Yes, It Really Is This Easy

The New York Times invites you to eliminate the federal deficit by picking and choosing among 16 options. I agree with Arnold Kling and David Henderson about the takeaway message: It’s really really easy to cut the deficit to zero without raising taxes. And that’s without even eliminating any agencies.

Moreover, the Bowles-Simpson proposals include dozens of additional specific recommendations that are not listed on the Times site. So cutting spending is even easier than the Times makes it appear.

If you want to raise taxes, the Times offers some very good ideas, like reducing the tax break for employer-provided health insurance, though a far better idea would be to eliminate the tax break for employer-provided health insurance. It also offers some very bad ideas, like raising capital gains taxes and limiting the mortgage interest deduction. A good idea would be to reduce the taxes on capital and interest to zero.

You can also opt for a national sales tax, an option I’d select if I could be assured of a corresponding reduction in the income tax. But as a practical matter, I’m afraid that more sources of revenue mean more revenue for the government.

But again—the site shows that you can easily get to zero without raising any taxes, and the Bowles/Simpson document shows that it’s even easier than it looks in the Times.

Meanwhile, Paul Krugman links to a CBS survey showing that only 4% of the population chooses “Budget Deficit/National Debt” as their top priority from a list of “problems the Congress should address” — a list of options that does not include government spending! If you asked me to rank the problems Congress should address, in order of priority, spending would be number one and the budget deficit would probably not make the top 25. The fact that nobody is focused on the deficit seems to me to be a hopeful indication of economic literacy. The fact that nobody chooses spending when spending is not listed among the options tells us — exactly nothing.

Share/Save

29 Responses to “Yes, It Really Is This Easy”


  1. 1 1 Nick

    Did anyone else wonder why cutting wages by 5% has a better effect on the budget than firing 10% of federal employees??

    I didn’t really think about it too much but this seems very strange.

  2. 2 2 John Faben

    Nick, just off the top of my head, presumably its harder to fire people who earn more. On other words, you wouldn’t be cutting loose a random ten per cent.

  3. 3 3 wintercow20

    Do you think eliminating the mortgage interest deduction would be a poor choice because of the wealth transfer from current to prospective home owners? Or perhaps because of the expected impact on home prices (don’t we want them to fall)? Or is it because the mortgage interest deduction allows entrepreneurs to finance projects out of their own capital more cheaply? Something else?

  4. 4 4 Steve Landsburg

    Wintercow20: I oppose all taxes on capital income. Mortgage interest is taxable income for the mortgage holder. The mortgage interest deduction undoes that tax. (That is, the tax on the lender plus the deduction for the borrower is economically equivalent to no tax at all.)

  5. 5 5 ryan yin

    If I’m reading it right, http://tinyurl.com/24prcpe , it looks like they’re not so much balancing the budget as reducing the deficit to 3% of GDP.

    That said, I was way over for 2030 (maybe 2.2% of GDP?), so I’m guessing that’s pretty do-able too if you added a couple things not currently on the menu

  6. 6 6 Harold

    It is a pity the Bowles Simpson Proposals do not share your view of the importance of the budget deficit. It is the second point in the first slide (Overview), and then crops up in points 1, 2 and 10 of the Guiding Principles and Values. It seems that they think it very important, or are using it as a smokescreen to sell their ideas, much as Krugman as alleged.

    I am sure some of these are not quite as easy as ticking a box. $136 billion by closing tax loopholes? If it were that easy, wouldn’t this already have happened? And is getting rid of earmarks so easy? It seems that should have gone a long time ago.

    You get most of the way there with costs of Iraq, a carbon tax and a bank tax.

    We can save $11 billion by creating new committees: “Create a Cut-and-Invest Committee charged with trimming waste and targeting investment $11b”.

    I am not suggesting we stop thinking of ways to sort out the system just because it is hard, but I supect the hardest bit is political rather than economic.

  7. 7 7 ryan yin

    I noticed they’re scoring the health insurance tax break as “reduce spending” rather than “increase taxes.” (I guess it’s a sort of Zen question — if we give you a subsidy for something, is that a tax cut or spending increase? Does your answer depend on if we send you the check along with your income tax refund?)

