Posted by Jay Livingston
“To spend is to tax.” Milton Friedman’s dictum means that spending and taxing eventually have to be in balance. No free lunch. If the government spends money on something, eventually the government has to pay for it, and the government gets its money from taxes.* This is the basis of Republicans shouting about deficits and trying to outdo one another on cutting spending.
At the individual level, people feel that government spending is like robbery. Because the government has to tax in order to spend, the government is taking money out of your pocket and spending it on someone else (the military, Medicare, etc.).
There are two ways to increase deficits – spending more or taxing less. So not to tax is also like spending. If the government leaves more money in my pocket by taxing me less, it has to make it up by taxing you more. Taxing me less has the same effect as spending more. They both take money out of your pocket. That’s why tax breaks are “tax expenditures.”
Which costs more – tax expenditures or spending?
The chart is from Senate Budget Committee testimony by Robert Greenstein of the Center on Budget and Policy Priorities.
The tax breaks cost us more than even our biggest of big-ticket items.
No surprise, tax breaks work mostly to the benefit of the wealthy. The mortgage deduction on a couple of million dollar homes (yes, second homes also get the tax break) costs the government more than the deduction on a $150,000 home (or the $0 deduction on a rental). The lower tax rate on money made in the stock market benefits people who own a lot of stock. Guess who that is.
(Click on the chart for a larger view.)In the graph, the tax expenditure bar stands way above Medicare and Social Security. And those bars are 100 times larger than Head Start. So if you’re wondering who is taking money out of your pocket, drive through the nice neighborhoods and look at the big houses. Maybe even stop, knock on a door or two, and ask to see their Schedules A and D.
10 comments:
Which costs more – tax expenditures or spending?
How is letting people keep the money they made a 'cost'?
Unless you are saying that all the money belongs to the government, eh?
For the government, not collecting taxes costs money in the same way that a store not collecting money for its goods costs the store money. If any tax at all is illegitimate -- it's "my" money, not the government's, and the government should let me keep it -- then no money belongs to the government. The result is that we have no government.
But if you allow that governments need to raise money to pay for the stuff they do, then you have to allow for taxes, just as Milton Friedman says. Then the question becomes, who should we tax.
To continue the store analogy, what happens if the store gives huge discounts on some of its items? Letting some customers keep the money they made is a cost, just as letting people keep the money they made (i.e., giving them a discount on taxes) is a cost. And that cost of these discounts and rebates might be greater than costs of things the store pays for -- rent, wages, materials, etc.
Jay,
I think you are confusing not collecting a levied tax and increasing taxes already levied.
I'm not saying that taxes aren't illegitimate. Not at all.
If the government spends money on something, eventually the government has to pay for it, and the government gets its money from taxes.
The government doesn't have to spend, at least not nearly at the levels that it does. Don't you agree?
Just because the government 'wants' to spend money it doesn't have doesn't mean the money it doesn't have is an expenditure.
So not to tax is also like spending
No. It is keeping a budget. Stores know how much they have to sell in order to buy more.
f the government leaves more money in my pocket by taxing me less, it has to make it up by taxing you more.
Again. NO IT DOESN'T.
It doesn't have to tax me more, it has to spend less.
They both take money out of your pocket. That’s why tax breaks are “tax expenditures.”
If your way of thinking is valid, why do we allow 40 something percent of the population to NOT pay federal income tax?
How much should the government should spend and on whathe t? The answers are a matter of values. Your answers will differ from mine. But once we allow that the government must levy taxes, regardless of that amount is smaller or larger, we still have to decide who should be taxed and how much, and who should get tax breaks? These too are questions of morals or values. Should we cut people a break because they borrowed a bundle to buy a house (or two bundles to buy two houses)? Should we cut people a break because they made a lot of money in the stock market rather than by working for a salary? Should we cut people a break because they made just enough to be above poverty?
About one-third of households paid no income tax. The highest incomes in that bottom third of the income distribution are around $30,000. Those people pay no tax mostly because of the Earned Income Tax Credit. That program costs just about as much as does the preferential treatment of capital gains and dividends. So if you’re asking me which I would rather do – hit earners making at most $600 a week with a tax that sends them back into poverty or force hedge fund guys to pay the same tax rates as people who make their money from wages – I’m afraid I’d get rid of the preferential treatment for the Wall Street guys. (When it comes to the payroll tax, by the way, the high-income folks actually pay a lower percentage of their income than do people earning less than $106K.) But that’s just my values. Other people might prefer to keep the capital gains preference and jettison the EITC.
These tax-reduction programs raise not just value questions but empirical questions about their practical effects. But that’s much to broad to go into here.
Should we cut people a break because they borrowed a bundle to buy a house (or two bundles to buy two houses)?
Should we cut the people who insured the employment of the builders, the lumberyard, the copper plant, the pvc plant, the glass manufacturer, etc a break?
People spending money to keep employment up should be given a break, wouldn't you agree?
Should we cut people a break because they made a lot of money in the stock market rather than by working for a salary?
