StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Difficult to Administer and Prone to Abuse

18 Feb 2010
Posted by Andrew Samwick

According to The Washington Post, this was the reaction of House leaders to President Obama's proposal to use tax credits to expand employment:

The administration also wants to put an additional $100 billion toward an immediate jobs bill. One of the most significant ideas would award tax credits worth as much as $5,000 per new hire to employers that expand their payrolls this year. By the administration's calculations, the tax credit would create 600,000 jobs at a cost to the government of about $33 billion.

That is my reaction as well.  If the Federal government could administer a problem this intricate, I doubt we would be in the shape we are in.  We are over two years into these discussions of stimulus and bailouts, and it is disappointing to continue to see these gimmicks being discussed.  What are we going to have next, "Cash for Coworkers?"  The basic lesson does not seem to have sunk in -- when you are relatively poor, you must be more careful with your money, not less.  You should be spending your money only on what you need and not spending it on what you don't.

So what do we need that we typically entrust the government to provide?  Infrastructure -- repair of the old and expansion of the new.  We need trillions of dollars of it, more than enough spending to replace the reduction in private sector demand that has occurred during this downturn.  Two years, over a trillion dollars of wasted spending, and counting.

Part of the problem is that

Part of the problem is that “tax expenditure” subsidies are treated by politicians and viewed by the public so differently than would equivalent, explicit, “spending” subsidies, even though there is no substantive difference between the two.

Tax expenditure subsidies incentivize or provide aid to individuals for particular choices and related situations (e.g., buying a home with a mortgage, having a child, sending a kid to college), and there is no inherent, substantive difference between a tax expenditure subsidy (or reduction thereof) and a “spending” subsidy (or reduction thereof), as long as the same things happen on the same basis (i.e,. you do X – e.g., buy a home, have a child, send a kid to college, and the result is that you’ll end up with $X more as a result of the presence of this tax expenditure than you would without it, and other taxpayers will, sooner or later, have to pay more to make up the difference [net of dynamic effects, which would apply equally to the equivalent “spending” subsidy]). Aside from any timing differences, there is no substantive difference between paying the government $20 and getting a subsidy of $5 back vs. just paying the government $15. And there would be no rational reason to prefer one over the other.

However, they are treated differently politically because many people erroneously, irrationally perceive an inherent difference and thus a subsidy that would be the same either way (substantively speaking) is often treated differently in our political process based on which form it takes, even though the only substantive differences being the label and inconsequential bookkeeping. Most notably and most problematic, folks on the right in particular are generally much more receptive to subsidies in the form of tax expenditures than they would be to the equivalents in the form of “spending” subsidies that were exactly the same in terms of what happens and on what basis and in all related incentives, macroeconomic effects, various effects on different people, the role of government in the economy and in people’s lives, likelihood of the subsidy’s creation/growth/maintenance/reduction/elimination, etc. It’s like if I were a cashier at their store, they would strongly object to my (for whatever reason) giving a customer $1 back after he has purchased a $10 item (because they would call that $1 of “spending”), but they would not object to my just taking $9 from the customer for that same item (which they would see as just not taking more of the customer’s money).

That’s why Obama expected applause from Republicans when, in his State of the Union address, he bragged:

we … made health insurance 65 percent cheaper for families who get their coverage through COBRA; and passed 25 different tax cuts.
Now, let me repeat: We cut taxes. We cut taxes for 95 percent of working families. (Applause.) … We cut taxes for first-time homebuyers. We cut taxes for parents trying to care for their children. We cut taxes for 8 million Americans paying for college. (Applause.)
[Obama looks at Congressional Republicans and says to them] I thought I’d get some applause on that one. (Laughter and applause.)

Fiscal conservatives (and everyone else) should view the above no more favorably than the translation below:

we … borrowed and spent more to provide subsidies to make health insurance 65 percent cheaper for families who get their coverage through COBRA; and passed [almost] 25 different increases in deficit-financed spending subsidies.
Now, let me repeat: We increased borrowing so we could increase spending subsidies. We increased borrowing so we could increase spending subsidies for 95 percent of working families. (Applause.) … We increased borrowing so we could increase spending on subsidies for first-time homebuyers. We increased borrowing so we could increase spending on subsidies for parents trying to care for their children. We increased borrowing so we could increase spending on subsidies for 8 million Americans paying for college. (Applause.)
[Obama looks at Congressional Republicans and says to them] I thought I’d get some applause on that one. (Laughter and applause.)

