Thanks for your response.

“This is a case of “begging the question”. The context of your query presupposes that the topical “concept” caused the budget surpluses of the Clinton years.”

I’m not implying it “caused” the surpluses but that it *contributed” to them and that when the legal mechanisms that operationalized the concept expired, their removel contributed to the return to deficit spending. This statement implicitly acknowledges that there were other variables at work.

“But it was easy to promote a balanced budget plank when revenue is skyrocketing.”

Yes, but Congress did not suspend the restrictions when the 1991-92 recession hit either. And it was allowed to end, and not renewed, in the boom times of the 2000s.

I agree with the rest of your post.

This is a case of “begging the question”. The context of your query presupposes that the topical “concept” caused the budget surpluses of the Clinton years.

I wasn’t a fan of Clinton at the time and my respect for his presidency has grown along with my appreciation for economics. But it was easy to promote a balanced budget plank when revenue is skyrocketing.

Spending as a % of revenue could be passed because it was relatively small but huge in terms of nominal dollars. And whoa did the Republicans laugh at Gore’s idea of a Social Security Lockbox. And whoa how they bring up Social Security’s finances as proof that a gov. run program will always fail. I get it.

But there was a lot more going on than just PAYGO that caused the budget surpluses.

My problem with Obama is that he falls into that same causal-relationship trap. The whole point of the Clinton economic plan, even Al Gore’s lock-box, was to pay down the debt during a period of economic expansion. SO when we have a period of economic contraction we will have surpluses and plenty of room under our debt ceiling which allow us to increase gov. spending.

It’s pure Larry Summers Keynesian theory and it’s brilliant. But the contract-with-America neo-con movement torpedoed the balanced budget amendment. The W. Bush years increased spending -MASSIVELY- throughout the second major period of economic expansion. and Now Obama, when an increase in gov. spending would actually help, is yielding to pressure to curtail it or to target it at the smallest number of people possible.

Krugman ran the math when he advocated a stimulus spending bill that called for 3 years of $800B spending each. Adding $2.4T to our national debt would amount to debt service fees of about 1% of our GDP. NOW is exactly the time we need to blow the debt up a bit, as long as we can have the resolve to pay it back down when the economy picks back up.

“So if the tax code used to be flat, then its current progressivity is a tax expenditure—but if it was never flat in the past, then its current progressivity is *not* a tax expenditure.”

I think the proper way to frame this statement so that it makes sense in terms of the concept of “tax expenditure” is…

“If the previous flat tax code is replaced by a progressive tax code that raises less revenue, then the progressive code is a tax expenditure-but if the code was never flat in the past is irrelevant because (1) the ‘flatness’ of the tax code has no bearing on whether there’s a tax expenditure, only whether there’s a loss of revenue and (2) “never… in the past” is irrelevant because only the immediate past tax code which is replaced can be the basis for calculating a tax expenditure.”

I hope this clears up the confusion.

“This strikes me as an extraordinarily useless concept.”

If it’s such a useless concept than how have balanced budget advocates used this concept so effectively (e.g., through devices like Gramm-Rudman) to drive us toward the budget surpluses of the Clinton years?

And how is it, now that those requirements to pay (through “offsets”) for all tax expenditures and spending proposals have expired, budget deficits have skyrocketed?

This has occurred during economic boom times when tax revenues were rising and *before” the current economic downturn drove deficits even higher.

Isn’t the implication of what you’re saying is that those budget balancers are deluded because the concept of “tax expenditure” is empty and “extraordinarily useless”?

Yes, of course it’s a useless concept… if anyone were arguing for this concept. I don’t know you that might be.

You: “So if the tax code used to be flat, then its current progressivity is a tax expenditure—but if it was never flat in the past, then its current progressivity is *not* a tax expenditure.”

I don’t know where you got the impression I said anything like this. Here’s what I *did* say:

Me: “The fact that the initial tax regime or the new tax regime is more or less progressive is irrelevant to whether it’s a tax expenditure.”

What *is* relevant is whether a “tax change (or a proposed one) … loses revenue from a previous (or current) baseline level…. “Tax expenditure” is never applied with respect to the potential to raise revenue by increasing a tax beyond a previous baseline or instituting an entirely new tax.”

