Wednesday, July 13, 2011

Tax Expenditures and Other Oxymorons

A couple of nights ago, Martin Feldstein was on Charlie Rose, in a segment with David Leonhardt. They were discussing a way to get a budget cutting deal in Congress that would enable them to raise the Debt Limit. This followed the first segment with Republican Senator Tom Coburn of Oklahoma, which discussed the current negotiations, what Coburn might vote for if the matter were put to a vote, and what Coburn thought of the Grover Norquist no-new-taxes pledge. Coburn is a "reasonable Conservative" who said he agreed with Norquist in principle and on 99% of what Norquist wants, but Coburn left some wiggle room for revenue enhancements from closing loopholes, reducing or eliminating tax expenditures, if you will.

In his segment Feldstein was gentle and I thought clever in the following. First he argued there was essentially no difference if a tax payer, upon buying a solar panel for the roof of his house, gets a deduction for that, from the government directly paying the seller of the solar panel. The economic effect is identical. The latter, however, is an expenditure that Republicans are willing to cut. The former is a negative tax, which the Republicans signed up with Norquist don't seem willing to eliminate. This is a semantic difference without any real economic distinction. Second, Feldstein talked about retaining all the deductions, expenditures, but capping their cumulative effect, say the maximum would be to reduce Adjusted Gross Income by 2%. Feldstein said he was getting some traction with members of Congress using this argument.

It is fairly easy to see the politics in this. "Leadership" meaning Speaker Boehner, but not Majority Leader Cantor who seems to toe the Norquist line, wants a deal along these lines. Most Democrats will go along on this; their primary concern is with Entitlements. And on that I heard something new (for me) that I found interesting. Social Security was not in the Ryan budget proposal, because there was a sense that President Obama would propose Social Security reform on his own, and they didn't want to preempt (and thereby preclude) such a proposal. If that is really true, more credit should be given to Ryan and his cadre. Healthcare is the other big ticket item. On this, however, the Ryan plan is a political loser. Even Republican Leadership recognizes his.

In today's New York Times Leonhardt has a column where he rails against "Free Lunchism" and argues that the reducing tax expenditures argument is popular among insiders but not with the population as a whole, so the more likely scenario is that the Bush Tax Cuts will expire next year.

Does this get us any closer to making a deal?

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