BloombergView has just published an article by Paula Dwyer entitled “Everything in This Column is Free Stuff.” A better title would have been “Everything in This Column is Economically Ignorant and Offensive Nonsense.”
The column attempts to draw an equivalence between the Democratic Party’s granting of “free stuff” (government benefits for housing, health care, education, food, etc.) and the Republican Party’s granting of tax breaks. The column basically accuses the Republicans of hypocrisy for criticizing the Democrats for pandering to their constituencies with “free stuff,” while the Republicans allegedly do the same with tax breaks of even greater magnitude than the cost of the freebies.
The column shows a table with the largest “tax expenditures,” which is Orwellian Newspeak for taxes not collected due to a particular feature of the tax code . The table is entitled “Tax Expenditure Greatest Hits – Most popular free stuff in the tax code” and it lists things like reduced tax rates on capital gain and dividends (about $95 billion), deductibility of state and local taxes ($83 billion), home mortgage interest deductibility ($74 billion) and deductibility of charitable contributions ($47 billion).
The column points out that the big beneficiaries of these “tax expenditures,” as estimated by the Congressional Budget Office (“CBO”), are high earners. The CBO found that more than half of the savings resulting from the top-10 expenditures went to taxpayers in the top 20% of incomes. But the only thing notable about this statistic is that the percentage isn’t even higher since the top 20% of earners pay 84% of the personal income taxes, although Dwyer neglects to mention this.
So, let’s make the first obvious point. Most of the Republican tax plans I have seen, and there are now at least four of them from the presidential candidates, want to eliminate many of these “tax expenditures” in the interest of simplifying the tax code, enhancing tax neutrality and reducing marginal tax rates. Without going into details on why almost all of them should be eliminated[1], suffice to say that this is reform that is long overdue. It is also reform that only the Republican Party is discussing seriously, with hardly a peep out of the Democrats, whose only tax ideas consist of finding ways to raise the 84% to something higher. In whatever form it takes.
So, showing a table like this in an article railing against Republican tax giveaways is, to put it mildly, a bit confusing.
Since Dwyer cannot be, objectively speaking, complaining about the particular giveaways contained in her table, she must be taking umbrage with the Republican desire to reduce marginal tax rates, which is a feature of all of these plans. These are the tax giveaways that have drawn her ire as the country club equivalent of “free stuff.” Economically speaking, however, this is complete nonsense.
For an economist, the key issue with tax and social welfare systems is the impact they have on the incentives to work, save and invest. This is the “real” impact of these systems, with effects on things like growth and standards of living. Although you can imagine special cases where this is not true[2], low marginal tax rates, of the types favoured by Republicans, are generally accepted to promote work, saving and investment. In other words, these “tax expenditures” promote the things that generate a high standard of living and a growing economy. Despite Dwyer’s insinuations to the contrary, this is why many Republican politicians and voters support them. At least this one.
Conversely, “free stuff” has exactly the opposite impact on incentives, particularly with respect to the supply of labor. As I have pointed out before, only a Democratic fantasist thinks that “free stuff” has no impact on work incentives and hasn’t contributed, for example, to the deplorably low labor participation rate that we currently have. (And which is also seen in economies like Norway, where the provision of “free stuff” has reached the totally pathological level to which Democrats aspire.)
So, at the deepest level, Dwyer’s equivalence between tax breaks and free stuff is complete nonsense. In fact, in terms of their effect on the economy, they are polar opposites. One is paying people for working, saving and investing – or, more properly speaking, letting them keep more of the money they earn from these activities. The other is mostly paying people for not working. This difference is not difficult to see, is it?
But in addition to being economic nonsense, the article is also offensive. This can be seen, for example, in Dwyer’s mentioning that 17% of the tax giveaways in her chart go to the top 1% of incomes. Almost all tax breaks are subject to restrictions that cap or “clawback” the benefit from high-income taxpayers. One that has a very high limit, or is effectively unlimited in the case of capital gains tax on appreciated property, is charitable giving. This means that the heavy skew to the top 1% is almost certainly the result of a tax break that does not directly benefit[3] the recipient since the money is going to someone else. This makes charitable giving unique among all the “tax expenditures” and “free stuff” discussed by Dwyer. A uniqueness that might have warranted a mention from an author more interested in an unbiased presentation.
The greatest offense, however, comes from the very term “tax expenditure.” This phrase implies that everything you make actually belongs to the government, except for the grace and favor amounts left to you by our benevolent rulers. It is part of the deeply offensive narrative, which infuses the Democratic Party and includes things like this, that individual effort, merit and responsibility are largely irrelevant and should not be recognized by society. By not compensating these goods, the Democrats are doing their best to assure their shrinking supply.
Roger Barris
Weybridge, United Kingdom
[1] For example, the mortgage interest deduction is a bad idea that promotes leverage and further distorts the consumer choice between renting and owning (a choice that is already skewed by the failure to tax “implicit” rents.)
[2] There is hypothetical argument that the supply curve for labour may be “backward sloping.” This posits that, at sufficiently high levels of income, people will actually work less because their incremental demand for leisure time is greater than their incremental demand for wealth. I will leave it to the reader to decide how important this hypothetical effect is in practical terms.
[3] Except through the “psychic” benefit that accrues to charitable donors, but we generally stick to the strictly monetary when discussing government policy.