Monday, June 27, 2011

Where the Koch Brothers Meet the Regressives: On Raising Taxes

WaPo blogger and regressive Ezra Klein writes:
Sometimes we can dive so deep into these legislative debates that we lose sight of the bigger picture. So I want to quote my friend Ben Adler, who tweets, “I want to meet an economist who thinks it would be better for US to default on debt than to cut tax credits, if one exists.”
Anyone? Anyone? Bueller?
The Koch brothers have, of course, made the ending of tax credits for ethanol one of their top priorities.

The Koch brothers argument is that tax credits for ethanol distort the economy. This fails to take into account that taxes everywhere and always distort the economy. A penny taken from the private sector and spent by government distorts the economy in favor of government spending.

A tax credit removes some of the government take.

It can be argued that tax deductions and credits do make distortions. A deduction for  say, educational organizations, including George Soros organizations, distort the economy in favor of educational organizations. But should the argument be that these deductions should be eliminated, the result being that individuals pay more taxes or should the argument be pushed that deductions should be instituted in more sectors of the economy? Cutting a deduction always increases government take. Deductions, tax credits etc. always move the economy more toward the type of economy that would exist without government taxes. It is hard to understand how those in favor of less taxes would spend their time trying to increase taxes, when it is called a tax credit. It seems the idea would be to call for more tax credits.

Nevertheless, the call for ending ethanol tax credits have put the Koch brothers in bed, where logic suggests they belong, with the Regressives, who understand that the ending of a tax credit means more money for government.

Hence the Klein-Adler support for the end to tax credits. They get it. An end to tax credits props up the state.

As for Klein-Adler confusion about no economists calling for a U.S. default. It simply means they don't read broadly enough. San Jose State University Assoc. Professor Jeffrey Rogers Hummel calls for exactly such a default:
The moral argument for repudiation is easiest to follow although by itself [it] says nothing about the practical results. Treasury securities represent a stream of future tax revenues, and investors have no more just claim to those returns than to any investment in a criminal enterprise. I favor total repudiation of all government debt for the same reason I favor abolition of slavery without compensation to slaveholders.
The economic argument depends on whether Ricardian Equivalence holds. Repudiating government debt eliminates future tax liabilities. To the extent that people correctly anticipate those liabilities, the value of private assets (including human capital) should rise over the long run by the same amount that the value of government securities falls. Thus, people will gain or lose depending how closely their wealth is associated with the State. If on the other hand, people underestimate their future tax liabilities, they suffer from a fiscal or "bond illusion" in which Treasury securities make them feel wealthier than they actually are. Debt repudiation will bring their expectations into closer alignment with reality, which should increase saving.
When I survey students in my classes, most of them claim to have no realistic expectation that social security will be there for them when they retire. If they are being honest, and they act on this belief as they earn income, then Ricardian Equivalence should hold for those liabilities, making any default less painful.
Economist Robert Murphy makes clear:
There is a strong libertarian argument to be made that all tax revenues are stolen, and in that respect the government has no business "honoring" its debt at all.
Gary North writes default will come, and that it would be the best thing for the United States:
Liberty will receive a shot in the arm when this phrase provokes universal laughter: "The full faith and credit of the United States." That day is fast approaching. The credit rating of the United States government will be marked down from AAA to AA. It will then be marked down to A. For every notch down that it falls, the national day of deliverance draws closer. American liberty is measured inversely to the credit rating of the United States government.
So yeah, you can be against tax credits, but what that really means is that you are in favor of the state propping itself up, a little bit longer. It's really the Koch brothers and Regressives versus those who want a shrinking government. The Regressives understand this.

UPDATE: Judging from a comment, their is some confusion as to whether the Koch brothers are against subsidies or tax credits. This is from a  Koch organization letter:
One such government intervention is the tax credit that provides about $6 billion each year to blenders of ethanol. Lawmakers in the Senate could take a sensible step by approving an amendment sponsored by Senator Tom Coburn (R-OK.) that would eliminate this credit
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.


  1. Prof Wenzel,

    I have to disagree that increasing tax credits should be encouraged.

    My understanding is that a tax credit is different than a deduction. A deduction allows to you to retain the income that you earned. A credit gives you the income that was taken from someone else. With a tax credit I can have zero income tax liability yet still receive a return via tax credits.

    Consider this thought experiment. If deductions were maximized to include any action (spending, saving, investment) then the State would have zero income tax revenue. On the other hand if credits were maximized the State would need to fund these through higher taxes or inflation.

