Jon Stewart's Fake News on Tax Expenditures

By :: May 11th, 2011

Dear Jon,

The Daily Show is my favorite TV show.  I think you’re the smartest policy analyst on television.  (Okay, as you prove time after time, that’s a really low bar, but, seriously, you're brilliant.)

Last month, however, your satire missed the mark.  You had a lot of fun with President Obama’s pledge to make “spending reductions in the tax code”:

What???  The tax code isn’t where we spend.  It’s where we collect. … You managed to talk about a tax hike as a spending reduction.  Can we afford that and the royalty checks you’ll have to send to George Orwell?

Jon, meet me at camera 3.

I know you say it’s fake news, but when you riff on policy, people take you seriously.  And, with respect, in this case, you don’t know what the hell you’re talking about.

For 40 years, tax geeks like me have been trying to explain that there’s a boatload of spending programs masquerading as tax cuts, and they're multiplying.  Their number increased by almost 60 percent between 1987 and 2007.

The fact that pols can claim credit for "tax cuts" (good) rather than "spending" (bad) has made them irresistible to legislators of both parties. Never mind that the IRS doesn't have the budget or expertise to effectively administer a couple hundred spending programs (sorry, tax cuts) or that many of them make no sense.  The tax code's cluttered with this junk.

Finally we get the president of the United States to acknowledge this and you drill him a new one.

You don’t believe there’s spending in the tax code???  Here's a real life example:  the chicken-s**t tax credit.  Really, section 45 of the Internal Revenue Code.  You can look it up.  The late Senator Roth of Delaware (home of lots of chickens and “poultry manure,” as it’s euphemistically called) put this little goody into our tax laws.  Here’s the backstory:  the EPA said that enormous chicken farms could no longer put their poultry waste in pools or bury it because it poisoned the ground water.  One of the best options to meet the new requirement was to dry the vile effluent and burn it to make electricity, but that was still costly.  Roth didn’t want chicken farmer profits to plummet or chicken and egg prices to rise just because farmers couldn’t use the earth as a giant toilet, so he pushed through the chicken s**t tax credit to create a profitable market for that (as well as all sorts of other crap).

There are lots of chicken s**t tax subsidies.  The mortgage interest deduction is basically a housing voucher for rich people.  Those who really need help get bupkes.  The tax-free health insurance you get at work is heavily subsidized by the tax code, but those with low incomes rarely get health coverage and, if they do, the subsidy is worth little or nothing.  The ethanol tax credit is a farm price support program  that is literally starving people.

It’s spending, Jon.  Often really dumb spending.  And when we’re talking about cutting food stamps, nutrition programs for mothers and infants, and environmental protections to save money, those spending programs in the tax code should be on the table too.

Tax subsidies add up to more than $1 trillion per year.  That’s not chump change, but, until recently, it’s been off limits in any bipartisan budget negotiations in Congress because Republicans have been unwilling to consider anything that might be labeled a tax increase.

But there's a glimmer of hope.  The president, his bipartisan debt commission, the bipartisan Domenici-Rivlin task force  that I served on, and even Paul Ryan want to slash tax subsidies.  Arch-conservative Oklahoma Senator Tom Coburn, leader of the bipartisan “gang of six,” has said that he’d support tax increases so long as they didn’t include rate increases.  That is, he wants to rein in subsidy programs run by the IRS.

This is important.  Coburn was willing to take on Grover Norquist, who has very effectively prevented any sensible compromise on the budget by insisting that cutting tax subsidies would violate the taxpayer protection pledge that he strong-armed most Republicans to sign.  Now Grover can use your laugh line to reinforce Republican intransigence and doom any chance of bipartisan cooperation.

In all seriousness, Jon, this is not helpful.

With respect,

Len Burman

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Len Burman is the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School of Syracuse University, an affiliated scholar at the Urban Institute, and a cofounder and former director of the Tax Policy Center.

21Comments

  1. Sid F  ::  9:56 am on May 11th, 2011:

    Well, a couple of points.

    1. “Now Grover can use your laugh line to reinforce Republican intransigence and doom any chance of bipartisan cooperation.” Not to worry, there was no chance of bi-partisan cooperation to begin with. That dimmer of hope you see is a mirage.

