Subsidies - What Do You Think?

[bada bing]

I can't think of any economist (other than Laffer) who thinks we're currently at the peak or on the right side of the Laffer curve. The Chicago Booth school gets a diverse panel of economists to respond to questions like this.

http://www.igmchicago.org/surveys/tax-reform-2

Only 2% of them voted that the recent tax bill would raise GDP in the long run. "Raise enough that the tax receipts on the increase will more than offset the loss in revenue from lower rates" wasn't asked, but it's a higher bar to clear.

People who look at the incentives will differentiate between rates (which you mention) and targeted deductions in the "tax expenditures". We might argue that a lower rate would cause some workers to try to work harder, it's hard to see how eliminating the deduction for home mortgages or religious contributions would do that.

The Economist predictions for the tax cuts under Reagan were also nearly universally negative, and yet the result was much greater tax receipts. I wasn't old enough to be involved in the JFK economy, but the results are a matter of record. To be fair, the Reagan experience was also an inflection point in deficit spending which has continued mostly unabated since. It is too early to see what the result will be of the current tax cuts or if they will persist long enough to tell.

It isn't just incentives to work more that matter or even that that is the major effect. "Incentive to work" is a gross simplification of how taxes influence economic activity, sparing of private sector capital is the major mode . It wouldn't seem to matter how that money stays. Either a marginal rate cut or a top line deduction accomplish the same sparing effect. It would be more direct and simple to eliminate "tax expenditures" and just lower marginal rates to compensate.

It is interesting that the majority of this thread's content is about behaviors that "abuse" subsidies or avoid taxes and the idea that tax rates are a simple 1:1 ratio with receipts is still held.

The old adage of "You get more of what you subsidize and less of what you tax" is one of the most basic and powerful principles and important to repeat often.

 

[ERD50]

Two questions: Who decides which statistics are meaningless?
Who decides the problem is serious?
My assumption is the person who hears the statistics and gets the most/least benefit from either solving the problem or ignoring the problem.
I think we have 400 million different opinions on what is a problem and what statistics are fact.

I honestly don't understand what is so confusing about this.

Each of us can decide for ourselves what is 'serious' or not. That decision should be based on meaningful data. I gave an example - the misuse of the already wish-washy term "food insecure household".

I don't know what more I can say. Read it again if you have questions.

-ERD50

 

[ERD50]

I can't think of any economist (other than Laffer) who thinks we're currently at the peak or on the right side of the Laffer curve. ....

I've never heard Laffer comment on where we are on the curve, but address it only as a concept. I tried googling, but it's tough when the curve is named after him!

Do you have a source? I'm just curious.

-ERD50

 

[Rianne]

I honestly don't understand what is so confusing about this.

Each of us can decide for ourselves what is 'serious' or not. That decision should be based on meaningful data. I gave an example - the misuse of the already wish-washy term "food insecure household".

I don't know what more I can say. Read it again if you have questions.

-ERD50

Your wisdom is beyond comment.

 

[Independent]

I've never heard Laffer comment on where we are on the curve, but address it only as a concept. I tried googling, but it's tough when the curve is named after him!

Do you have a source? I'm just curious.

-ERD50

I was just vaguely remembering a couple pieces - one was on state level taxes. I think he was big on the Kansas tax cuts.
https://thinkprogress.org/trump-art-laffer-tax-cuts-kansas-7aa427240148/

I think he is still beating the tax cut drum. Here's a piece he wrote at heritage.org https://www.heritage.org/taxes/report/the-laffer-curve-past-present-and-future

 

[Independent]

The Economist predictions for the tax cuts under Reagan were also nearly universally negative, and yet the result was much greater tax receipts. I wasn't old enough to be involved in the JFK economy, but the results are a matter of record. To be fair, the Reagan experience was also an inflection point in deficit spending which has continued mostly unabated since. It is too early to see what the result will be of the current tax cuts or if they will persist long enough to tell.

It isn't just incentives to work more that matter or even that that is the major effect. "Incentive to work" is a gross simplification of how taxes influence economic activity, sparing of private sector capital is the major mode . It wouldn't seem to matter how that money stays. Either a marginal rate cut or a top line deduction accomplish the same sparing effect. It would be more direct and simple to eliminate "tax expenditures" and just lower marginal rates to compensate.

It is interesting that the majority of this thread's content is about behaviors that "abuse" subsidies or avoid taxes and the idea that tax rates are a simple 1:1 ratio with receipts is still held.

The old adage of "You get more of what you subsidize and less of what you tax" is one of the most basic and powerful principles and important to repeat often.

