Tax Subsidies Are Subsidies
Kevin Drum observes that “most people simply refuse to view tax breaks as the equivalent of federal subsidies.” It’s true and quite perverse. Ultimately the long-run level of taxation is determined by the level of federal spending, so simply creating some new tax deduction or tax credit doesn’t do anything to reduce the overall tax burden. Rather, it represents a shift of the tax burden and the creation of a new subsidy.
But people don’t look at it this way. If you said “we should create a federal program to give gold bars to people who own homes, and people with higher incomes or more expensive houses will get more gold” everyone would regard that as completely insane. Instead we have a tax deduction.
It’s not, however, just that these tax subsidies are real subsidies but that they also tend to be a really bad way of subsidizing things. If you want to subsidize something with a formal spending program, then you can target the spending at the truly needy or else hand it out to everyone. But with a tax deduction, you’re actually providing a larger subsidy to richer people while doing little or nothing for those facing economic hardship.
28 Responses to “Tax Subsidies Are Subsidies”
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November 10th, 2009 at 9:33 am
The idea is to influence how people with money spend it. Ideally, the taxes they displace should tend to be assumed by those in similar economic situations who do not avail themselves of the deduction. Tax deductions are not a bad tool per se, but how they are used should be re-eavaluated frequently. The behaviour they are supposed to promote may no longer be desirable, and the taxes they displace will tend to gravitate to the politically weak.
November 10th, 2009 at 9:40 am
Often, people don’t think of taxes as something the government does that it can pay for what it does. They think of taxes as something the government does to punish people. Less punishment is good for everyone. The right wing (”it’s your money, it’s not the government’s money”) furthers this confusion of taxes and fines.
November 10th, 2009 at 9:46 am
How we morally justify the decision to screw renters, subsidize churches and tithers, and help the rich get richer I’ll never know. It really is a disgusting violation of any attempt at fairness or decency.
November 10th, 2009 at 9:49 am
Yes its true Matty!
Big Bad Mean Selfish Americans have decided that when giving tax “breaks” or refunds or rebates that we would largely give them to the people who actually pay the damn taxes in the first place.
Of course we also decided to play Robin Hood so that we have things like the Earned Income Tax Credit and the 1001 other ways that we transfer money from the “haves” to the “have less”.
How dare we not recognize that all we have belongs to the state and its minions? How shameful that we refuse to show sufficient gratitude for the portion of our earnings we are allowed to retain.
The only problem with the “progressive” program of expanding the welfare state is that it is destroying our economy and our social contract.
Look at France. Or England. Or Germany. Hell, even Canada.
They are all coming to grips with reality and cutting back on their welfare statism.
Yet you busy your otherwise non-productive self by inventing new fatuous excuses for expanding our culture of dependence.
Oh but I forgot, you are a Leftie and so truth is a rather meaningless concept to you.
November 10th, 2009 at 9:51 am
Better-quality trolls, please. Yeesh.
November 10th, 2009 at 9:53 am
Interestingly, the home mortgage deduction seems to be a historical accident, an unintentional byproduct of another policy (the interest deduction, aimed at businesses), since discarded because of changing conditions. Here’s an article from 2006, outlining the sorry history:
http://www.nytimes.com/2006/03/05/magazine/305deduction.1.html?_r=2&oref=slogin
The mortgage interest deduction never promoted any socially useful activity; it just happened to be free money for a class of people who voted at higher-than-average rates, and that kind of subsidy is very hard to get rid of.
November 10th, 2009 at 9:57 am
Yes please tax my mortgage payments while billionaires continue to pay almost nothing. Please.
November 10th, 2009 at 10:22 am
The point is that we need to ignore the hissy fits about subsidizing X, Y, and Z. Pretty much everything is subsidized by the government in one way or another, and we need to just get over that fact.
The whole idea behind tax breaks is that they’re an equally efficient behavioral control as direct subsidies. There’s a mortgage tax break because we want people to buy houses, not because we’re wild and crazy policy-makers.