    2. The Supreme Court says tax expenditures are not expenditures.. See

    ARIZONA CHRISTIAN SCHOOL TUITION ORGANIZA-TION v. WINN ET AL.
    CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
    No. 09–987. Argued November 3, 2010—Decided April 4, 2011*

    “In contrast, a tax credit allows dissenting taxpayers to use their own funds in accordance with their own consciences. Here, the STO tax credit does not “extrac[t] and spen[d]” a conscientious dissenter’s funds in service of an establish- ment, 392 U. S., at 106, or “ ‘force a citizen to contribute’ ” to a sectar- ian organization, id., at 103″

    Who are we to believe, people who are highly educated and experienced with respect to legal matters and the tax code and economics of taxation, or the Supreme Court

    3. Even those of us fanatically devoted to free speech are ready to draw the line at criticism of Jon Stewart.

    Seriously though, your points are good ones, but it is a mystery to many of us why anyone would expect to see a bi-partisan tax reform package that included increased revenues pass the Congress.

  2. AMTbuff  ::  12:58 pm on May 11th, 2011:

    Len, on the substance, my opinion lies between you and Stewart. I believe that a narrowly targeted tax benefit is similar to spending, whereas a broad-scope benefit is similar to a rate reduction.

    Unless I missed something, the main reason to use the term “tax expenditure” is to count removal of tax breaks dollar for dollar as equivalent to reductions in government outlays. Taxpayers who have to send more dollars to the IRS simply are not going to see it that way. They will not accept a hypothetical no-deduction tax code, a code which has never existed, as the legitimate baseline from which to measure tax expenditures. Neither would they accept a baseline in which the government takes 100% of all income, making everything left over a tax expenditure.

    This debate centers on what is a reasonable baseline. The only two baselines widely accepted today are current policy and current law. (They differ from each other due to sunsets and other chicanery.)

    Len, you and other wonks have missed the important practical challenge that a pure baseline does not exist and has never existed. In the public’s mind, the baseline is what they paid last year. More tax than that is a tax increase. If advocates want to count “tax expenditures” as fully equivalent to spending, they need to set out a proposed baseline and convince the public that it is superior to current policy, which is the only baseline the public knows.

    My opinion would never win public approval due to its complexity, but I see most tax breaks as a mix of rate reduction and spending equivalent. I would classify the personal exemption a rate reduction and most narrow refundable credits as spending. In between these extremes I would count removal of a tax break as partly rate increase and partly spending reduction. One could argue endlessly about the correct fractional split for each tax break.

    For example, the exclusion for employer-provided health insurance is inequitable, but is it spending? That particular provision benefits most taxpayers, and the benefit tends to flatten out at higher incomes. It’s very much like a tax rate cut for the many or a penalty for the fewer. Revoking that break and pocketing the extra revenue will never be seen as anything other than a tax increase. Pocketing 20% of the extra revenue and using the other 80% to reduce rates might be seen by the public as legitimate revision of the baseline rather than as an excuse for a revenue grab.

    I fully agree that if the public wants to increase revenues, revoking tax breaks that do not improve horizontal equity is the best place to start. Agreement on this issue does not require agreement on the “tax expenditure” labeling for mass-market tax breaks. However I believe that the public will only agree to large revenue increases after spending has been cut dramatically and those cuts have been fully felt. Governments at all levels have no remaining credibility to claim that disaster will ensue if revenues do not increase.

    The recession has affected the private sector much more heavily than the public sector. The public sector is in no position to claim poverty until major salary reductions, layoffs, and benefit cuts occur, including drastic means testing of government-funded health and pension benefits as other countries have done. A bond market crisis will force all this and more, so politicians should not pretend that they can prevent deep spending cuts or major tax increases.

    Once the public can agree on the proper scope of government, then and only then will it make sense to close the gap with new revenue. Adding more revenue without flattening the spending curve enables further dithering on this crucial issue. Band-aid “solutions” are a dereliction of our duty to put the country on a sustainable course.

  3. Paul Johnson  ::  1:37 pm on May 11th, 2011:

    Len,

    I’m glad someone is monitoring the “fake news” outlets. Today’s youth is bright, but also entertainment-oriented, and probably gets much of it’s information from shows like these.

    Paul

  4. AMTbuff  ::  3:06 pm on May 11th, 2011:

    There is a difference of perspective operating here.

    To a pure economist, tax breaks are equivalent to spending to the extent that they influence behavior. From that perspective it doesn’t matter whether the behavior is influenced by direct subsidy or by tax breaks.

    To a taxpayer, removing a mass-market tax break for something they are in the habit of doing would be a tax increase. Taxpayers are not going to look at this the way economists do. Ain’t gonna happen.

    The only way to align these two different perspectives is to establish a credible baseline tax code free of provisions that do not improve horizontal equity. That can be accomplished in a revenue-neutral way at first, then the rates can be increased to the extent that the public agrees that more revenue is needed.