I should point out that this is all a tangent to this thread.

When I said I'd be happy to kill the mortgage interest deduction and the religious contribution deductions, I didn't mean that as a way to necessarily increase overall revenue. I'd be fine with using those cuts to reduce the basic rates. (Though, what assumes we're starting with a decent match of spending and taxes.)

-----------------

So, following the tangent. The Kennedy tax cut took the highest marginal rate from 90% to 70%. 90% may well be on the downhill side of the Laffer curve. We aren't there anymore.

Reagan's tax cuts were in the midst of a recession that was artificially engineered by the Fed to kill inflation. Once the Fed took its foot off the brake, the economy expanded. Then, OPEC lost its iron grip on oil prices, that was good for the US economy. And, Reagan signed a big tax increase a couple years later. Hard to parse all that into an impact of the tax cut by itself, the economists who answered the poll have given that more thought than I have.

The standard response to "tax cuts put more money in the private economy" is the "crowding out" syndrome. Unless the tax cuts are matched by cuts in gov't spending, each dollar of tax reduction is another dollar of gov't borrowing. So the gov't pulls money out of the private economy exactly as fast as tax cuts put it in.

 

[bada bing]

Yes it a tangent to the thread and probably gets close to a political redline. It also rapidly gets way above my pay grade although I find the topic interesting.

My main point, that is on topic (I hope), is that no reasonable economist will tell you that changing tax rates is 1:1 with tax receipts. Taxes and subsidies influence economic behavior. People will do what they can to avoid taxes and increased rates increase the incentive to avoid. Same the other direction with subsidies. If you offer more attractive subsidies you are going to encourage more applicants for those subsidies, even to the point of altering behavior to qualify. There are a lot of tragic life stories in urban housing projects that were facilitated by the unintended consequences of subsidies. There are a lot of young people with college loan balances that were inflated by the very availability of guaranteed loans. The connection between ethanol subsidies and starvation in Africa. A lot of unintended negative things can happen when theory meets practice in public policy and economics.

 

[athena53]

I was just vaguely remembering a couple pieces - one was on state level taxes. I think he [Laffer] was big on the Kansas tax cuts.
https://thinkprogress.org/trump-art-laffer-tax-cuts-kansas-7aa427240148/

And it's been a disaster. I've listened to podcasts on it (BBC or Freakonomics, forget which) and they pointed out that reducing the taxes that, say, a restaurant owner, pays, does not mean he/she will hire more waiters. They create more jobs when there's more business and the latter hasn't happened. It doesn't help that in the Kansas City area where I live, both states lure large companies across the state line with generous tax incentives.

The standard response to "tax cuts put more money in the private economy" is the "crowding out" syndrome. Unless the tax cuts are matched by cuts in gov't spending, each dollar of tax reduction is another dollar of gov't borrowing. So the gov't pulls money out of the private economy exactly as fast as tax cuts put it in.

This. Kansas is now claiming they don't have enough money to support the schools.

 

[razztazz]

The standard response to "tax cuts put more money in the private economy" is the "crowding out" syndrome. Unless the tax cuts are matched by cuts in gov't spending, each dollar of tax reduction is another dollar of gov't borrowing. So the gov't pulls money out of the private economy exactly as fast as tax cuts put it in.

Not only that but when the Gov spends money it gets into the economy. It does something. When you cut taxes the natural tendency is to return some of it but sequester as much as you can out of the economy. That's what "bottom line" means. You don't increase net worth with mere tax cuts by returning it all to the economy. The Gov never sends it to Swiss bank accounts.

 

[Independent]

Yes it a tangent to the thread and probably gets close to a political redline. It also rapidly gets way above my pay grade although I find the topic interesting.

My main point, that is on topic (I hope), is that no reasonable economist will tell you that changing tax rates is 1:1 with tax receipts. Taxes and subsidies influence economic behavior. People will do what they can to avoid taxes and increased rates increase the incentive to avoid. Same the other direction with subsidies. If you offer more attractive subsidies you are going to encourage more applicants for those subsidies, even to the point of altering behavior to qualify. There are a lot of tragic life stories in urban housing projects that were facilitated by the unintended consequences of subsidies. There are a lot of young people with college loan balances that were inflated by the very availability of guaranteed loans. The connection between ethanol subsidies and starvation in Africa. A lot of unintended negative things can happen when theory meets practice in public policy and economics.

I agree with this general idea. When I read your first post, I thought this was the direction you'd go, but then you seemed to veer off into a statement that the federal tax system is currently on the right side of the Laffer curve. That's what bothered me.