  2. @Zach Bush

    You are thinking of a subsidy.

    A tax credit only reduces taxable income.

  3. @Zach Bush

    Thank you. Think of the Earned Income Tax Credit...Many people GET money from the government..even though they already have NO tax liability when they get it.

    It is certainly an imposition on the rest of us...not just a withdrawal of a government imposition on them.

  4. Quote:

    "When EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. "

  5. Prof Wenzel,

    Again I must disagree.

    Look at an income tax withholding worksheet. Your taxable income is determined by taking your income and subtracting any deductions and allowances. This amount is then applied at the appropriate rate.

    Tax credits are applied after the fact and therefore do not determine your taxable income. This is how an individual can have zero income tax liability, pay no taxes, yet still receive a refund.

    People that do not work (or have low-income) can receive refunds for things like not working or having children. Someone could have had zero income in 2008, 4 kids, and bought a house and would have had an ~$13k tax refund. Please explain to me how that is not a subsidy.

  6. @Lila

    Well, Lila I'm not sure there is a direct comparison with EITC. Second, I am not familiar enough with the terminology used for EITC. If a tax credit, means a credit against taxes owed and a refund of past taxes. I see no problem with that.If there is some kind of subsidy that is different, but I see no indication of that.

  7. The IRS says it is a "subsidy" for low-income families, but that it's paid "as a refund" - so that you get it even if you don't owe.

    (Mind you, I'm not objecting to assistance to low income families...I am just wondering aloud about whether a tax credit isn't a type of subsidy by pointing to this example)

  8. @ Zach Bush

    I have no problem with a tax credit, when it means just that, a credit against taxes. I have a problem with subsidies. If a firm lowers its taxes past or present, I have no problem with a tax credit, when it slips into a subsidy it is a different situation. But you should never be against a tax credit. That said, in the everyday common sens use of the word, you need a tax bill to use a tax credit. A tax credit, beyond a tax bill, is just a government attempt at obfuscating a subsidy. To the degree a tax credit is really a credit against tax liabilities, I am all for it. At the point it becomes a subsidy, I am against it.

    Therfore, why go along with government obfuscation, call a tax credit, a reduction in a tax liablility and be all for it. And be against subsidies. You are falling into a government trap by insisting on using their distorted terminology.

    The first step with any tax credit is a reduction in tax liability and I remain in favor of it. If there is a payment beyond that, it is a subsidy and I am against it.

  9. @Lila

    I do object to assitance by the government to low income families.

    As far as the rest, see my above comment regarding tax credits,as long it is a credit (in terms of a credit against tax laibilities) rather than a subsidy being called a tax credit, I am for it.

  10. @RW

    Yes, you're right but I'm too tired to defend myself from the ensuing attacks on "heartless right-wingers"..

  11. Here is the definition of a tax credit from Merriam-Webster's Dictionary of Law:

    Function: noun
    : an amount that may be subtracted from the sum of tax otherwise due and that is distinguished from a deduction applied to gross income in the calculation of taxable income

    There is nothing that I can object to in this definition. When it is extended to become a subsidy, I object, but not to the standing of a tax credit, when it acts as such and is applied against "taxes otherwise due." All tax credits I am aware of start here. As I say, if they go beyond this, they should be objected to only when they go beyond functioning as a tax credit and become a subsidy.

  12. It looks like the EITC credit is NOT a credit then, but a subsidy.

  13. Zach is correct about tax credits versus tax deductions. The ethanol tax credits are tax credits, not deductions. The renewable fuels association has provided this helpful page about how the ethanol tax credits work:

    Note that the Volumetric Ethanol Excise Tax Credit is a refundable tax credit and people will get a refund for the entire size of the tax credit if they have no tax liability.

    Are you saying professor that you support the tax credits as long as they only function as tax deductions and not as full blow tax credits?

  14. @Daniel

    A deduction is different from a tax credit. A deduction is reducing your income that can be taxed. There is nothing wrong with deductions.

    A tax credit as defined by Merriam-Webster's Dictionary of Law is a reduction in taxes owed.

    To the degree a tax credit is what it is considered in general terminology. It is a reduction in a tax. And should be favored. To the degree it is any type of payment not associated with a tax reduction, it is a subsidy. Therefore, no one should be against a tax credit. They should be specifically "be for tax credits that reduces taxes owed, but be against the part that becomes a subsidy that is mis-named a tax credit."

