Friday, December 2, 2016

Further Commentary on Tax Credits and Tax Cuts

There are a few comments at the post, The Muddled World of Tax Credits and Tax Loopholes, that I want to discuss and amplify on.

The first two commenters write:
Commenter 1:

I think of it like this:

A tax credit absolutely requires government revenue while a tax deduction does not. In other words, if you were to say, "tax credits for everyone!",then the government would have to tax someone to pay for the credit. If, on the other hand, you were to say, "100% tax deductions for everyone!",then government wouldn't need any revenue.

I would like every dollar that once a dollar enters the Treasury, it is tracked until it leaves the Treasury. That way we could see exactly who benefits and who is harmed by taxation. Follow the money.


Commenter 2:

If I'm reading this correctly a tax credit is viewed in the sense of shifting the tax burden elsewhere instead of just reducing said burden. If my view is correct wouldn't this be in a form of welfare since another industry will be forced to pick up the slack from the industry getting the credit?
In the Carrier case, it does not appear there was a cut in government spending relative to the tax credit. Therefore, it was a shift in the tax burden away from Carrier to others.

However, there is nothing that doesn't allow a tax credit to be tied in with a cut in government spending.

On the other hand, an across the board tax cut by definition means there is no immediate increase in tax burden. However, it could mean more government borrowing rather than a cut in government spending.

In other words, a tax cut or credit does not tell us at all about what happens on the government spending side. They are separate issues.  It just happens that in the Carrier situation there does not appear to be a cut in government spending so it is just a case of a shift in burden.

Another commenter states:
  And, BTW, IMHO, you argued the opposite position here (although I still don't see one of my comments, so I don't think this is the original blog post I was thinking of): Where the Koch Brothers Meet the Regressives: On Raising Taxes
In the post the commenter references, I argue against the Koch opposition to ethanol tax credits

But in my opposition to the Carrier tax credit, I wrote:
But a tax credit can simply be further manipulation of the economy. It is not necessarily a "tax break" where a corproation is free to do as it pleases with money that otherwise would have been taxed.
Carrier gets the tax credit only if it acts in a certain way, that is,only if it doesn't move some of its work to Mexico.

I wrote this at the Koch post:
A "tax credit" can sometimes go beyond just being a credit and become a subsidy. But even the ethanol bill starts off as a reduction in taxes. A fine line should be drawn between a credit which reduces a tax bill, and a "credit" that becomes a subsidy at some point, but the line should be drawn at that point and not at the overall tax credit. But, the further question must be asked, why spend so much time battling this bill and not just spend the time calling for more tax reductions and elimination of subsidies.
Further, in the case of the Koch tax credit opposition, they were opposing a tax credit that was already in place. That's important.

To try and make all this a bit clearer, consider legislation that would give everyone a tax credit for wearing socks.

Since almost everyone already wears socks, it would be pretty much an across the board tax cut for everyone. It wouldn't distort the sock economy. The sock economy  already exists and wouldn't change much because of the tax credit.

Now let's say a tax credit is proposed for everyone that wears alligator belts. Since few people wear alligator belts, the credit would cause a shift in the economy toward alligator belts (and away from other belts). This could be a minor shift in the economy and be pretty much still a tax cut if the credit is much greater than the cost of an alligator belt to get the credit---but it would still be a distortion.

Now let's think of an economy where a tax credit is given for education. This could be a tax deduction for some who had already planned to use a specific tax credit qualified school but it could also be a distortion by causing some to use government tax credit qualified schools who wouldn't otherwise have used such. In other words, this is about the government on a very serious issue distorting the system in favor of the schools it deems qualified. I trust readers can see the serious problem with this type of tax credit. It is really moving society in a specific government-approved direction. This is not a minor distortion.

So now let's take a look at a tax "reformer" who wants to eliminate tax credits.

In the case of eliminating a tax credit for wearing socks, such an elimination would be pure and simple a tax increase.

In the case of eliminating the alligator tax credit, it did distort the economy but the economy would have adjusted over time to the minor distortion, but eliminating the tax credit after it has been in operation would result in tax increases for most-- not a good idea.

In the case of reversing the school tax credit, a very good idea since it would pull the rug from under a very dangerous government involvement in approving schools.

The tax credit the Koch's opposed is a tax credit that is probably worse than my alligator belt example but not as bad as the school tax credit.

All this is a government technocrat's dream, reading tea leaves to weigh the benefits and costs of various government proposals.