    Incidentally, I still contend that most tax breaks do not influence behavior as much as direct spending would, for reasons including the inscrutability of the tax code. I believe that most tax breaks are only partially equivalent to spending, and that counting removal of $1 of tax breaks as $1 of spending reduction is incorrect.

    Also, if we consider every tax expenditure as the equivalent of spending, does that mean that the federal government is now spending 30% of GDP rather than a mere 25%? Or, if we choose a baseline of 100% confiscation of income, is the government now spending 100% of GDP?

  5. rationalrevolution  ::  4:25 pm on May 11th, 2011:

    @AMTbuff

    No. There is ABSOLUTELY no difference between a “tax credit” and a spending program, NONE AT ALL, other than how its administered.

    Here is what makes that clear. Suppose that instead of having a “tax credit” for mortgage interest, the government instead removed that tax credit and had a voucher program, where you sent in your mortgage interest receipt to the government and they mailed you a check for the exact same amount of what you currently claim as a “tax credit”.

    EVERYONE would call this a spending program and they would be really angry when they saw the government giving huge checks to millionaires to cover the interest on their mansions, while giving no aid to renters and only small checks to middle class and poor folks.

    But the program would be EXACTLY THE SAME. The same net effect exists. In one case the government sends you a bill and everyone pays exactly what’s on the bill, in addition you send in a receipt and the government mails you back a check. In the other case the government sends you a bill, but then subtracts what you owe them from the bill based on the amount of your receipt.

    The exact same money is changing hands, that’s the point, THE EXACT SAME MONEY is changing hands!

    The GOP is saying that the method of accounting completely changes the money, that what is considered a debit in one case gets turned into a 0 all because of the method of accounting.

    Their claim is that you can take a $2 trillion debit and call it a 0 just because you let people subtract that money from the bill instead of sending them a check.

    It’s total hogwash of course!

  6. AhDuh  ::  5:03 pm on May 11th, 2011:

    It’s fine for some taxpayersnot to look at this the way they do. Taxpayers, and people in general, tend to ignore all sorts of things that might inconveniently disparage their own version of reality.

    Taxpayers have the right to believe they’re not spending but there are a whole lot of people out there that believe there is no connection between a budget deficit and any measure that has the effect of reducing revenue. Taxpayers denying the connection have every right to do so but it doesn’t make the view any less batsh*t insane. Especially in light of the fact that if you reduce your revenue without equal reductions in spending, it results in ‘actual’ spending…in the form of debt service and interest.

    So while the batsh*t taxpayers get to sleep at night thinking spending is getting cut and taxes are getting cut (or at least staying the same) and somehow in the end it’ll all even out and freedom or whatever…foregoing revenue, for whatever reason has very real consequences on the budget.

  7. Jim Tucker  ::  5:29 pm on May 11th, 2011:

    No, a credit is not spending. I don’t know how many times it has to be said. You can’t spend what you never collect. A credit is not spending. It is taxes not collected. You have to go to school a good long time and drink lots of post modernist cool-aid to think otherwise.

    Why not extend the reasoning to its logical conclusion? The act of NOT taxing me is IN FACT a SPENDING exercise such that the government is responsible for the purchases of every single person in the US. Of course, individuals make bad spending decisions so that justifies taking all income so that all government spending can be controlled by… the government.

  8. rationalrevolution  ::  6:18 pm on May 11th, 2011:

    So, if the government lets you deduct from the bill that you owe them its not spending on their part, but if they gave you a voucher for that exact same amount instead it would be….. riiiighhhtt

    Govt gives you a bill, the bill is $5,000. You pay the bill in full. Then you send in a separate form and apply for a subsidy payment and the govt sends you back a check for $1,000.

    You call this spending.

    Govt gives you a bill, the bill is $5,000, and when you pay the bill you supply a form that allows you to deduct $1,000 from what you owe, so you send a check for $4,000 instead of $5,000.

    You say this isn’t spending.

    It’s the same damned thing…

  9. AMTbuff  ::  6:33 pm on May 11th, 2011:

    Federal spending, as conventionally measured, is 3.83 trillion dollars, equal to 25% of GDP. Revenues are historically about 18% of GDP.

    If we accept the argument that the 1 trillion in tax expenditures is fully equivalent to spending and should be included in a new and improved measurement of spending, the federal government is actually spending a staggering 31.5% of GDP. Regulatory costs and state and local expenditures increase the total to something over 40% of GDP.

    If we accept this argument, we are supposed to celebrate when the tax breaks are removed and revenues increase by 6.5% of GDP, balancing the federal budget at 25% of GDP. I doubt the public will buy into this plan.