    The entire tax credit issue is NOT about tax deductions. It is about breaking down a tax credit to what it is and a second part of many what government calls "tax credits" which are in fact subsidies. The ethanol "credit" has a combination of both. The part that is a tax credit, in real terms is a plus and should not be messed with, sibsidies are an entirely different matter. Those against tax credits, rarely, if ever make this clear. Because they are generally for or against awarding an industry or sector of the economy.

  15. I think the law could be either a credit or a subsidy.
    Volumetric Ethanol Excise Tax Credit (VEETC)
    An ethanol blender that is registered with the Internal Revenue Service (IRS) may be eligible for a tax incentive in the amount of $0.45 per gallon of pure ethanol (minimum 190 proof) blended with gasoline. Only entitles that have produced and sold or used the qualified mixture as a fuel in their trade or business are eligible for the tax credit. The incentive must first be taken as a credit against the blender's fuel tax liability; any excess over this tax liability may be claimed as a direct payment from the IRS. Under current law, this incentive expires December 31, 2011. For more information, see IRS Publication 510 and IRS Forms 637, 720, 4136, 6478, and 8849, which are available via the IRS website. (Reference H.R. 4853, 2010, Section 708; and 26 U.S. Code 6426)

    From how I understand how the blenders are using this is they are passing the benefit onto consumers to lower ethanol pump price. So removing this tax credit/subsidy is just going to raise prices.

  16. @Matt M.

    True, so my argument is to expand the tax credit part of the bill and call for the elimination of subsidies.

  17. A true tax credit is a reduction in taxes otherwise payable. What is called a "refundable tax credit" means that if the tax credit reduces the tax owed to a negative dollar figure, the government sends the "taxpayer" (or, rather, "tax-eater") the difference. The EITC and apparently the ethanol credit is a refundable credit and the Kochs are correct in opposing them. And the business subsidies should go first.

  18. The government's murky, intentionally obfuscatory language has so confused people that they don't understand the difference between a tax credit (less taxation) and a subsidy (welfare in another name)!

  19. @Jule Herbert

    The EITC and "ethanol tax credit" are both a combination of a tax reduction and a subsidy. There is nothing wrong with the tax reduction part of these programs.

    If you get people to object to "tax credits", they will object to real tax credits and otherwise, such as you are. It's an odd place for the Koch brothers to take a stand.

  20. I will take the Kochs over the Wenners of the world any day.

  21. The fact that this thread of posts has so much discussion just shows how tax-credits, subsidies, deductions, whateveryoucallthem distort the market.

    The obvious answer is to eliminate taxes, but that's a glib statement in the face of reality.

    ANY reduction of taxes is good, but let's consider another example. (wow, trying to think of a non-controversial topic- beer, guns, cigarettes, bacon, Hummers, prostitutes...)

    Hell, let's use coal-fired electricity. ABC and XYZ company produce it, and get credit for all they produce. Since coal can also be used for heating homes (with coal-burning with me here!) then a) electricity, despite being a less efficient due to transmission costs, would be more attractive to a consumer, b) overproduction of capacity would be encouraged, resulting in c) a distortion and introduction of inefficiency into the system. Even if electricity was cheaper, coal would be the better choice, but since the credit distorts the cost-benefit structure, the less efficient method would be more economical to the consumer...but less economical as a whole.

    Does that make sense?

  22. @Prof Wenzel

    All tax credits are subsidies. You have yet to address the point I raised how taxes are actually calculated. To demonstrate again I will use a standard accounting analysis.

    When you pay taxes you are paying into an account at a tax bank. Your debits, or liabilities, are determined by adjusting your income by subtracting and deductions and allowances. This is your total liability.

    Throughout the year you or your employer must deposit money into this account to meet the total liability. This credit (or asset) side of the account can only be funded in 2 ways; by your income or the income of someone else.

    A tax credit is an actual deposit of funds into your tax account to meet your liability and is by definition always a subsidy. Because this is an actual deposit of funds it must be from the income of someone else (or inflation). In either case, the funding for the tax credit comes from the theft of another person's property. It is robbing Peter to pay Paul. To support this scheme is clearly anti-libertarian.

    The proper libertarian response to tax credits is to convert all of them to taxable deductions.

  23. @Matt M

    "From how I understand how the blenders are using this is they are passing the benefit onto consumers to lower ethanol pump price. So removing this tax credit/subsidy is just going to raise prices."

