Wednesday, July 30, 2008

The bogus tax-spending distinction strikes again

While McCain tours the land insisting that Obama plans to raise taxes, his chief economic advisor (leaving aside the buffoonish Phil Gramm), Doug Holtz-Eakin, has admitted publicly that Obama actually plans to cut taxes on balance. Details here.

The ground for finding a net tax cut is that Obama's healthcare package would make heavy use of targeted tax benefits to increase insurance coverage and the like.

Holtz-Eakin, by the way, is using the net tax cut point to argue that Obama's overall policies are fiscally irresponsible. This of course is true enough, albeit comical coming from someone who works in a campaign that is calling for $5.7 trillion of tax cuts over ten years with virtually no significant and credible offsets. (McCain will presumably nonetheless keep on saying that Obama is raising taxes, since the truth has certainly been no constraint for him over the last few weeks of the campaign.)

Anyway, back to the net tax cut point. As I show at some length (but I hope reasonably entertainingly) in my recently published fiscal language book, people treat the taxes versus spending distinction as if it were substantively meaningful (e.g., regarding the size of government or some such thing) even though in fact it is pure form.

A program that is substantively equivalent to targeted tax benefits can always, at least in theory, be provided through direct spending. My favorite example, which I owe to the late economist David Bradford, is reducing both taxes and spending by $50 billion, without substantively changing anything whatsoever, by replacing $50 billion of military spending with a $50 billion "weapons supplier tax credit," which results in the government's getting exactly the same weapons as before while everyone in the society ends up with exactly the same money and incentives.

Whatever the reasons for and against using the tax system to deliver healthcare benefits, it is pretty silly to have the computation of whether one is "cutting taxes' or not depend on it. Or more precisely, it's pretty silly to think that the "cutting taxes" meme means anything until we have dug down into the details a bit more.

One possible takeaway: Obama is increasing the government's role in the economy despite styling these things "tax cuts." True enough, perhaps, although the healthcare sector of the economy is too much of a mess for this necessarily to be bad even if one generally likes less government intervention. (One key problem in the healthcare sector is its mix of generous subsidies with private profit motives, arguably leading to worse incentives than those from either a purely public or purely private system.)

But then again, unsustainable tax cuts like McCain's don't make the government smaller either, even if they take the form of reduced marginal rates and the like, as I also explain in my book.

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