One reason tax expenditure analysis still matters (at least conceptually)

I hadn't yet discussed here the NYU Tax Policy Colloquium held on March 25, at which Robert Peroni presented his paper (co-authored with Clifton Fleming) "Can Tax Expenditure Analysis Be Divorced From a Normative Tax Base?: A Critique of the “New Paradigm” and Its Denouement." But something seemingly unrelated from the recent blogosphere brings it firmly to mind.

Peroni's paper criticizes Ed Kleinbard's efforts at the Joint Committee on Taxation to reformulate tax expenditure analysis so that it wouldn't run into all the anomalous side-controversies that have undermined its acceptance over the years, such as its conflating the controversy over hidden "spending" through the Tax Code with the income versus consumption tax debate. I agree with Peroni that the now-abandoned JCT effort did not entirely work, but I was also dissatisfied with the notion - seemingly a main theme of the Peroni-Fleming paper, although in person Bob seemed far more flexible - that Stanley Surrey got everything exactly right, and we should just all bloody well shut up and do it his way.

I naturally couldn't resist bringing up my take on the tax expenditure issue, which I view as having gotten things conceptually right, and which I at times self-centeredly feel ought to have reshaped how everyone thinks and talks about tax expenditures far more than it evidently has (it's generally ignored, I self-pityingly tend to feel, except for being cited in a footnote, typically around page 20 or so).

Anyway, the overwhelming consensus from the floor at the NYU tax expenditure session, voiced as well by regulars who for this very reason didn't come, was: Enough with the tax expenditures already! The whole thing isn't even worth thinking about any more! The whole thing is so 1960s to 1980s, and anyone who's really paying attention has long since moved on.

Okay, fine. But the other day I noticed a recent blog entry by economist Greg Mankiw, including the following table:

TAXES PER PERSON

France $15,556
Germany $13,893
U.K. $13,714
U.S. $13,097
Canada $12,789
Italy $12,478
Spain $11,014
Japan $8,992

Mankiw thinks this is meaningful as a gauge of whether the U.S. is truly a "low-tax" country. Critics respond that he should compare taxes to GDP rather than measuring them per capita. But what if the "taxes" number is entirely meaningless to begin with?

In illustrating this, I always like to use the "weapons supplier tax credit" (WSTC) example, which I got from David Bradford, in which the U.S. cuts both taxes and spending by $50 billion by zeroing out a bunch of weapons appropriations and replacing them with tradable tax credits, given to the very same manufacturers for the very same weapons. End result: by Mankiw's lights, the government is now spending $50 billion less. Yet nothing has changed anywhere. Weapons procurement is unchanged and distribution in the society is unchanged. All that's happened is a bit of creative relabeling, treated as substantive due to our reliance on the pure form represented by "taxes" and "spending."

A fanciful example? Ed Kleinbard argues that Congress now does things almost exactly like the WSTC. And note that, per Peroni's paper, the 2010 estimate of U.S. federal income tax expenditures is almost $1.2 trillion, or about $4,000 per person. Now, that isn't an actual revenue estimate. For example, it's static, in the sense of entirely ignoring behavioral responses to repeal, along with interactions between different provisions. And it treats consumption tax features of the income tax that don't involve inter-asset distortion - e.g., retirement saving tax benefits, as distinct from, say, expensing for Asset A but not Asset B - as if they were "spending," which I would reinterpret here as meaning allocative rather than distributional, an ill-fitting label for the retirement saving rules.

Nonetheless, if we raise U.S. taxes per person by the raw tax expenditure number, we're up to about $17,000. Now the U.S. is clearly first, except that we also need to run the same exercise for everyone else.

Now let's think about payroll taxes. To the extent I pay in to the Social Security system but expect to get money back, is that really a tax? Is the "tax" just the excess in present value of taxes paid over expected retirement benefits? This would require a much longer conversation. Seemingly different from tax expenditure analysis as such, but for me it's part of the very same fiscal language point. "Taxes" and "spending" are not substantively meaningful in this context. They shouldn't be used in such empty and formalistic ways. Not just Mankiw, but everyone else who routinely talks in these terms, ought to know better.