Where is the source of our confusion?

So if the tax code used to be flat, then its current progressivity is a tax expenditure—but if it was never flat in the past, then its current progressivity is *not* a tax expenditure.

In other words, the *exact same policy* is or is not a tax expenditure depending on what policies were in place sometime in the past.

This strikes me as an extraordinarily useless concept.

I worked for years as majority staff director of the Senate Finance Committee, which has jurisdiction over all taxes and govt most expenditures in the Senate, and at senior levels in Treasury, and I can attest that, with a few unimportant quibbles, Jim’s description of how “tax expenditures” are defined and treated is on the money.

And I agree with Jim that there is an important logical difference between how you are defining tax expenditures and how it is universally defined in the world of policy making, including at CBO and Treasury.

Steve, in your example, a “tax expenditure” is involved only if the current progressivity of the tax system reflects a revenue loss compared with some previous tax policy. And the tax expenditures are only the specific provisions in the change that lost revenue. The fact that the initial tax regime or the new tax regime is more or less progressive is irrelevant to whether it’s a tax expenditure.

In other words, a tax expenditure is any tax change (or a proposed one) that loses revenue from a previous (or current) or baseline level. (I don’t know if there’s a “statute of limitations” on how far back you can go in setting the baseline, but typically it goes no further back than the Tax Reform Act of 1986.) Changing the tax back in the direction of the previous baseline partially or entirely eliminates that tax expenditure.

“Tax expenditure” is never applied with respect to the potential to raise revenue by increasing a tax beyond a previous baseline or instituting an entirely new tax.

So does the progressivity of the personal income tax count as a tax expenditure? Here we’re setting a top rate and then giving specially favored parties—i.e. those not in the top tax brackets—a partial exemption, which is equivalent to a cash beneift (compared to a baseline situation where everyone pays the same rate). How does that differ from any of your examples?

(Hat tip to FaTriplet3, who raised this question in the comments on Ezra Klein’s blog.)

I hope you’re pulling a Schwerbitz of your own here. Because if you aren’t, your disregard of basic facts — and plain truth — is appalling.

In no way, shape or form could those ever be considered tax expenditures.

And only the Congressional Budget Office can estimate the cost to taxpayers of not taxing taxpaying.

Not the Treasury? It’s been publishing an official tax expenditure budget since 1967. Amazingly, expenditures for not taxing birthdays and breathing aren’t included in it! Because there is no “logic” at all under which they could be.

There are also several CBO papers on the subject. If you took a look at a couple you might then present the true logic of it in a way that is a bit more fair and accurate, for the benefit of your readers.

“Look. It’s really important to distinguish between spending on the one hand and not-taxing on the other. Spending consumes resources, which are then unavailable to members of the next generation. Not-taxing doesn’t do that…”

This is just plain flat wrong, when you are “not taxing” through a tax expenditure. The economic and fiscal effects of cash expenditures and tax expenditures are identical.

With a tax expenditure, just like a cash expenditure, you start with a policy baseline and then give a specially favored party a cash benefit, paid for by taxpayers, that departs from it.

For instance, the lobbyists for Purple Gizmo Makers dole out money to politicians to get a cash subsidy of $X from the Treasury.

Result: The PGMers receive $X in a transfer from taxpayers. (The taxpayers incur this cost of $X because either they must pay that much immediately to finance the subsidy, or the $X will be added to the national debt — in which case they must pay the tax cost of servicing the interest on that increase in the debt, which discounts at present value to $X. )

But wait, there’s a snag. When people hear of the subsidy check about to be written out by the Treasury, they protest: “Why gizmo manufacturers, and not all manufacturers? Why only purple gizmo manufacturers, and not us patriotic red, white and blue gizmo manufacturers? Why this spending, hand out of money?”

So the politicians go back to the drawing board and instead enact a refundable tax credit for the purple gizmo manufacturers, equal to the exact same $X.