As a note, I realize that, conceptually, one could view some individuals having lower tax rates applied to them on income based on level or type of income as a “subsidy” of a sort, but it is of a different nature (in terms of incentives, economics, “fairness” etc.) than subsidies for particular, explicit choices and related situations (getting a mortgage, sending a kid to college, having a child or even getting more of one’s compensation in the form of health insurance). And it’s possible that, if we reduced/eliminated these tax expenditure subsidies we would want to adjust tax rates and brackets to better reflect the level of progressivity we consider optimal (from the standpoint of incentives and “fairness”). But again, there is no substantive difference between tax expenditure subsidies and “spending” subsidies, so the semantic and bookkeeping difference between the two should have no bearing on whether one favors or opposes a given tax expenditure subsidy or tax expenditure subsidies generally. They are the same. And they both ARE substantively different (in incentives, effects, ideology, economics, etc.) from a tax rate cut.

Now, the next, different and separate question is whether or not reducing/eliminating tax expenditure subsidies is desirable. I’d say generally “yes” for the following reasons, not in any particular order:
(1) Because of the aforementioned, irrationally favorable political treatment of them vs. their equivalent explicit “spending” subsidies, they are likely to receive less scrutiny (i.e., “Is it worth the increase in our debt? Good economics? Fair?”) and more likely to be created/increased/maintained, which is exactly why Obama crafted those subsidies as tax expenditures and why he expected applause even from (or perhaps particularly from) Republican members of Congress. Some subsidies may be worthwhile due to positive externalities, compassion, etc., but they should have to withstand the scrutiny applied to explicit, “spending” subsidies.
(2) Because they are economically distortionary (just as “spending” subsidies would be), interfering with costs/pricing as market signals, thus causing economic inefficiency and reducing the aggregate well-being and the well-being of most people.
(3) Because they impose greater explicit costs in terms of administration, compliance (e.g., accounting services), etc.

"Two years, over a trillion

"Two years, over a trillion dollars of wasted spending, and counting."
I must agree. Infrastructe should be the priority, but... no strong improvement are planned.
loi scellier
loi scellier

Dubious numbers...

By the administration's calculations, the tax credit would create 600,000 jobs at a cost to the government of about $33 billion.

That works to $55,000 per job, which seems very much on the optimistic side.

They claimed the original $787 billion stimulus created or saved job years of employment for "only" $116,000 each. So if they really had such an option as this available to create jobs for less than half the cost, and didn't use it, they pretty much missed the boat! And left us taxpayers high and dry!

Reading CBO's analysis [.pdf] of the most effective stimulus measures for job creation, I don't see much support for this claim.

There is a nice discussion of the "New Jobs Tax Credit of 1977 and 1978", which seems closest to what the Administration is talking about -- but which won't make any impartial reader want to rush to try it again:

"A report by the Departments of Labor and the Treasury later argued that the two studies could not determine whether the New Jobs Tax Credit increased aggregate employment."

As per CBO, the best option seems to be to slash employers' payroll taxes, which at the very upper-end most optimistic approaches the number claimed by the Administration in the WaPo. But of course there is nothing intricate or complex about that -- and it easily could have been done a good year ago.

Looking at the CBO "rankings", it is rather distressing how low, near to the bottom "Aid to States" is, considering how it took such a hugely disproportionately large share of the $787 billion (now up to $862 billion), when apparently there were so many other more effective possibilities available. Sort of like all those politicians had other priorities in distributing that money.

Here's a fundamental cost-benefit question I haven't seen answered anywhere, or even really discussed...

The BLS says the wage of the average job is about $42,000. Let's assume the average job year "created or saved" by a stimulus pays that $42,000 (even though one might imagine a marginal job would pay less).

How much should we add to the national debt via "stimulus" to save/create that $42,000 job for a year? What should the cost limit be?

Perhaps $42,000? ... $55,000? ... $116,000? ... $150,000? ... $200,000 ... $250,000 ...??

I mean, keeping the ominous-to-begin-with state of our national debt in mind.

If nobody has an objective answer, how can we say we know what we are doing?

Projections show less than

Projections show less than full employment for several years. The knock on fiscal stimulus is that it is not timely. Timeliness is not an issue if unemployment will still be high 3 years out.

Plus, high unemployment means that "labor is cheap" and the government should be able to complete projects for less than if there were a boom.

Do you think the jobs picture would have been better if Bush had spent on infrastructure rather than relying on low interest rates to stimulate a housing construction boom?

That was my rationale

This was all predictable in December 2007 when the first calls for "timely, targeted, and temporary" came about.  We should have moved with our capital spending plans at the first sign of weakness.  As you say, we are still seeing weakness -- better late than never.

Had we started the infrastructure spending in, say , 2005, then we would have a lot more infrastructure and a lot less housing today.  Assuming the former was done smartly, then we would have higher productive capacity today, higher deficits in the interim, higher interest rates, a (much?) smaller housing bubble, and likely a smaller financial crisis from which we'd be recovering.  I think I would take that state of affairs over what we are experiencing today.

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