  8. 8 8 Pat

    Steve,

    “I oppose all taxes on capital income. Mortgage interest is taxable income for the mortgage holder. The mortgage interest deduction undoes that tax. (That is, the tax on the lender plus the deduction for the borrower is economically equivalent to no tax at all.)”

    Thank you so much for making that comment. That never occurred to me – quite an “aha” moment for me. Very important insight.

  9. 9 9 Doug

    @Steve L.

    As I understand your position you oppose taxes on investment (capital gains/interest) because of the deadweight loss on those taxes (i.e. punishers savers and rewards consumers). I totally agree with this sentiment.

    However given that we take a tax on interest as a given, isn’t it a lot more economically distortional to give a tax exemption for one investment class and normally tax everything else? Taking it as a given that the minimum economic distortion would come from not taxing any interest, if we’re going to tax some interest isn’t it better to tax all of it at a uniform rate?

    -Doug

  10. 10 10 Coupon Clipper

    What Pat & Doug said. By this reasoning, we should exempt credit card debt. (Not that I have a problem with that.)

    It’s important to note that a lot of times, mortgage interest is *not* deductible b/c of the standard deduction and b/c of AMT issues. So maybe we need to make it easier to deduct mortgage interest.

  11. 11 11 Al V.

    After trying the tool, I agree that it really is that easy to cut the deficit. I was able to do so without touching defense spending, other than reducing the troop levels in the Middle East. Of course, I made major cuts in Medicare and Social Security by raising the retirement age and means testing benefits. However, the lesson for me was that this can be done without raising taxes, or by raising taxes in only limited ways – for example, by raising the FICA maximum.

    I hope the Times is capturing people’s choices on the back end to aggregate and report on the selections people make.

  12. 12 12 RJ

    I managed a 25% savings from tax increase and 75% from spending cuts. Since I’m anti SS and further waste on medicare I took extreme measures on both. I figured if I could keep taxes as low as possible this would help increase real GDP to compensate for any political complaints my plan would have (lol!) The only tax increases I did were returning the estate tax to Clinton era levels and allowing the tax cuts for those with income above 250K to expire (I’m guessing their MPC would be low, in which case the income wouldn’t be spent or invested.)

  13. 13 13 Alan Wexelblat

    Steve, despite your explanatory note above I am not clear why you favor removing the tax advantaged status of mortgage interest payments.

    I understand that you favor the elimination of all taxes on interest income. “Mortgage interest is taxable income for the mortgage holder” is true, but it’s not clear to me why you think I should get a benefit for providing that income. Let me try an example to help me understand.

    I pay $1000 in mortgage payment this month and $500 of that is principle on the loan and $500 is interest. By your previous columns I know that you believe the lender should pay tax on $500 of that (the principle) and no tax on the other $500. But how does that relate to the tax break I am given for the $500?

    If we assume that the tax amount paid by the lender is the same as I would have paid had I not gotten this deduction then you’re right it nets to zero – but that seems to be an argument in favor of your position that interest should be tax-free. We can say that in effect the lender is paying some tax for me, via this subsidy mechanism, but to the degree that the tax break for mortgage interest payments goes up, we are creating an ever-larger subsidy for me. And I don’t see how you favor that.

  14. 14 14 Zack

    Steve – could you please link to your “solution” (from the NYTimes site)? I’m very interested in what specific cuts you choose – I love your blog, mainly BECAUSE while we think about problems in similar ways but often reach different conclusions. Thanks.

  15. 15 15 David Wallin

    Alan Wexelblat,

    My gut levels, too, has been that I am subsidizing others with the mortgage interest deduction (since I no longer have a mortgage). But, I keep coming up with the solution that I’m better off buying no or a cheaper house unless capital gains taxes apply to non-house, but not house, investments. Seems counter-intuitive, I’ll double check.