Then again, Cash for Clunkers shows the efficacy of direct subsidies. Hooray communism!
November 10th, 2009 at 10:22 am
damn, damn, damn… I hate it when I have to agree with whats written here but this time I do. ALthough I like all the tax deductions I get (and my church) I agree that they are unfair. Now, who has a plan that could actually make the tax code fair… didn’t think so
November 10th, 2009 at 10:27 am
Well, ‘tax subidies’ equaling tax breaks is nominally a better neologism than ‘tax expenditures’ equaling tax breaks
http://yglesias.thinkprogress.org/archives/2009/10/tax-expenditures-are-a-poor-way-of-subsidizing-infrastructure-investment.php
but it’s still the same semantic game that the ‘death tax’ people play, just on the other side of the ball.
You know darn well that it isn’t this simple – the specific intertemporal aspects of borrowing at any given time mean that all dollars are not created equal – it’s the entire justification for why the current deficits are no big deal.
That said, I’m all for simplifiying the tax code, but I would bet that the Democrats would be as much if not more to an obstacle than the Republicans. Although I disagree any of the variation of the plans (for instance I don’t have a problem with keeping progressive marginal tax rates) it’s only the Republicans that campaign on simplifying the tax code.
November 10th, 2009 at 10:31 am
Steve LaBonne wrote:
Steve, I think that the post at #4, “Rand Was Right About You!” was intended to mock people who truly believe in the Libertarian/Objectivist point of view and wasn’t really a sincere troll. But I agree that even on that level it wasn’t very good.
November 10th, 2009 at 10:33 am
Hihi, another very American aspect, the anti government rethoric has completly won over the vocabulary.Tax burden Really? How about some non netural term. Like just tax rate.
November 10th, 2009 at 10:34 am
Sorry for the troll food, but I have a tip for the Rand acolyte at number 4: Check your handbook. You’re supposed to believe in a flat tax or the fair tax or some other scheme that shifts the tax burden away from the rich. Tax breaks are for sissies who don’t understand the survival of the fittest world that we are supposed to live in. I’m sure that the fact that you can’t be rich if you don’t have middle class shoulders to stand on is lost on you. Cry me a freaking river about how you can’t afford your third house anymore because of a four percentage point increase in your marginal tax rate while we watch people suffer without health care and decent opportunities.
November 10th, 2009 at 10:39 am
Steve, I think that the post at #4, “Rand Was Right About You!” was intended to mock people who truly believe in the Libertarian/Objectivist point of view and wasn’t really a sincere troll.
No, not at all. It’s an actual troll that we’ve had for Matt’s whole time at Think Progress. The same guy who used to use “ObaLiar” and such in every sentence. You can tell it’s him because he hits return after every sentence.
November 10th, 2009 at 10:51 am
it’s only the Republicans that campaign on simplifying the tax code.
True, but when Republicans campaign on this what they’re actually talking about is huge tax cuts for the rich (by eliminating all marginal rates). They never talk about deductions at all.
I’d favor eliminating all deductions (especially the home mortgage deduction). This does get tricky, though. Some “deductions” are actually there to capture legitimate business expenses. Still it could be done. I’ve long been disgusted by Democrats (Bill Clinton was among the worst at this) tendency to try to hide social programs in the tax code.
November 10th, 2009 at 11:09 am
The mortgage interest deduction never promoted any socially useful activity; it just happened to be free money for a class of people who voted at higher-than-average rates, and that kind of subsidy is very hard to get rid of.
It is not even free money. If you remove these subsidies, then the prices of homes would go down (eventually; things are a tad sticky on the way down). The price of a house is determined by competitive bidding, and if you give everyone the exact same subsidy, they will use this money in their bidding to drive up price.
All the mortgage tax break does is allow you to compete with people who buy with cash. How often does that happen these days?
