In a democracy it is the nature of government to promise benefits without paying for them. To accomplish this, they hide the costs in cross subsidies, mandates, proxies, regulations, tax codes, debt, and various forms of complexity. They are so successful that they hide the costs from themselves and thus become ignorant the costs of their own policy.
They use rhetoric to call expenses investments. Public education and public health are worthy objectives and one can make a case that it reduces other expenses in the future, but these future expenses are unquantifiable while the current expense is very real. This distinguishes policy from investment. An investment is a transaction entered voluntarily by individuals seeking a quantifiable if uncertain return.
You can assess the quality of an investment by the necessity of government force to make it function.
John Conchrane proposes that we separate the government funding portion of the budget from the social policy objectives:
Our economy is like a garden, but the garden is choked with weeds. Rather than look for some great new fertilizer to throw on it, why don’t we get down on our knees and pull up the weeds? At least we know weeding works! For another metaphor, our economy has become like a hoarder’s house. For a while he could get through the passages and keep life going, but now the junk is closing in. Well, rather than read the architectural magazines about just what the perfect house will look like, let’s get to work cleaning up the mess.
Second, our tax code mixes raising revenue with a host of special provisions designed to encourage specific activities and transfer income to specific groups or businesses. Objections come from those who what to preserve one or another subsidy, deduction, or exemption.
Third, our tax code mixes raising revenue with efforts to redistribute resources across income and various demographic classes.
The result is paralysis. The answer lies in separating the arguments. One could go so far as to separate the actual legislation.
First, we should discuss the structure of the tax code separately from the proper level of revenues. Let us agree that we will eliminate deductions and exemptions and have three brackets. Start with a revenue-neutral code. But agree that we can separately and much more frequently adjust the rates, which adjust the overall level of revenues.
Second, we should separate the tax code from the subsidy and redistribution code. Let us agree, the tax code serves to raise revenue at minimal distortion. All other economic policy goes into the subsidy code. And subsidies should be on-budget and explicit. So, you want a subsidy for home mortgage interest payments? Sure, let’s talk about it. But it will be an on-budget expense — we will send checks to home buyers if we do it. You want to give $7,500 to each purchaser of electric cars? Sure, let’s talk about it. But it will be an on-budget expense. We will send $7,500 checks to electric car purchasers if we do it.
If our society had only two citizens who each made $10,000 and the government needed $2,000 to provide its services, it is simple to tax each taxpayer 10% to fund the government. But if Citizen Bob justifies a deduction for building a house because of the employment the construction provides or importance of home ownership, and he thus pays $500 less in taxes, then Citizen Al will have to make up the difference.
Citizen Bob may justify a special historical tax credit because the project of renovating old buildings does not work with existing returns, but the dynamic persists. A reduction on Bob’s tax liability is an increase on Citizen Al.
Rather than voluntarily collecting funds from people willing and able to preserve old properties Bob uses lobbying and influence to get a break to make the investment work. He uses the force of government to force Al to help him.
Like Bastiat’s broken window fallacy, Bob will be able to point to the renovated historical buildings and see the visible result, but what he does not see is the investment that was not made by Al who had to pay more to cover Bob’s historical tax credit.
These various tax credits and deductions disproportionately benefit the wealthier members of society. According to Matthew Stewart in The Birth of the New Aristocracy (The Atlantic) :
Every year, the federal government doles out tax expenditures through deductions for retirement savings (worth $137 billion in 2013); employer-sponsored health plans ($250 billion); mortgage-interest payments ($70 billion); and, sweetest of all, income from watching the value of your home, stock portfolio, and private-equity partnerships grow ($161 billion). In total, federal tax expenditures exceeded $900 billion in 2013. That’s more than the cost of Medicare, more than the cost of Medicaid, more than the cost of all other federal safety-net programs put together. And—such is the beauty of the system—51 percent of those handouts went to the top quintile of earners, and 39 percent to the top decile.
When does the inability for me to make an investment financially feasible justify the right to make another taxpayer subsidize it?
Our tax system is plagued by this because of the principle of focused gains and dispersed costs. The immense gains the wealthy gain from the system justifies million-dollar salaries for lobbyists, but the relatively small cost per taxpayer makes politicians unwilling to sacrifice their scarce political capital to block these special interests.
“There are no solutions, only tradeoffs.” Could the tax credits granted to the wealthy for historical renovation serve us better if it was used to provide health care for the poor? Could it be better served invested in a productive enterprise innovating new products, generating economic growth and dividends which will provide additional tax revenue instead of less?
Every proponent insists they provide these special tax gifts to the wealthy for our own best interests. Each tax benefit is justified, but in its collective they can choke the garden with weeds.
“Each snowflake in an avalanche pleads not guilty.”- Stanislaw Jerzy Lec
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