And in making money in the stock market, they kept companies from having to take a government bail out, provided working capital to companies, provided jobs to those people in the companies, provided jobs to the stock brokers or people who worked the web sites.
Should we cut people a break because they made just enough to be above poverty?
Versus giving people who made below poverty money from you and I?
See I don't mind giving people a break on their taxes. I do mind giving people such a break that it turns into giving them money because elements of society dont' think they made enough.
That program costs just about as much as does the preferential treatment of capital gains and dividends.
You keep saying that preferential treatment "costs" and that simply isn't true.
If I don't get a promotion at work, it does cost me X number of dollars. I just don't have X number of dollars to spend and adjust my budget accordingly.
I don't spend X number of dollars MORE then complain about the lack of money.
So if you’re asking me which I would rather do – hit earners making at most $600 a week with a tax that sends them back into poverty or force hedge fund guys to pay the same tax rates as people who make their money from wages
And my values say we should expect everyone to pay the same percentage of their income.
I'll agree the tax system is messed up.
But let's look at how is putting more back into the system instead of taking out of the system.
The people who pay no federal income tax aren't providing nearly the opportunity for employment that the wall street guys you rail about and that is the simple truth.
The problem I had and have is simply -- that people tend to view letting people keep the money they made as a problem.
You said it 'cost' the government and it doesn't.
If that view is unchecked, it leads to a socialistic view of money / work and I have a problem with that.
All spending keeps someone employed. If I borrow money to take my family on vacation, I’m helping to employ people in the hospitality industry. If I borrow money to buy a car, I’m helping keep auto workers and dealers employed. I have to pay taxes on that money; I can’t deduct my interest on that debt. So people who buy homes get preferential treatment.
Most workers also benefit others. If some guy drives a truck, he provides an important service to others – think of how difficult life would be without trucks delivering food and cars and gasoline and other stuff – and he helps keep gas stations and truck mechanics and others in business.
The trucker worked hard last year and made $100,000. Me, I didn’t actually do any work that anyone could see. I just took $200,000 and bought 1,000 shares of Apple a year ago. I just sold it for $300,000. We both made $100K. If the truck driver has to pay 25% income tax for moving stuff around in his truck, and I pay only 15% for moving money around in the market, I’m getting preferential tax treatment.
Of course, I prefer to think, L’Oreal fashion, that I’m worth it, and that my getting lucky with AAPL is much more valuable to the economy than is the work of some freight hauler, and that maybe the government shouldn’t tax me at all. But the truck driver probably doesn’t agree.
And if the government taxes me only 15% instead of 25%, that is a cost to the government. As you say, giving tax rebates is a cost to the government in the same way that passing up a promotion at work is a cost to the individual.
Jay,
It isn't a cost to the government. It was NEVER THE GOVERNMENT'S MONEY.
They didn't pass up anything, they didn't give up anything. IT WAS NEVER THE GOVERNMENT'S MONEY.
Just as the money I never received wasn't a cost to me.
Paying the company money to stay employed is a cost.
And that is what we are doing for way too many people.
We are taking money from those who have earned it -- however they earned it -- and giving it to those who aren't earning as much.
That is a cost, a true cost, to the taxpayer.
I just took $200,000 and bought 1,000 shares of Apple a year ago. I just sold it for $300,000.
So, are you saying that 'intellectual work' isn't real work?
How does that effect your job as an educator?
You didn't drive a truck, you didn't build a road or a car.
Are you saying your efforts are worth less than those who do physical work?
As far as the tax on the amount you made; where did you get the money in the first place, eh?
Did you earn it -- and pay taxes on it once already?
Did you inherit it? Someone earned it and paid taxes on it, right?
How many times should income be taxed?
Plus, buying Apple stock (with money that has already been taxed once) strengthens the Apple company -- enabling it to invest capital in new products for sale. And guess how those new products get taken out of the factory and delivered to market? -- on trucks!... trucks that are driven by men and women hired to do so.
That's how capitalism works -- investing in companies gives them resources to hire and produce -- making capitalism such a powerful engine for producing and distributing wealth -- as imperfect as it.
So investing by individuals is beneficial -- and should be encouraged. And by the way, more and more working people own stocks directly or through retirement funds -- giving them the opportunity to build wealth via personal investing.
@Bob S.: The government's net income is determined the same way as any business's is: net income = revenue - expenditures. So, the government faces a problem of having a very large negative net income, and thus it has 2 choices: increase revenue or decrease expenditures. Republicans are very much in favor of decreasing expenditures, Democrats are in favor of increasing revenue. What the graph that Jay posted shows is that "tax expenditures" -- that is, special discounts from the standard tax rate total more than either Medicare or Social Security, two MASSIVE expenditures. Do away with a lot of tax loopholes, and nobody has to lose their healthcare or their social security check.
It can also be compared to individual expenditures. Whenever there's something borrowed, it should be paid back on time to avoid imbalance in spending and savings. One should not make another spending without paying the previous debts.
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