Why is spending through the tax code popular on the Right? Justin Wolfers and Betsy Stevenson have a Bloomberg editorial on tax expenditures that, beyond being a smart column on the topic, notes the distributional impact of these expenditures:
The rich get such big subsidies for three reasons. First, they spend more on the things the tax system favors, such as homes and health care. Second, they are subject to higher tax rates, so they get more benefit from each dollar of deductions. Finally, they’re rich enough to take full advantage of their deductions. The poor typically have too little income to itemize, while many families in the upper middle class find themselves siphoned off into a separate tax system known as the alternative minimum tax, which allows fewer deductions.
They note that Grover Norquist and other conservatives tend to support tax expenditures. Why is this? One reason they give are various psychological biases - "It’s a tribute to our psychological biases that getting a subsidy through the tax system is treated so differently from receiving a government check or copping a fine."
Will Wilkinson at Democracy in America adds some additional reasons. He argues that many on the right might think the following: "Tax deductions and credits are best understood as selective restraint, as selective acknowledgement of what is ours, on the part of a generally kleptomaniacal government." He also notes that a lot of how people view this issue is tied up with how they view "giving and not taking" as equivalent actions.
I'd like to throw in another point to compliment these. It's important to understand tax expenditures as a political project. This goes back quite some time on the Right with health care spending through the tax code - but let's focus on the Reagan era. Conservatives think that tax expenditures help with privatization and their larger political projects. Let's look at Heritage's Stuart Butler's 1985 article, released by Cato, titled: Privatization: A Strategy to Cut the Budget. (Butler was writing this in a lot of venues, but the Cato one is online; we discussed this article recently here.) Butler is worried that President Reagan can't destroy the Welfare State. He's shocked and appalled by the way that middle-class people rush to the defense of Social Security. The outright assault isn't working. What can conservatives do next?
They can use the tax code to create a private-sector welfare state to compete and ultimately win out against the government, removing the government from people's daily lives. Butler is concerned about "public sector coalitions" which are difficult to dislodge; why not create private sector ones? Butler (my bold):
Complaining about public-spending coalitions achieves little more than high blood pressure. But developing methods to entice the public to choose a private rather than a public way of promoting their self-interest may achieve a great deal….But a distinction is drawn between government as a provider (implying that government should levy taxes and deliver services itself), and government as a facilitator (implying that it should encourage or require those services to he provided by the private sector). Privatization, in other words, means seeking to transfer programs into the private sector using the carrot of incentives, not the stick of aggregate cutbacks…These privatization coalitions are the mirror image, so to speak, of the public-sector coalitions. And they are at the heart of the strategy to create a “privatization ratchet” to counter the federal ratchet. By providing a targeted benefit (such as a tax incentive or some regulatory relief) to those who demand or provide a private alternative to government, considerable rewards can be guaranteed to individuals within the coalition. Members of that coalition can be expected to press for deeper incentives and to oppose any move to eliminate existing incentives…
Privatization thus turns conventional political dynamics on its head. Lobbying pressure develops for less taxation (if a tax incentive is given), and for private, not public, programs. Moreover, each legislative victory won by the coalition, however small, serves to strengthen it, thereby adding to its capacity to achieve furthen legislative concessions and a corresponding growth in the private program…tax incentives concentrate benefits on a small number of people and they act as the nucleus for the growth of privatization coalitions….Because tax incentives are so essential to a privatization campaign, supporters of the approach should be cautious in their support of tax simplification.
Social Security is a classic example of the federal ratchet in operation…Yet a minor provision in the 1981 tax act may eventually break up that coalition…By allowing all working Americans to open tax-deductible IRAs, Congress planted the seeds of a private alternative to Social Security…It was not long after the passage of the 1981 act that banks and other financial institutions…began a massive campaign to encourage Americans to open retirement accounts. Soon after that, nonworking married women began to complain that limiting their deduction to just $250 was unfair and discriminatory (near beneficiaries). And politicians were quick to propose accommodating the near beneficiaries and increasing the standard IRA deduction. A privatization coalition was born.The “tax loss” (as the Treasury puts it) of IRAs has vastly exceeded the original Reagan Administration projections. Yet repealing on reducing the deduction is already politically unthinkable—the coalition is too powerful and the privatization ratchet is in place….In short, the incentive has begun to divert the pressure of demand for a secure retirement income away from the publicly provided system (Social Security) and to the private alternative (IRAs)….From the budget-cutter’s point of view, the growing power of this IRA coalition offers the only real hope for spending reductions in Social Security, since the more Americans prefer IRAs as their primary pension vehicle, the weaker will become support for retaining Social Security in its present form.
For these conservative intellectuals, in order to slay the monsters of the New Deal and the Great Society they had to unleash an even more vicious beast - the political mess of our tax expenditure system.
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