    BTW, I assume you meant that neither party pays taxes on return of the principal. The question is taxes on the interest, which the lender does pay now. Lenders would, of course, demand on higher interest rates for home loans because of this. So, homeowners pay higher mortgage interest in the current regime than SLs desired one with no tax on the lender’s interest received. Thus, the mortgage tax deduction partially offsets that.

  16. 16 16 Michael

    I have an economics professor that claims that the deficit really doesn’t matter because the government can always print money to cover it. He also claims the money supply is effected by prices, not the other way around. Is there any validity in this arguement?

    (May I also mention that he is a Post Keynesian)

  17. 17 17 Coupon Clipper

    Michael, is your prof Randall Wray? Yes, he is correct. See my blog for some simple explanations of how fiat money works.

  18. 18 18 Steve Landsburg

    Alan Wexelblat:

    Suppose that I am making mortgage interest payments of (say) $500 a month to you.

    Now let’s start taxing your interest income. This will lower the supply of loans and lead to a higher interest rate. Instead of paying $500 a month, I pay (say) $540 a month, of which you keep (say) $440 a month after taxes. (I am making these numbers up for illustration, but any other plausible numbers would do just as well.)

    Now let’s give me a mortgage interest deduction. This will increase the demand for loans and lead to a still higher interest rate. Instead of paying $540 a month, I’m paying $600 a month, of which you keep $500 after taxes. So the mortgage interest deduction cancels the tax on interest, and leaves you right back where you started. (At the same time, I’m paying $600 a month, but getting a mortgage interest deduction worth $100 a month, so I’m also right back where I started.

    Wait a minute now. You started off getting $500 a month. The tax on interest lowered your (after-tax) interest income to $440 a month. The mortgage interest deduction raised your (after-tax) income right back to $500 a month. How did I know that the two effects exactly canceled? How did I know that the mortgage interest deduction didn’t raise your (after-tax) interest income up to, say, $490 a month, or $510?

    Answer: the fact that these two effects exactly cancel is the first non-trivial proposition that gets proved in most intermediate-level economic theory classes. The proof fits easily on a blackboard, but I’m not sure I can fit it in a blog comment.

  19. 19 19 Steve Landsburg

    Michael:

    I have an economics professor that claims that the deficit really doesn’t matter because the government can always print money to cover it.

    True in exactly the same sense that your household deficit doesn’t matter because you can always put it on your credit card.

  20. 20 20 Jeffrey

    >Did anyone else wonder why cutting wages by 5% has a better effect on the budget than firing 10% of federal employees??

    I have two guesses, but neither one really explains the data.

    First, the plan is to hire two people every time three leave. So it won’t be complete until 30% of employees leave service (and they are replaced by 20% for a 10% reduction.) I don’t know how long this will take, but it would not be done by 2015.

    Second, the money saved is money that would be paid to *new hires*. New hires make a lot less than average.

    But if either of these is what’s going on, in the long run, a workforce cut of 10% should approach twice the effect of a 5% pay cut. I have no idea why the 5% pay cut seems to beat the 10% workforce reduction in 2030 by about the same ratio as in 2015.

  21. 21 21 Michael

    Coupon clipper,

    It’s actually not Randall Wray but he has mentioned him many times and I believe they are even friends. I can’t say that I buy the argument specifically because we’ve had examples throughout history where it doesn’t hold true (Latin America and Germany).

    Steve,

    Yes i agree but what I understand from Post Keynesians is that this argument does not hold true specifically because a federal government’s budget is not like a household budget. I found this which might clarify the point: http://www.newdeal20.org/2010/02/10/the-federal-budget-is-not-like-a-household-budget-heres-why-8230/

  22. 22 22 Alan Wexelblat

    Steve – thank you for that, I think I may be further along to understanding. I won’t require a large proof but will allow a stipulation that the two effects cancel. Is the conclusion then that because these effects cancel you support the individual deduction? That is, the individual deduction is a way to accomplish your larger goal of removing all taxation on interest income?

    And by implication if the government removed that taxation would you then support removing my individual tax deduction for paying that interest?