Yes, if we eliminate the religious contributions deduction we'll probably see some (I'd guess small) reduction in religious contributions. If we eliminate the mortgage interest deduction, higher income people are likely to buy smaller homes and some lower income people by decide to continue renting.

I don't see much secondary tax revenue effect. We could offset the primary effect by lowering the base tax rates. IMO, we'd have a "simpler", "fairer", and "less distorting" tax system if we did. But I'm not claiming any observable changes in GDP or other federal revenues.

(I thought you'd say something like if we estimate that the RC deduction is worth $R/yr, and the MI deduction is worth $M per year, we would not get $R+$M if we eliminated both. The primary reason is the interaction with the standard deduction. I'd agree with that statement.)

 

[morriss003]

Do you consider the Panama Canal, NASA, and interstate highway system to have been subsidized? How about the Erie Canal, the continental railroad, or Tennessee Valley Authority? Were the land grants in the Northwest Territories subsidies? Are government guaranties subsidies? Like those given to the builders of the Golden Gate Bridge or Hoover Dam?

Subsidies are hard to define and harder to control. It's hard enough if the population is a million. It's much harder if the population is 325 million.

 

[Independent]

Do you consider the Panama Canal, NASA, and interstate highway system to have been subsidized? How about the Erie Canal, the continental railroad, or Tennessee Valley Authority? Were the land grants in the Northwest Territories subsidies? Are government guaranties subsidies? Like those given to the builders of the Golden Gate Bridge or Hoover Dam?

Subsidies are hard to define and harder to control. It's hard enough if the population is a million. It's much harder if the population is 325 million.

The OP says ..

Let’s start with a definition: A subsidy is a form of financial aid or support extended to an economic sector (or institution, business, or individual) generally with the aim of promoting economic and social policy. (Wikipedia)

Yes, that is plenty vague. I don't get hung up on words. There are "subsidies" that I think are Good Public Policy and subsidies that I think are Bad Public Policy. The OP, for example, said that tax and lending policies subsidize home ownership, and he thinks that is Good Policy. I think the thread was about opinions on good vs. bad.

I think we use "subsidy" two ways.

1. The gov't makes some private activity more attractive than it would otherwise be. (the definition above)
I buy and keep the house as a private asset, but the gov't makes it easier. That's a "subsidy".
This usage distinguishes between interstates and railroads.
The railroads were privately owned by profit seeking firms, the gov't made building them more economically attractive. That'a a "subsidy".
OTOH, interstates are publicly owned and operated, available to everyone as a tax funded public good. So that is just "spending".

2. The gov't has a spending program, but some group gets a better tax/benefit ratio than some other group.
The OP mentions SS. Every worker pays the same tax, whether you are single or married, have kids or don't have kids. But, "traditional" married worker with a stay-at-home-parent for a spouse and children gets higher benefits than a single, childless person. In this case, the single group "subsidizes" the traditional married group.
If we pay for interstates with gasoline taxes, then it seems that people who drive low mileage cars "subsidize" those who drive high mileage cars. That seems okay to me.
OTOH, I've seen things that say trucks do much more damage to the highways than cars. So much more, that the ratio of (damage done)/(taxes paid) is much higher for trucks and for cars. So car owners "subsidize" truck owners. I don't like that subsidy.

Again, I'm not that hung up on exactly what policy should be labeled "subsidy". I'm more interested in which seem to promote the Greater Good.

 

[NW-Bound]

... Again, I'm not that hung up on exactly what policy should be labeled "subsidy". I'm more interested in which seem to promote the Greater Good.

Even then, there's never a consensus.

People who directly benefit from a narrowly targeted subsidy still claim that the rest of society will also benefit.

A past GM CEO has claimed, "What was good for the country was good for General Motors and vice versa.”

 

[Huston55]

The OP says ..



Yes, that is plenty vague. I don't get hung up on words. There are "subsidies" that I think are Good Public Policy and subsidies that I think are Bad Public Policy. The OP, for example, said that tax and lending policies subsidize home ownership, and he thinks that is Good Policy. I think the thread was about opinions on good vs. bad.

I think we use "subsidy" two ways.

1. The gov't makes some private activity more attractive than it would otherwise be. (the definition above)
I buy and keep the house as a private asset, but the gov't makes it easier. That's a "subsidy".
This usage distinguishes between interstates and railroads.
The railroads were privately owned by profit seeking firms, the gov't made building them more economically attractive. That'a a "subsidy".
OTOH, interstates are publicly owned and operated, available to everyone as a tax funded public good. So that is just "spending".

