have paid less for the car...

How about this--The Program to Feed Indigent Orphans spent $2B in 2010, and according to the budget (Congress used to make them) was scheduled to spend $4B in 2011. When mean old Congressman X votes that the spending in 2011 should instead be $3B, did he cut the program by $1B, or did he add $1B to it? In most of our personal finances, when we increase spending over the previous year, we wouldn't say that we cut spending, only in DC did Congressman X vote to "slash spending" for feeding orphans. Your use of the word "spending" to include money that the government hasn't received yet is in accordance with this way of discussing taxes/spending.

 

[samclem]

The critical difference in the end result is that for spending the government must pay administrative costs to collect revenue, allocation dollars, etc. there are much fewer administrative costs for revenue reduction.

But here's another point: even revenue reductions (tax cuts) can have very big costs to the economy, well out of proportion to their dollar amount. They do this if they cause capital to be used in a way that does not produce the highest return. All kinds of special tax exemptions, loopholes, etc do this by pushing capital to favored government uses, or by driving up legal costs and compliance costs (requiring specialized corporate structures, trusts, etc). That's one reason it is so important to simplify the tax code. The other main reason is to make it understandable and transparent--people will willingly pay more taxes if they believe others are paying their share, too.

 

[SunsetSail]

But here's another point: even revenue reductions (tax cuts) can have very big costs to the economy, well out of proportion to their dollar amount. They do this if they cause capital to be used in a way that does not produce the highest return. All kinds of special tax exemptions, loopholes, etc do this by pushing capital to favored government uses, or by driving up legal costs and compliance costs (requiring specialized corporate structures, trusts, etc). That's one reason it is so important to simplify the tax code. The other main reason is to make it understandable and transparent--people will willingly pay more taxes if they believe others are paying their share, too.

I alluded to this in my last post regarding tax simplification and agree with you. In fact, I think you may even have understated the financial and social costs of the complexity of the tax code.

I will never willingly pay more taxes just because I believe others are paying their share. I pay what is required of me by law and not a penny more. I'm not going to argue with you on this as a generalization because I have no idea what other people would do.

None of this changes the bottom line that a spending subsidy of $X paid by the government will take $X plus $Y of revenue to fund while a tax exclusion will only take $X to fund and will be applied to the target party much faster.

 

[Gone4Good]

So the $8K tax credit for buying a new house is not 'spending', but the $4K cash for clunkers is... but if I had bought a house, I would have $8K in my pocket... if I bought a new car with a clunker... I would not... I just would have paid less for the car...

So, which is spending and which is not

This seems like a fair critique to me. One of the things illuminated by the deficit commission is the magnitude of "tax expenditures." I think the number is $1T annually.

In any real sense, a $1,000 refundable tax credit and a $1,000 transfer payment are exactly the same thing, only one is considered a tax cut and the other spending.

 

[SunsetSail]

In any real sense, a $1,000 refundable tax credit and a $1,000 transfer payment are exactly the same thing, only one is considered a tax cut and the other spending.

This statement couldn't be more wrong. A transfer payment requires the entire infrastructure of the government - IRS payroll, computer systems to collect the revenue, Treasury disbursement of the payment, the cost of the agency oversee the transfers, etc. An exclusion from the tax base requires none of this infrastructure. The rare situation of a refundable tax credit that exceeds total tax liability requires a very small portion of the infrastructure to process the refund.

How can anyone think these are exactly the same thing?

 

[samclem]

The rare situation of a refundable tax credit that exceeds total tax liability requires a very small portion of the infrastructure to process the refund.

For the record--there's nothing rare about a refundable tax credit exceeding total tax liability.

Link
This is from about 5 years ago.

Of the 42.5 million tax returns that pay no income taxes, roughly 53 percent received some form of a refundable credit—either the EITC or the child tax credit. In 2004, Uncle Sam paid out about $33 billion in “refundable” checks to the families and single individuals who qualified for the Earned Income Credit and another $9 billion to families who were eligible for the child credit.
Figure 2 demonstrates the effect that refundable credits have in not only erasing the income tax burden for the lowest-income Americans, but transferring income from wealthier taxpayers and, thereby, shifting the burden further up the income scale.
Figure 2. Effect of Refundable Tax Credits on the Distribution of the Income Tax Burden

 

[Gone4Good]

This statement couldn't be more wrong. A transfer payment requires the entire infrastructure of the government - IRS payroll, computer systems to collect the revenue, Treasury disbursement of the payment, the cost of the agency oversee the transfers, etc. An exclusion from the tax base requires none of this infrastructure. The rare situation of a refundable tax credit that exceeds total tax liability requires a very small portion of the infrastructure to process the refund.

How can anyone think these are exactly the same thing?

Um, a refundable tax credit requires most of those things. The IRS has to collect taxes, determine who's eligible for the credit, and return the money. Don't forget the billions in private sector compliance costs that multiply every time one of these new credits is added to our already ridiculous tax code.

But who cares? Your main point suffers from the misconception that our spending problems are mostly a matter of administrative overhead. That isn't true. The entire Federal payroll is only about 5% of the budget. And more than half of those employees are dedicated to Defense and The Postal Service. So even if tax credits were costless from an administrative perspective, which they're not, we'd be talking about the difference between a $1,025 transfer payment and a $1,000 tax credit, at the very high end. Big deal.

A better approximation for the cost of administering transfer programs is Social Security, whose admin expenses run just 0.9%

But since we're nit-picking irrelevancies, I'll amend my comments as follows . . .

In any real sense, a $1,000 refundable tax credit and a $1,000 transfer payment are [-]exactly[/-] essentially the same thing, only one is considered a tax cut and the other spending.

Feel better?

 

[Independent]

None of this changes the bottom line that a spending subsidy of $X paid by the government will take $X plus $Y of revenue to fund while a tax exclusion will only take $X to fund and will be applied to the target party much faster.

I don't see it that way. Suppose the federal government wants to encourage state governments to borrow money for public works. It can make bond interest tax exempt if the bonds meet certain criteria, or it can let the interest be taxable and send a check to the state government for xx% of the bond interest it pays. It's not clear to me that the second is more expensive to administer than the first. (In fact, the second seems easier because the first impacts thousands of tax returns, some of which will be audited.)

I also think that the second is cheaper overall from a tax perspective. Rational individuals will buy tax exempt bonds only if the taxes they save are > the interest they give up. So there must be a value for xx where the subsidy check from the federal gov't would be less than the lost federal taxes, and the check would also be greater than the states' interest savings in the first option.

[ Of course, I'd prefer that the federal government just stayed out of state borrowing entirely - drop the tax exemption and don't provide a subsidy.]