Tag Archives: government spending

Tax Expenditures – A Celebratory Post for CPA Liberation Day

In celebration of CPA Liberation Day I bring you a link to a column by two professors at the University of Pennsylvania's Wharton School about how we might think differently about tax deductions if we (properly) identified them as government spending:

Here’s a way to see through the fog. Instead of looking at all the breaks for mortgage interest, health care, retirement savings and so on as deductions, picture the government writing you a check for each item. This equivalence between tax deductions and government spending leads economists to call them “tax expenditures.” Reformers have hit on an even more pointed description: spending through the tax code.

The tax system is also equivalent to a collection of individual mandates, like the one in the Obama health-care law, with penalties for Americans who fail to buy insurance. For many people, that’s how our system works. You and your neighbor might have the same income, but if, unlike your neighbor, you fail to have a mortgage or buy as much health insurance, then you have to pay higher taxes…

Here’s our proposal: Let’s replace all tax expenditures with explicit subsidies — that is, with actual federal payments — so we can really see the costs and debate all spending programs on an equal footing. Doing so would help us answer crucial questions, such as whether we get more bang for our buck by subsidizing homeownership or by spending more on schools.

There’s one more payoff to getting rid of the myriad breaks hidden in our byzantine tax code: It will be a lot easier to get your taxes done before midnight.

Per Capita Tax Revenue Down, Down, Down – Who Cares?

When I was working in direct marketing we would spend weeks writing the sales copy for our letters and sales brochures. One thing we always looked at was how we would describe any discount we might be offering.  Say we were offering a 20% discount on a $1,000 item, we'd try and figure out which would have more impact, writing "You can save $200 by ordering right now" or "You can save 20% by ordering right now."  We didn't have a hard and fast rule, but generally the lower the dollar amount the more likely we were to use a percentage instead.  Saying you saved someone 30% is a whole lot better than saying you saved them $3 on a $10 purchase.

That memory hit me when I read this post on Tax.com by my go-to guy on taxes, David Cay Johnston:

We take you now to the official data for important news. Federal tax revenues in 2010 were much smaller than in 2000. Total individual income tax receipts fell 30 percent in real terms. Because the population kept growing, income taxes per capita plummeted.

Individual income taxes came to just $2,900 per capita in 2010, down 36 percent from more than $4,500 in 2000. Total income taxes and income taxes per capita declined even though the economy grew 16 percent overall and 6 percent per capita from 2000 through 2010.

Corporate income tax receipts fell 27 percent and declined 34 percent per capita, even though profits boomed, rising 60 percent.

Payroll taxes increased slightly overall, but slipped per capita because the nation's population grew five times faster than the number of people with any work. The average wage also declined slightly.

You read it here first. Lowered tax rates did not result in increased tax revenues as promised by politician after pundit after professional economist. And even though this harsh truth has been obvious from the official data for some time, the same politicians and pundits keep prevaricating. Some of them even say it is irrelevant that as a share of GDP, income tax revenues are at their lowest level since 1951, when Harry S. Truman was president.

So to compare this to my direct marketing work, in this case we have one side of the political aisle saying "Hey we cut taxes AND raised revenue" while on the other side they're saying "Whoa, we have more revenue only because we have more people and those people are paying a LOT less in taxes than they did 10 years ago."  My reaction?  So what!?

I know sometimes I sound like a broken record, but I really wish we could start arguing about the right things.  Instead of worrying about whether or not lower tax rates generate more tax revenue, let's worry about what we do with that tax revenue.  In other words it's totally irrelevant to me that the per capita tax rate is lower; what's relevant is that we're taking in less money per person BUT we haven't reduced how much we're spending on each person.  As I wrote in a previous post, we get caught up arguing about issues that really are irrelevant in and of themselves and lose sight of the big picture. In this particular case I think it's disingenuous of any leader to focus on how much our tax receipts have grown in the gross sense or shrunk in the per capita sense, without putting it into context by comparing it to a growth in expenses, both gross and per capita.  

To be fair, as Johnston points out later in his post, it's not that politicians aren't also talking about government spending – he highlights several conservative leaders saying that we don't have a revenue problem, we have a spending problem – it's just that we continually get bombarded with arguments like this one about tax revenues that really don't make a hill of beans of difference in and of themselves. Johnston concludes his post by saying it is a revenue problem, but between those two points he also writes that there's a need to figure out what we need our government to do and how we should pay for it. I'm going to disagree with both sides and say what I think is pretty obvious: it's a revenue and a spending problem. 

So if you made me king for a day what would I do? I'd mandate that we all agree that the real questions that need to be answered are:

  • What's the proper scope of government services for our society? Should it just be the basics like fire, public safety, defense of our borders, etc. or should it include healthcare, retirement, etc? 
  • Once we determine the proper scope of our government how should we finance it? Flat tax of 10% on everyone but those living under the poverty line and with zero deductions, a progressive tax structure, or a VAT?

That's it. Simple, huh?  Yeah and if you believe that I have a bridge in Brooklyn I'll sell you.  Honestly I can't think of a tougher nut to crack than determining the role of government in our society, and how much that should cost us.  Everyone has their own ideas, and everyone has their government program that they think is essential.  For every person who thinks we simply can't live without the FDA there's probably someone who thinks the FDA is just another example of over-regulation.  So no it's not a simple problem, but getting distracted by silly arguments over how we measure revenue only makes it worse.