2. The gov't has a spending program, but some group gets a better tax/benefit ratio than some other group.
The OP mentions SS. Every worker pays the same tax, whether you are single or married, have kids or don't have kids. But, "traditional" married worker with a stay-at-home-parent for a spouse and children gets higher benefits than a single, childless person. In this case, the single group "subsidizes" the traditional married group.
If we pay for interstates with gasoline taxes, then it seems that people who drive low mileage cars "subsidize" those who drive high mileage cars. That seems okay to me.
OTOH, I've seen things that say trucks do much more damage to the highways than cars. So much more, that the ratio of (damage done)/(taxes paid) is much higher for trucks and for cars. So car owners "subsidize" truck owners. I don't like that subsidy.

Again, I'm not that hung up on exactly what policy should be labeled "subsidy". I'm more interested in which seem to promote the Greater Good.

This aligns with my thoughts in the OP. I was hoping to read others’ opinions on subsidies, the rationale for those opinions and, perhaps most importantly, the details/research/links to (hopefully) enlighten us on differing views.

I also share “Independent’s” view on the difference btwn a ‘Subsidy’ and ‘Govt Spending.’ My intent was to focus on the ‘Subsidy’ side of the discussion in this thread.

BTW, as a retired Civil Engineer, I can attest that trucks damage highways exponentially more than cars; and, proportionally, much more than the extra bit of tax/fees they pay.

 

[Independent]

BTW, as a retired Civil Engineer, I can attest that trucks damage highways exponentially more than cars; and, proportionally, much more than the extra bit of tax/fees they pay.

Thanks. I've seen that before (typically, road damage goes up by the third or fourth power of weight per axle), but I never had a chance to talk to an expert.

I'd also think there is a significant difference in original construction costs. If I were building roads and bridges, and knew they would only be used by vehicles under 5,000 pounds, designs would be cheaper.

 

[NW-Bound]

Plus one of them semi-trailers splashed gravel on the Alcan highway, which broke my RV windshield.

Seriously, without the trucks, we would not have the life standards we do. In the Yukon, a high percentage of the trucks I saw plying the Alcan were tanker trucks, carrying either fuel or propane. Without them, a lot of people would freeze to death.

 

[Mdlerth]

Oh what a tangled web we weave when we choose one to pay and one to receive

BTW, as a retired Civil Engineer, I can attest that trucks damage highways exponentially more than cars; and, proportionally, much more than the extra bit of tax/fees they pay.

Thanks. I've seen that before (typically, road damage goes up by the third or fourth power of weight per axle), but I never had a chance to talk to an expert.

I'd also think there is a significant difference in original construction costs. If I were building roads and bridges, and knew they would only be used by vehicles under 5,000 pounds, designs would be cheaper.

Plus one of them semi-trailers splashed gravel on the Alcan highway, which broke my RV windshield.

Seriously, without the trucks, we would not have the life standards we do. In the Yukon, a high percentage of the trucks I saw plying the Alcan were tanker trucks, carrying either fuel or propane. Without them, a lot of people would freeze to death.

Enlightening series of posts.

Let me summarize what I just read: Everybody who drives helps pay for constructing and maintaining roads. Heavy freight trucks wear it out faster, while bearing only a small fraction of the cost. Translation: freight on roads is subsidized.

Are there alternatives? Maybe if hauling by truck had to pay its "full freight" (another example of my clever wordplay which causes DW's eyes to roll), it might justify moving cargo off asphalt and putting it on trains, so that the highways last longer. However, first you'd have to build the rail lines, which cost roughly the same per mile, but in practice don't command support for subsidy because only railroad operators are seen to benefit. So the rails don't get built and the highways crumble.

I submit that road vs rail is a good example of the slippery slope greased by subsidies. And why it's always perilous to get into the subsidy business in the first place.

 

[Huston55]

Enlightening series of posts.

Let me summarize what I just read: Everybody who drives helps pay for constructing and maintaining roads. Heavy freight trucks wear it out faster, while bearing only a small fraction of the cost. Translation: freight on roads is subsidized.

Are there alternatives? Maybe if hauling by truck had to pay its "full freight" (another example of my clever wordplay which causes DW's eyes to roll), it might justify moving cargo off asphalt and putting it on trains, so that the highways last longer. However, first you'd have to build the rail lines, which cost roughly the same per mile, but in practice don't command support for subsidy because only railroad operators are seen to benefit. So the rails don't get built and the highways crumble.

I submit that road vs rail is a good example of the slippery slope greased by subsidies. And why it's always perilous to get into the subsidy business in the first place.