  23. 23 23 Steve Landsburg

    Alan Wexelblat:

    Is the conclusion then that because these effects cancel you support the individual deduction? That is, the individual deduction is a way to accomplish your larger goal of removing all taxation on interest income?

    And by implication if the government removed that taxation would you then support removing my individual tax deduction for paying that interest?

    Yes, yes and yes.

  24. 24 24 Steve Landsburg

    Alan Wexelblat: Let me be a little more precise about that final “yes”.

    If we get rid of the tax on interest income, mortgage rates will fall. That’s good for homebuyers. If we get rid of the mortgage interest deduction, mortgage rates will rise. That’s bad for homebuyers. By the argument that’s too big to fit in a blog comment, these two effects cancel. So the combination of policies ends up having no impact on the homebuyer.

    However, *existing homeowners* (as opposed to new homebuyers), who negotiated their mortgage arrangements under the old system, would feel only the bad effect and not the good. So there’s a perfectly good case for grandfathering existing homeowners into the mortgage deduction.

  25. 25 25 eyesay

    Professor Landsburg, with all due respect, I don’t think this criticism of yours is very reasonable:

    Meanwhile, Paul Krugman links to a CBS survey showing that only 4% of the population chooses “Budget Deficit/National Debt” as their top priority from a list of “problems the Congress should address” — a list of options that does not include government spending!

    Krugman has a valid point. The CBS survey included a question: Of all the problems facing this country today, which one do you most want the new Congress to concentrate on first when it begins in January?
    Economy and Jobs
    Health Care
    Budget Deficit/National Debt
    Immigration
    Education
    War/Iraq/Afghanistan
    Taxes/IRS
    Other
    DK/NA

    That’s a pretty reasonable list. It could be criticized for not having items like
    Global Warming/Environmental Protection
    Investigating and Punishing Those Responsible for the BP Gulf Disaster and Making Future Such Disasters Less Likely
    Drug Policy
    Don’t Ask Don’t Tell
    Same-Sex Marriage/Defense of Marriage
    as all of these are topics that our nation is grappling with. But presumably they weren’t given as options by the pollsters because very few Americans now believe that any of them should be the number one priority of the 112th Congress in January.

    I know, you are passionate about cutting government spending, most people who think that cutting government spending should be the number one focus of Congress, think so because they are concerned about the deficit or national debt, and would choose that item. And only 4% chose that item, which supports the theory that CBS was right not to list cutting government spending as a separate item. It may be that a lot of people would have chosen cutting government spending one of their top five issues for Congress, but most people aren’t placing it or its proxy as number one.

    I agree with Krugman and not with you that in the short term, cutting spending would be harmful. Even if a majority of Americans disagree with Krugman and believe that we need to cut government spending, I don’t think very many people think this should be the number one focus of Congress in January, and Krugman’s point is well taken.

  26. 26 26 Jeff Semel

    Steve Landsburg:

    Answer: the fact that these two effects [mortgage interest income tax and deduction] exactly cancel is the first non-trivial proposition that gets proved in most intermediate-level economic theory classes.

    Do the effects still exactly cancel if mortgage lenders are (on average) in a higher income tax bracket than borrowers?

  27. 27 27 Steve Landsburg

    eyesay:

    I don’t think very many people think this should be the number one focus of Congress

    But of course you’re just guessing, since the survey didn’t give people the chance to express this opinion.

  28. 28 28 Steve Landsburg

    Jeff Semel:

    Do the effects still exactly cancel if mortgage lenders are (on average) in a higher income tax bracket than borrowers?

    No.

  29. 29 29 Nick

    eyesay, I agree.

    I believe that most of the population (without MA Econ. or above) who believe in cutting gov’t spending would’ve selected budget deficit/national debt, seeing the two options as being effectively the same.

  1. 1 Tweets that mention Yes, It Really Is This Easy at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics -- Topsy.com
  2. 2 Keep the Mortgage Interest Deduction at Steven Landsburg | The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics, and Physics
  3. 3 Quote Of The Day at Hispanic Pundit
Comments are currently closed.