Result: The PGMers receive $X in a transfer from taxpayers. (The taxpayers incur this cost of $X because either they must pay that much immediately to finance the subsidy, or the $X will be added to the national debt — in which case they must pay the tax cost of servicing the interest on that increase in the debt, which discounts at present value to $X. )

Identical.

Except, not politically. For those who favor small government, the tax expenditure is worse because the politicians find it so much easier to use to expand their reach over the economy while transferring more of taxpayers’ dollars to favored interests.

The politicians stand up and say “Look how we cut taxes, we’re shrinking government! We’re just letting the PGMers keep their own money to strengthen American industry, with no spending, no hand out of money! (And you buy this line, we’ll do it again and again.)”

If some voters ask, “But if you are cutting taxes why are our taxes going up? And if you are shrinking government why is the national debt growing so fast?”…

The politicians reply: “Don’t take our word for it. Here’s the noted economist Professor Schwerbitz. He’ll tell you about how special tax breaks for favored parties reduce taxes! So obviously they reduce the size of government”

“But Professor Schwerbitz, if in the first case the Purple Gizmo lobby gets $X from us taxpayers, and in the second case the Purple Gizmo lobby gets $X from us taxpayers, what’s the difference?”

“Don’t you see the obvious: in the second case the Treasury doesn’t have to write a check!”

The classic Economics in One Lesson teaches that the important thing in economics is “the thing unseen”. When protectionist policies protect jobs that are seen, the jobs that go uncreated as a result are not seen.

Here, when the cash subsidy is replaced by a tax expenditure, they fact that a check isn’t sent by the Treasury is seen — but the fact that the exact same flow of money is still going to the special interest from taxpayers nonetheless, just as if the check had been written out, is unseen.

However, it is the job of economists to see the unseen — and the ones at Treasury and OMB do see this, which is why they’ve published a detailed tax expenditure budget since the 1960s.

Now here’s another point — it is a plain contradiction from what has been claimed repeatedly elsewhere to say it is even possible to “not tax”, by deciding to not tax something, unless a matching spending cut is enacted.

If it is true that the cost of government is spending, that taxes must equal spending (and it basically is true), then one simply can’t have a tax cut without cutting spending. The supposedly new “not taxing” is only a tax shift (again a thing unseen) that must increase general tax rates. Other people must pay the shifted tax amount either immediately or later as the national debt piles up.

This is identical to the situation with a same-sized cash expenditure. If one favored party gets a money benefit of $X from taxpayers, then taxpayers must pony up $X. QED. It doesn’t matter a whit whether the favored party gets the $X by cash payment or tax break.

And with everybody’s tax rate going up we meet again our friend, the deadweight cost of taxes, which rises not with the tax rate but by the square of the increase in the tax rate … a very costly thing for us all.

Every tax expenditure can be converted into an equivalent cash subsidy. If you wouldn’t support the cash subsidy you shouldn’t support the tax expenditure. Because the cost to you — and to the entire economy through the deadweight loss cost of taxes — is the same either way.

“Crazy as all this may sound, it’s not out of the mainstream. Deficit hawks often…”

In fact, among tax and budget professionals it’s entirely mainstream among hawks and doves and just plain old non-partisan professionals alike.

Yes there is. If expenditures were constant (as is implicitly assumed in this case), the tax burden previously borne by capital *must* shift to labor, either through a rate increase or through inflation. Inflation simply delays the day the bill comes due, and since capital is tax exempt, it all falls on labor.

“It’s likely we’d collect more total tax revenues if all we did was cut the corporate tax rate and did nothing else; other taxable things would happen in greater volume, so even a constant tax rate would collect higher revenues.”

This is a *very” big leap, like supply side economics on steroids. Can you cite me a source for this conclusion?

“I’m sure you know this, but I might as well state it. You can’t simply increase or decrease tax revenue from any particular group. All you can do is change the rate of taxation; the actual effect or revenue might be in the same or the opposite direction of the change in the rate.”

I don’t see how you can come to this conclusion. This would mean all those folks who make campaign contributions and pay lobbyists to get tax laws changed are deluded in thinking they’re reducing their tax burden when in fact they’re not.

And if you believed this, why do you prefer eliminating taxes on capital instead of on labor. Wouldn’t it all wash out.