    Taxes increases cannot raise prices. Prices are determined by utility scales of the producer and consumer. Because a business will always be offering prices at the most a market will bear then adding any additional tax is paid for by the producer and ultimately affects the original factors of production (workers, landowners, etc). For this reason, as Rothbard showed, taxes cannot be passed onto the consumer.

  24. @Wenzel

    Did you see this?

    @Zach Bush

    Did you see RP's column in LRC on the taxes/subsidies issue?

    I couldn't quite make out where he stood on EITC, for example.

    It looks like a subsidy to me, but he mentions credits to families with children, which seems to refer to EITC.

  25. @Lila

    I did see the column. It was also posted at The Daily Bell a few days ago.

    I still maintain that Ron Paul, Prof Wenzel, and Murray Rothbard are wrong on the tax credit issue. As I have demonstrated above all tax credits are subsidies because the government is depositing funds into your tax account. These funds must come from either; A)income tax you have already paid, B) income tax somebody else paid, or C) inflation.

    From Ron Paul's article, "with tax credits and deductions, industries, business, and individuals simply get to keep more of the money they have earned."

    This is true with tax credits only in the above case of A. But the reality of this case is highly unlikely for two reasons. Firstly, if the money is coming from taxes you have already paid then why not just make the credit a deduction? Secondly, as we have seen nearly all credits are refundable and you can receive the credit even if you paid no income tax.

    The second reason highlights why the distinction was made between credits and deductions. Deductions are a genuine tool for reducing the tax burden whereas credits are used as a redistribution. Again the proper libertarian position (aside from eliminating the income tax altogether) is to call for all credits to be converted to deductions. Indeed if every action was deductible then the income tax would be effectively eliminated.

    It's actually a clever trick because now the principled libertarians (even Rothbard!) are supporting a State redistribution scheme while pseudo-libertarians (the Kochs) are against them.

  26. Yes, that is how it seemed to me too..

  27. Wenzel, you are wrong. A credit is receiving cash against any amounts owed whereas a deduction is against taxable income.

    source: I'm a CPA.

  28. I agree with the notion it is an exercise in semantics whether you call it a tax credit or a subsidy. Given that money is fungible, does it really matter if I get a $1000 check from the government to purchase an electric car versus getting a $1000 reduction in my tax bill? Deductions are the same, but are essentially means tested by income so that they phase out at a certain point - they can just calculate a deduction amount (say $3000) that gets close enough to whatever the credit would have been. The principled Libertarian answer should be to reject the proposition that the state has any right to your property at all - coming out in favor of tax credits runs the risk of legitimizing the whole tax collection process

  29. As much as it makes me suspicious of myself to disagree with Rothbard and RP, I must on this issue. The income tax is used by the State as a weapon. This is why even net tax-receivers pay it, even though they could just be payed the balance (e.g. the military pays the income tax - I grew up in a military family and never heard the end of the complaints about this or that change). When a new regime comes into power they use credits, exemptions, rebates, etc. to punish or reward various groups. If they get you fighting over who is getting this or that favor, or what the proper definition should be, they've already won.
    Eliminate the income tax (first).

  30. Corn ethanol is outright subsidized with taxpayer funds by the US federal government. If it's constructed as a 'tax credit' it's the kind of credit where by someone who pays no income tax gets a 'refund'.

    Not only is corn ethanol subsidized, cheaper foreign made sugar-cane ethanol is highly taxed. The sugar cane ethanol is cheaper because it is a more productive process.

    As to tax credits in general, the problem of being for them is that government can use a simple trick to achieve the same ends. It's very simple. Set the tax rate at 100% where everyone qualifies for various tax credits. It's the same system just semantically backwards.

    Taxes should simply be eliminated otherwise they remain the same tool of picking winners and losers regardless of the semantics and order of mathematical operations.

  31. Please note the fuel tax on ethanol is the same as the tax on gasoline. Because ethanol is a less dense fuel, this means the tax is 50% higher. It's even worse when compared to premium gasoline and diesel fuel.

  32. The entire corn based ethanol is an agribusiness corporate welfare scheme.

    It should be ended entirely.

  33. I thought this over.

    Why do libertarians "have to" object to subsidies, if it is for poor families?

    Is it possible to see some transfers, even if redistributionist, as providing an insurance against social pathologies that might occur, if those redistributions were not made.

    I know purists would argue otherwise...but, just thinking aloud.

    I somehow don't see a direct line from that sort of thing to fascism..