November 10th, 2009 at 11:19 am
The purest type of subsidy in the tax code is the refundable tax credit. The earned income tax credit is a good example. But an even better example is the cash for clunkers “rebate” and the $8,000 homebuyers credit. These are just welfare for middle class people. No one will admit it and would rather disguise it in the legitimacy of the tax code. If it is a “tax credit”, it can’t be a government handout, right?
November 10th, 2009 at 11:19 am
But with a tax deduction, you’re actually providing a larger subsidy to richer people while doing little or nothing for those facing economic hardship.
And you’re also increasing the complexity of the tax code, which in and of itself reduces prosperity by increasing costs, and probably has long term, pernicious effects with respect to compliance/tax avoidance, lack of faith in the system, etc.
November 10th, 2009 at 11:45 am
Well if we can’t eliminate the mortgage deduction (really a benefit not shared by the vast majority of people who rent as opposed to buy), we could gradually eliminate the deduction starting at say 500K and have it go totally away around 1000K. Anyone buying a million dollar home doesn’t need a tax write off. The amounts can be partially indexed for inflation so in 10 years, (if the housing market ever comes back) that middle class buyers aren’t caught in an AMT trap like they are now. Also, the deduction on second homes should totally go away. Each individual should get the mortgage deduction on only 1 home. A couple could conceivably own 2 homes, but each one would have to claim one as a primary residence, get mail there, vote there, etc.
November 10th, 2009 at 11:47 am
Don’t forget that in our country corporate spending for advertising is subsidized by a tax break. Don’t know when that started, after WW2?
November 10th, 2009 at 12:15 pm
Jay, the tendency of of local governments to use “fines” and “fees” is probably more responsible for that confusion than anything else.
Do you really care to explain to Americans why they should have to pay the court money when they win a criminal case? Sounds like punishment to me, no matter what the stated purpose is.
November 10th, 2009 at 12:55 pm
@Argus #9,
Well, here’s that plan: all income from any source except as mentioned below shall be taxed equally with three 8% progressive steps from 6% to a maximum of 30%. Everyone would pay from the first dollar above the personal exemption, and no deductions for charitable giving, home ownership, state income taxes and so on would be allowed. Personal exemptions would be reduced somewhat to reflect the elimination of itemized deductions but they would become refundable in order to replace the EITC.
Take the “cap” off of OASDI deductions at the same time in order to extend the life of the trust fund. Double the Medicare deduction for both the employer and employee to extend that trust fund.
These changes would mean that people at the top income bracket would pay 51% in total taxation instead of the current 42% (39% plus 3% for Medicare). The primary difference is that they would pay it on all sources of income except the narrowly defined capital gains described below. “Capital gains” on third-party securities transactions would be specifically excluded from the narrow definition.
However, in order to maintain a healthy investment climate income from actual investment in new productive capacity should be exempt. In other words, if a person invests money to expand the operations of a sole proprietorship or partnership or buys “treasury” or “IPO” shares in a corporation or bonds newly issued by one, thus increasing the actual capital base of the enterprise, any interest or profit from the sale of those capital certificates or the non-corporate business should be exempt.
Those are genuine “capital gains” because they have expanded the productive capacity of the economy. Everything else that happens on Wall Street is nothing more than speculation in already issued capital certificates of various forms.
The ongoing operating earnings of a non-corporate enterprise should not be exempt because they are a surrogate for the wages of the proprietor(s).
November 10th, 2009 at 1:08 pm
#22 Continued,
I forgot to address Schedule C. I would leave it pretty much unchanged except to limit Section 179 deductions for capital tools used by a sole proprietorship to once every specific period, based on the useful economic life of the asset. This is to ensure that the use of Section 179 is simply to capture actual depreciation rather than subsidize personal lifestyle.
So, if a computer has a useful life of three years the deduction could be used only once in any three year period. If a vehicle has a five year life, once in any five year period. And so on.
In order to allow for the expansion of a sole proprietorship business, actual depreciation on any additional vehicles or computers purchased during the waiting period would be applicable.
November 10th, 2009 at 1:22 pm
Wrong wrong wrong, like always.