    Some economists have responded to the “tax expenditure” concept by defining “regulatory expenditures”. Cutting regulations can be seen by experts (although again, not by the public) as equivalent to cutting taxes. Would conservatives trade $1 trillion of reduced regulation for $1 trillion of higher taxes? I doubt it.

    All these theoretical arguments are interesting but irrelevant to the public. These arguments are used only as tools toward political ends. The fundamental problem is that the public has not decided on the scope of government it wants to pay for. Once that is decided, agreeing on a tax structure will be child’s play by comparison.

  10. AMTbuff  ::  6:43 pm on May 11th, 2011:

    If the government makes this arrangement with one person, it’s spending. If the government makes this arrangement with every person, it’s a tax reduction. Think about it for a minute or so before you read the rest of my post.

    If you prefer, a tax break for everyone is the kind of spending nobody wants to cut: It benefits everyone and stopping it would take money away from everyone.

    This is why I say that mass market tax breaks are more similar to rate reduction than they are to spending. The scope of the tax break matters.

    Economists seem to have trouble with this because their mathematics on this issue is linear. If you assume a fixed baseline that excludes a tax break, the economists are right. However a broad-scope tax break changes the baseline. That’s why the conventional linear mathematics fails.

  11. rationalrevolution  ::  6:51 pm on May 11th, 2011:

    By definition, there are no tax deductions that apply to every single person, that wouldn’t be a deduction, that would just be a reduced rate.

    Name a tax deduction that 100% of the population receives?

    I’ll just go ahead and grant you that one, if there is a “tax credit” that is received by 100% of tax payers, then that’s “not spending”.

    Moving on…

  12. Brian  ::  7:20 pm on May 11th, 2011:

    Every tax credit or deduction comes with some condition for receiving it. Once the government applies conditions to your retention of property, it has appropriated the property.

    Tax credits and deductions have the same effect as conventional government spending. It is a distinction without a difference.

    I wouldn’t characterize the personal exemption as spending because it applies to any income and any taxpayer, but every other tax credit or deduction is the same as spending.

  13. AMTbuff  ::  7:29 pm on May 11th, 2011:

    We agree that a tax break given to one person is spending and that a tax break given to 100% of taxpayers is a rate reduction. In between these extremes a tax break is partly spending and partly rate reduction. Agreed?

    People who use the term “tax expenditure” argue that every tax break is 100% equivalent to spending. That’s not correct, as we just saw. Each tax break needs to be evaluated separately.

  14. Michael Bindner  ::  7:59 pm on May 11th, 2011:

    Len, I still wouldn’t use tax expenditure reform to lower rates. As part of introducing consumption taxes, I would eliminate some of the reforms for the wealthy to increase a consolidated Child Tax Credit. More children means more workers, taxpayers and consumers – and that is the only way to really save Social Security and Medicare/Senior Medicaid in the long run.

    I know that people smell blood in the water because the GOP needs to compromise to forestall having all deficit reduction come from the expiration of the Bush/Obama tax cuts (which is automatic if gridlock rules) – however there is a value to higher tax rates on the wealthy – as these would take the incentive out of the continued reduction in worker pay and benefits which began with Reagan and accellerated under George W. Bush.

    The only tax benefits which should be used for deficit reduction are letting capital gains and dividend rates go up to normal income. Cash disbursements from inherited income being taxed that way (in exchange for dropping the death tax) would also be a nice change.

    Finally, gutting the home mortgage deduction would be seen as an attack on the housing industry (even if it does not affect the behavior of most wealthy vacation home or McMansion buyers). Increasing the child tax credit would arguably lead families to either seek better housing or even expand family size because they can now afford more living space.

  15. Michael Bindner  ::  8:04 pm on May 11th, 2011:

    I know one thing – they want Medicare to be the same as it is now. If what you say is true about agreeing on a tax structure being child’s play, then please join me in advocating for a Net Business Receipts Tax to replace some income taxes and the HI payroll tax (or just increase the payroll tax and income taxes to cover the shortfall). Just increase them enough to pay down the debt as well.

  16. Michael Bindner  ::  8:06 pm on May 11th, 2011:

    Before we do tax reform, we should let the Bush/Obama cuts expire – then use that level as a baseline.

  17. Len  ::  10:40 pm on May 11th, 2011:

    Thanks for all the comments. 16 may be a personal best. :-)

    Jim Tucker, As an economist, the difference is hard to see: you can often design a tax credit that has virtually the same effect on prices, resource allocation, economic incentives, and the the budget constraints of households and firms as a spending program. (Princeton Economist–and Republican political appointee at Treasury–David Bradford used to joke that you could design a weapons supply tax credit that would allow the Pentagon to zero out its procurement budget). Often, the only practical difference is that the IRS does not have the resources to properly monitor the program. You can say that the difference in packaging is important on a philosophical level, but the effect on the size and scope of government, its interference with private markets, and budget deficits, is the same. If you favor small, limited government, why would you give tax expenditures a pass.

