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Posted at 12:18 PM ET, 11/22/2010

The fuzzy difference between spending and taxes

By Ezra Klein

Greg Mankiw's column arguing that "the distinction between spending and taxation is often murky and sometimes meaningless" is worth a read. One of the cruder measures that both liberals and conservatives have been using to assess the deficit-reduction plans is their proportion of tax hikes to spending cuts. But that doesn't tell you very much. Liberals, for instance, want to see relatively more of the deficit reduction done through taxes, as the assumption is that most spending is progressive, so you don't want much less of it, and most taxes are progressive, so if you have to close a budget gap, that's the fairest way to do it. But that's not true for all spending, or all taxes: Cutting $100 billion from the defense budget is much preferable to raising $100 billion from a value-added tax.

And that goes double when we're talking about raising taxes by eliminating a specific tax break. Mankiw gives the example of a legislative effort to encourage snipe hunting: One side proposes that "every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.” The other side says that "every time an American bags a snipe, the federal government should pay him or her $100.” If you eliminate the former, you're "raising taxes." If you eliminate the latter, you're "cutting spending." But they're basically the same thing.

One of the interesting moves of the various commissions has been to classify reforming tax expenditures like the mortgage-interest deduction as spending cuts rather than tax increases, which has arguably allowed them to raise more money on the tax side than people realize. We'll see whether it actually works.

By Ezra Klein  | November 22, 2010; 12:18 PM ET
 
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Mankiw gives the example of a legislative effort to encourage snipe hunting: One side proposes that "every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.” The other side says that "every time an American bags a snipe, the federal government should pay him or her $100.” If you eliminate the former, you're "raising taxes." If you eliminate the latter, you're "cutting spending." But they're basically the same thing.


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But in the first example, the government is not losing money it already has, and in the second example, they have money, and they are spending it. Isn't that a substantial difference?

Posted by: puzzlemuse | November 22, 2010 12:37 PM | Report abuse

@puzzlemuse It is a difference, though from a theoretical perspective, I'm not sure it's a substantial one. It's the difference between lowering your deductions versus getting a tax rebate check in the mail. There's timing issues and a matter of bureaucracy, but has the same impact on the budget deficit and the same impact on the beneficiary.

From a practical perspective, discretionary spending programs come under review every year while tax cuts stay buried in the tax code until systemic tax reform comes around once every 20 years or so....

Posted by: js4981 | November 22, 2010 12:54 PM | Report abuse

We see this every year.

Republican people cut taxes then never (and I mean NEVER) cut spending even 1/5th as much as what they are supposed to.

Why? Because MASSIVE spending cuts mean MANY job losses....MASSIVE cuts in public sectors that everyone uses...and MANY unhappy people

So...they just put it on the deficit and move forward

Posted by: Bious | November 22, 2010 12:58 PM | Report abuse

A clarification: "But they're basically the same thing" IF AND ONLY IF the snipe hunter actually HAS $100 of tax liability in the first place.

That is, say there's a $100 tax credit for each bagged snipe and a TANF mother bags a snipe. The government just got the bagged snipe it wanted and didn't gain or loose a dime... because the TANF mother didn't have $100 in tax liability against which the the $100 credit could be applied. [Obviously, cash-convertible tax credits, which are birds rarer than snipe, are a different matter.]

As a real-world example, consider the tax credits promised to "help" businesses meet the crippling Obamacare regulations. Giving a business owner a tax credit of $100 (for example) is meaningful if and only if the business owner has a tax liability greater than $100: businesses which have no tax liability -- typical businesses where income covers expenses without significant actual profit -- gain no benefit from the tax credits... but the tax credit spin certainly sounds good for politicians.

Tax credits are merely social policy tools offering incentive to the government's "best customers." If the incentives weren't present, many of these large taxpayers would simply ignore the social policies: if the fine for ignoring the silly social policy is smaller than any gain from following it, isn't it perfectly rational to simply ignore the silly social policy?

Better put, *why* would the TANF mother who knows the $100 tax credit does her absolutely no good *want* to go out and bag a snipe? That is, in fact, the root question: *why* would a TANF mother want to do anything other than receive TANF payments?

Posted by: rmgregory | November 22, 2010 1:11 PM | Report abuse

"Why? Because MASSIVE spending cuts mean MANY job losses....MASSIVE cuts in public sectors that everyone uses...and MANY unhappy people"

Is that why Democrats bailed out the teachers union to prevent those spending cuts?

Posted by: krazen1211 | November 22, 2010 4:43 PM | Report abuse

--*[...] the assumption is that most spending is progressive [...] and most taxes are progressive[...] Cutting $100 billion from the defense budget is much preferable to raising $100 billion from a value-added tax.*--

It's all just nonsense, isn't it, Klein?

You got your "progressive" code word used so loosely that it can mean anything anyone wants it to mean, but basically means Klein wants more taxes and more spending, despite the fact that most of the money is not going to poor people (though even if it did, it would still be wrong.)

And then the girlie scratch at "defense", as though all that money ends up in less worthy pockets than, say, the stolen loot shipped off to the nation's hospitals. Who does Klein think drives the train with the loads of Humvees I see going through Tennessee?

And what would you rather have when North Korea or Iran get slightly more uppity (Clinton's "Smart Diplomacy" hasn't exactly accomplished much, has it?), $100 billion in Defense readiness, or $100 billion spent in making sure poor people don't feel stigmatized?

And let me be clear: If it were up to me, I wouldn't force a soul to pay for a defense he or she didn't want to pay for. I'd like the same courtesy extended back to me respecting the allocation of my own resources. I'm just pointing out another of Klein's ignominious muddles.

Posted by: msoja | November 22, 2010 8:05 PM | Report abuse

I respectfully disagree. In the latter case, the government would be forced to open a Snipe Hunting Disbursement Agency to hand out the $100s, verify non duplicate Snipes, etc. In the former case, people would just create fake receipts for the Snipes and put it on their taxes.

Posted by: staticvars | November 22, 2010 9:49 PM | Report abuse

'twould be vastly preferable for the government leave snipe hunting to the amusement of drunken adolescents where it belongs, and not have to split hairs over whether the 100 bucks amounts to raising taxes or cutting spending.

Posted by: bgmma50 | November 22, 2010 10:41 PM | Report abuse

The difference between spending and taxes is not fuzzy.

"Progressives" think that your income is already the property of the government and how much we get to keep of it is for them to decide.
Eg, The intention to raise taxes on the top earners as a means to avoid more borrowing and debt shows you that the government already considers this $$$ theirs. Any one of us would be damned for not keeping a proper budget in our households, but the government can spend other peoples money, and argue to raise taxes without a budget in sight.

Ezra answer this: which has a limit, spending or taxes?

Posted by: gomer3 | November 23, 2010 12:36 AM | Report abuse

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