It’s your money and if you can manage to keep it out of the hands of Yglesias, his Orcs and their demonic schemes, that is always a good thing.
What should be understood is that direct subsidies using someone else’s money like Social Security, Medicare, The Public Option and Military Spending are WELFARE and that the persons receiving them are Welfare Queens.
And that’s not “OK”.
November 10th, 2009 at 2:45 pm
While it is absolutely true that tax breaks on housing have provided a benefit to homeowners, the problem is that it provides a one off benefit to those who owned houses when it was created or increased and nothing to new home buyers.
The reason is that a new buyer will look at his income + tax benefits and figure out how much he can buy, he then bids for the best house he can.
This change in affordability increases the prices of houses to a percentage above what they would be without the tax benefit so that if I go out and buy a house now, I am overpaying compared to its natural price and I recoup that to a greater of lesser extent through my tax deductions.
Therefore, if you were to abolish it today, you would hurt current owners as affordability would decline as would house prices.
As with so much policy/legislation that has gone before, it was just a huge present that the people in power gave to themselves and their generation at the cost of future homeowners.
November 10th, 2009 at 3:36 pm
actually, that huge present is at the expense of future tax payers, not future homeowners
November 10th, 2009 at 9:47 pm
“Ultimately the long-run level of taxation is determined by the level of federal spending…”
False, false, false, false, false, false, false.
Totally false!
If you stop for even a moment to think about it you see that it is… false.
The US ran a $400+ billion deficit in 1945 (that’s constant dollars, nominally at the time it was less.)
Was that money borrowed from future taxpayers? Was it paid back at some point? No. It was never paid back. It will never be paid back. It doesn’t need to be paid back. It doesn’t work that way.
Matt, you are a smart guy. You or Ezra Klein or anybody could easily learn to understand this stuff if you would read some books about it.
Instead, you persist in propagating these weird myths, under the assumption (understandable, but wrong!) that US government debt is just like household debt.
It is impossible to borrow money from the future.
Say that again with me.
It is impossible to borrow money from the future.
A conception of the monetary system that includes the idea of borrowing money from “future generations” is necessarily wrong. It is impossible to borrow money from the future.
Please spend a moment thinking about this.
November 11th, 2009 at 12:34 pm
The Randian tax trolls in this thread have a tiny morsel of a point. In order for tax breaks to benefit a taxpayer directly, the taxpayer must be paying taxes. (Since most tax breaks aren’t refundable.) Generally speaking, those with higher incomes are paying higher tax rates. So it’s almost inevitable that tax breaks are going to provide a bigger benefit to those people with higher incomes. (It’s possible to structure a tax break that doesn’t, but we rarely do it.)
The problem that Kevin’s/MY’s posts identify ends up being a rather large public perception problem for those interested in having a progressive tax code. The most visible numbers in our tax code are the progressive steps of marginal rates, and Congress, pundits, and the public spend a lot of time wrangling over them. People get it in their heads that the IRS taxes the rich at 35%+ of their income, and poorer folks at 15% or less. And that degree of progressivity seems to be about what Americans seem willing to tolerate. (It varies – but Americans are generally less willing to tolerate the 50%+ brackets some other countries do.) By contrast, for the most part (aside from some phase-outs here and there) we don’t structure tax breaks to be progressive; we make them flat. In the context of progressive tax brackets, a tax break that is outwardly evenhanded seems fair, since everyone apparently can enjoy it equally. Thus, the fact that both the $250K couple and the $50K couple get an “equal” break from taxes on their health insurance and their mortgage interest seems perfectly fair.
The net effect of such “flat” breaks is actually regressive — it lowers a rich person’s taxes a lot more than a poor or middle class person’s. So the breaks remove a great deal of the progressivity we see in the basic income tax bracket system.
For the Randian tax trolls, this is actually a great situation. The outward progressivity of the basic tax brackets (from 35% down to 10%) gives them something to complain about, and in the meantime, the variety of tax breaks that disproportionately reduce the tax payments of the rich.