    Howard had an excellent post on this yesterday, suggesting (with tongue firmly in cheek) that we can solve the budget problem by paying medicare providers with tax credits. (I think I made a similar suggestion on Taxvox a while back.) Jim, would you be cool with that? If not, why not? It’s a tax cut.

    To take a real world example, the low-income housing credit is modeled after old HUD housing supply programs. (I know, because I worked on its design in 1985 and 1986.) However, investors are paid with tax credits from the IRS rather than cash from HUD. The mechanism worked well (at least for the investors) until the subprime meltdown and recession created large tax losses for a lot of low-income housing investors. Tax credits became much less attractive. Congress passed a law that temporarily (in 2009) allowed state housing agencies to allocate cash grants rather than credits if they were having trouble getting people to buy into the tax credit program. All the other rules stayed the same. The estimated cost of the temporary outlay was $3 billion. In 2010, the program turned back into a tax credit. Did it magically transform from a spending program into a tax cut at the stroke of midnight? I don’t think so.

    AMTbuff, I understand well the baseline problem. You can look at some of my articles on tax expenditures posted on the TPC site if you’d like to see a discussion. The fact that you can’t measure them perfectly is certainly no reason to ignore them. You mentioned regulation, which can often be tantamount to a tax, and is also hard to measure. (See, e.g., health insurance mandates, to pick a recent example.)

    Sid, Bob Williams summarized the Supreme Court decision nicely. Ruth Bader Ginsburg, writing for the minority, got her analysis just right. Suggesting that 4 out of 9 supreme court justices understand the concept of tax expenditures. (I think you attributed cynical motives for at least two of those in the majority unrelated to the merits of the tax expenditure argument.)

    Cheers,

    Len

  18. rationalrevolution  ::  9:39 am on May 12th, 2011:

    Well, look at it this way. If all tax expenditures were converted into regular payment programs, exactly what you just said would be true.

    In other words, if we eliminated 100% of tax credits, but made it possible to get the same reimbursements by filing a separate form and getting a check back from the government for the same amount, revenues would increase to about 24% of GDP and spending would be at 31.5% of GDP.

    So… you tell me…

  19. Jim Tucker  ::  11:28 am on May 12th, 2011:

    I think the answer to the medicare providers question ( paying medicare providers with tax credits; “would you be cool with that? If not, why not?) is found in your HUD housing example (“Congress passed a law that temporarily (in 2009) allowed state housing agencies to allocate cash grants rather than credits”). If tax credits and tax spending really were the same, this would not have been neccessary. For the record: I don’t want to give tax credits a “pass.” I would want them reviewed and many eliminated. But thats a political problem where the many have no interest and the few who are benefied by the any given credit vociferoulsy lobby etc. etc.

    Peace.

  20. SteveinCH  ::  8:02 am on May 14th, 2011:

    Still peddling the GOP has to compromise line eh Michael?

    There is simply zero chance of rates going up on the “middle class” in a Presidential election year. So the a new law will need to be passed in 2012. Can you imagine the Presidential election campaign where the R candidate is saying leave the rates where they are and the President is arguing to do nothing as you suggest.

    If you think that’s a good idea, you must want the President to be a one-termer.

    You’d be right if the rate expiration date as 1/1/14. With it being 1/1/13, you are as incorrect as it is possible to be.

    As to your comment below to AMT, he said solving for taxes would be easy once we had all agreed on the appropriate level of spending. Since we haven’t done that yet, it won’t be so easy.

  21. SteveinCH  ::  8:06 am on May 14th, 2011:

    Len,

    You’re speaking as an academic, not a policy person if you discount the baseline problem. The baseline is the crux of the problem in defining “tax expenditures” with a number. It doesn’t mean the concept should be avoided but it makes it very impractical from a policy perspective because it promotes universalist thinking.

    People who subscribe to this thinking (I can’t tell if you do or you don’t), presuppose a tax code that would raise an extra trillion dollars or so. While I don’t believe in the natural cap of 18 to 19 percent of GDP in tax argument, if you think there is a political consensus in this country for a tax code that raised 24 or 25 percent of GDP in taxes, I submit you are way off base. And yet, that is precisely what the “$1 trillion in tax expenditure” crowd is arguing.