Actually, I didn’t make a judgment about transportation subsidies. I just stated that large trucks do most of the damage, which is factual. Also factual is that a smaller & smaller portion of highway/roadway costs is paid by “user fees”, with general taxes now making up a much larger portion than in the past. So, that means that, “Everybody [-]who drives[/-] helps pay for constructing and maintaining roads.”

In my posts on this thread summarizing & quantifying subsidies, I’ve noted that I don’t know the details regarding Transportion Subsidies. If you’re so inclined, posting the info for items #1-4 in the OP for Transportation Subsidies would be useful.

 

[Texas Proud]

One of the other problem with trucks is that a number of them are overweight... overweight trucks cause a lot more damage than one that is loaded properly...


One of the reasons they have weigh stations along the highway...

 

[Independent]

Seriously, without the trucks, we would not have the life standards we do. In the Yukon, a high percentage of the trucks I saw plying the Alcan were tanker trucks, carrying either fuel or propane. Without them, a lot of people would freeze to death.

Sure. And, without ____ we'd all be worse off. That doesn't mean the gov't needs to subsidize anything we might put in the blank.

If trucks had to pay their proportional share of the cost of building/maintaining highways, the rest of us would pay a little less. We'd also pay more for goods shipped by trucks. Trucking would not end, it would be a little more expensive.

Maybe a few more things would move by rail. Maybe a few more things would be produced closer to where they are consumed.

IMO, the general rule is that the price of a good should reflect the entire cost of producing it, including transportation.

 

[Just_Steve]

Sure. And, without ____ we'd all be worse off. That doesn't mean the gov't needs to subsidize anything we might put in the blank.

If trucks had to pay their proportional share of the cost of building/maintaining highways, the rest of us would pay a little less. We'd also pay more for goods shipped by trucks. Trucking would not end, it would be a little more expensive.

Maybe a few more things would move by rail. Maybe a few more things would be produced closer to where they are consumed.

IMO, the general rule is that the price of a good should reflect the entire cost of producing it, including transportation.

I assume you know that trucks pay taxes to each state according to how many miles driven in each state and if I'm not mistaken thats on top of fuel tax.

 

[VanWinkle]

I want to keep all the good subsidies I currently receive. Because I helped pay for them gosh darn it!

All those other subsidies that I don't currently get only go to lazy good-for-nothings and should be eliminated immediately. Until I qualify for those same benefits, at which point they should be immediately reinstated. Because I helped pay for them gosh darn it!

<this seems to summarize the mentality of most people>

+1 Great answer Fuego!!

 

[Independent]

I assume you know that trucks pay taxes to each state according to how many miles driven in each state and if I'm not mistaken thats on top of fuel tax.

No, I didn't know that. I tried Googling and got this. https://cdllife.com/2014/taxes-truck-drivers-pay/
And got just a few states that seem to have mileage taxes. The IFTA form seems to be about allocating miles and taxes properly between states. But, I could certainly be missing something.

I tried Wikipedia and got this: https://en.wikipedia.org/wiki/Fuel_taxes_in_the_United_States

Maybe you can point me at something better.

 

[Just_Steve]

No, I didn't know that. I tried Googling and got this. https://cdllife.com/2014/taxes-truck-drivers-pay/
And got just a few states that seem to have mileage taxes. The IFTA form seems to be about allocating miles and taxes properly between states. But, I could certainly be missing something.

I tried Wikipedia and got this: https://en.wikipedia.org/wiki/Fuel_taxes_in_the_United_States

Maybe you can point me at something better.

It appears you are correct about allocation of taxes, but each truck on the road files IRS 2290 and pays up $550 depending on weight in addition to fuel tax, not as much as I thought.

 

[Independent]

Yes, that's a tax specifically on trucks. If a truck travels 90,000 miles per year and gets 6 mpg, that's 15,000 gallons of fuel. Then $550 is the equivalent of 4 cents per gallon.

My comment on subsidies was based on reading that road damage varies with the third or fourth power of weight per axle. An ordinary car might put 2,000 pounds on each of it's two axles. A semi, 10,000 pounds on each of its five axles. Now (10,000/2,000)^3 = 125. So each truck axle seems to do as much damage as 125 car axles. Then, the truck has 2.5 times as many axles, so I'm at 300 times the damage per vehicle.

Trucks get poorer fuel mileage. Maybe a semi burns 4 times as much fuel per mile as a car. And, not all the costs of roads are repair/replacement. The original construction costs include land acquisition and rough grading, for example.

Still 300 >>> 4. It seems that anything remotely close to equal tax per gallon must result in a "subsidy" for the trucks.