I could spin out examples of probably two dozen more permutations of tax credits, some good and some bad, but just know anytime you hear "tax credits," it is probably the government trying to obfuscate sum scam to benefit some insiders. But that once a tax credit is in place, it is often better just to leave it there, if it isn't really driving a bigger government scam like the direction of the nation's education system, because the economy in an odd way will adjust and you are generally going to hurt more than help tax-wise by pulling the credit.(Think the interest rate deduction on mortgages)

In the end, though, what is best for the economy overall is less of a tax burden across the board. Leave most tax credits in place but bring taxes down across the board and then cut more and then more, until the tax credits are inconsequential for all when making spending decisions at the individual or corporate level. We need a woodpecker attitude to tax cuts, just keep pecking away.

The Carrier "deal" is nothing like this. It is Trump forcing tax credits on a company that would really choose to do something else. It benefits no one but Trump. It is a Banana Republic deal.

-RW







4 comments:

  1. Note: I wish html blockquotes were allowed in comments.

    Start quote:

    *******

    But in my opposition to the Carrier tax credit, I wrote:
    But a tax credit can simply be further manipulation of the economy. It is not necessarily a "tax break" where a corproation is free to do as it pleases with money that otherwise would have been taxed.
    Carrier gets the tax credit only if it acts in a certain way, that is,only if it doesn't move some of its work to Mexico.

    I wrote this at the Koch post:
    A "tax credit" can sometimes go beyond just being a credit and become a subsidy. But even the ethanol bill starts off as a reduction in taxes. A fine line should be drawn between a credit which reduces a tax bill, and a "credit" that becomes a subsidy at some point, but the line should be drawn at that point and not at the overall tax credit. But, the further question must be asked, why spend so much time battling this bill and not just spend the time calling for more tax reductions and elimination of subsidies.

    *********

    Your arguments here are red herrings. Tax credits are always meant to manipulate behavior, and are never just blanket credits. If they were going to give blanket credits, they'd just cut taxes instead.

    Although I hate arguing technical policy-wonk crap, here you have one deal with Carrier that actually preserves part of their tax base and prevents a larger tax-burden shift than would happen if the company left the country (and we all agree the government shouldn't be taxing anyone, but this is relative you the burden-shift argument you're making). That seems far less like a subsidy to me than to give ADM tax credits meant to artificially boost corn production and use in non-edible ways -- increasing food costs in the process. The fact that these subsidies already exist as an argument for their preservation is beyond spurious, and honestly, I can't believe you're making that case.

    Attacking the Koch brothers for wanting to end a very political tax credit, but arguing the also-political Carrier tax credit that actually reduces tax-burden shift relative to their leaving the country is inconsistent.

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  2. A tax credit is a targeted tax cut. You have supported this before, so it is now Wenzel vs Wenzel. Sad that Trump has deranged you in this manner.

    You are suggesting that this targeted tax cut will lead to tax increases elsewhere. Not so! If Carrier were to leave then the US government would receive no tax at all from that company, raising the tax burden on others, or increasing the amount of money that would need to be borrowed. At least now there are some taxes received from Carrier, and employees still have jobs and do not require welfare payments.

    Preferably blanket lower taxes would be better, but by giving tax credits to Carrier it shows clearly that Trump realizes that high taxes impose an uncompetitive regulatory disadvantage on US company. Regulatory disadvantage, Wenzel, not a competitive advantage on the side of Mexico.

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  3. Our economy is severely distorted by a witch's brew of taxes, regulations and crony trade deals. Trump's deal with Carrier may have incentivized the company to keep jobs in Indiana in exchange for a tax break. This could be good or bad, depending on what the specifics of the deal are. Trump does not understand austrian economics. These are all true. But construing Trump as a bigger threat than Clinton is where Wenzel Pretzel's logical chops get exposed. He assumes that because Trump can rally people, he will be able to do much more damage to the economy than Hillary. This foolish argument ignores the fact that a president, even without a majority in the house or senate, can pretty much do whatever the fuck he wants, as proven by Obummer's last few years by executive and regulatory fiat. For libertarians to freak out over Trump is hilarious. At worst, the guy is like any other republican president, and at best, he might be an actual peacemaker. But Pretzel logic makes you twist and turn in strange ways.

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  4. Carrier didn’t decide to stay because of $7 million in tax credits spread over 10 years. It wasn’t near enough because they’ve said they stood to save $65 million per year by moving to Mexico. It was promises of federal subsidies, the details of which are not being revealed. Their parent company, United Technologies, the US’s 8th largest federal contractor, received $6.7 billion in 2015.
    http://www.cbsnews.com/news/carrier-united-technologies-donald-trump-indiana/

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