Friday, February 24, 2012

Bartlett on Taxes: Two and a Half Footnotes

I join the general chorus of enthusiasm for Bruce Bartlett's new tour d'horizon  of the American tax system.   It's the kind of book in which most who read will enjoy the gratifying intuition that it tells them stuff they already knew.  They will be wrong: Bartlett is a master of his brief and he writes with a kind of Mozartian ease that deludes one into believing that everything is simpler or more obvious than one knew.Which is not to say he is simplistic: he just doe a grand job of seeming to simplify what is, after all, almost irredeemably complex.  But for the moment, let me follow up on just two (well: maybe two and a half) issues.

One: "tax expenditures."    If I tax you a dollar and then give you back the dollar as a benefit, I've done the sort of thing that governments do.  If I simply skipped the tax altogether I might achieved the same result. Welcome to the world of  "tax expenditures," first thrown into scrutiny a generation ago by the great Stanley Surrey.  Bartlett does a fine job of surveying the lush landscape of tax expenditures and making, along the way, the point that if (as we should) we count "tax expenditures" as "taxes," then we are actually taxed a whole lot more heavily than we suppose we are.

En route, he spotlights an absurd quotation from Utah Senator Orrin Hatch arguing that that money is really ours and don't even think of calling it a tax.    But Bartlett does not stop savor the irony here.  That is: you'd think a rugged, hairy-chested anti-Washington free marketeer  like Orrin Hatch would want to magnify, not minimize, the size of our tax bill ("worse than Denmark"--now there is a rallying cry).

Actually, though again Bartlett doesn't pursue it, I think there is a reason why Hatch doesn't follow his own logic.  That is: if we did pick any particular "tax expenditure" and turn it into a tax, there is just no way we would distribute the revenue the same way we took  it in (Surrey understood this in the 70s).  Take the mortgage interest deduction.  Suppose we decided we wanted to increase the subsidy for housing (good luck!); suppose we fund it by cancelling the interest deduction.  In order to mimic the deduction, we'd have to turn around and pay it to (a) mortgagors, (b) in exact proportion to what we had taken away, (c) i.e. most to the richest taxpayers with the biggest mortgages.   I don't think even a McConnell-Boehner Congress could sell that one. The point is that--even if we stuck with housing, we'd find some other way to redistribute the money.  So also with health care tax subsidies, with IRAs--indeed, with any tax expenditure you can imagine.

So in this sense, Hatch is on to something. If he tells us it's "our money" and he doesn't "the government" to get its hands on it, he means he is just fine with a policy that subvenes the prosperous and the highly leveraged. 

Second point: I know it is a bit rich to ask more from a book that covers so much but I wish he'd said more about tax incidence--who "ultimately" pays a tax: to who, and how (if at all) is it passed on. He does mention incidence when he suggests that the corporate income tax may be freighted forward to the workers. And he talks at length about the closely related issue of incentives--whether, to what extent and how taxpayers are motivated by rate change.  Maybe the defense is that incidence is just to squishy a subject: one on which everybody can spin out an argument and nobody's can be disproved.  Still, I'd love at least to know how much he believes that last statement of mine to be true.

A final half-point, perhaps little more than a cheap shot: I still don't think Bartlett has quite come to terms with his supply-side past.   He does quote derisively Tim Pawlenty and Mitch McConnell mouthing the supply-side mantra that tax cuts don't matter because the energetic and enterprising will just be motivated to work harder to as to make up the lost revenue (for a simple hypo showing why this is deeply implausible, go here).  He goes on to summarize the overwhelming evidence that tax cuts emphatically do nor pay for themselves (although taxpayer incentives very often do serve to recapture some of the "lost" revenue).  Bartlett says "this is not surprising given that no one in the Reagan administration ever claimed that his 1981 tax cut would pay for itself"--he calls it an "oft-repeated myth." On the narrow point, I suppose he has to be right; he's a careful and responsible writer and he wouldn't think about making stuff up here.

But the "myth" certainly endures (hello, governor P and senator M), and it didn't spring forth full blown like Athena from the brow of Zeus.   If i wasn't the administration itself, there certainly was a pack of running dogs around the administration who were perfectly happy to fuel the myth, and I really don't recall anybody inside the administration ever taking a podium to say "you know that supply side stuff? All bullshit.  Forget it."

But that's ancient history; I should give it a rest. This remains a superb book which amply deserves the attention it is getting.

No comments: