Tuesday, October 25, 2011

The Government Does Not Own 100% of Everything

. Tuesday, October 25, 2011

If I am reading this right, then Suzanne Mettler believes that any tax rate lower than 100% is "indirect social policy":

Conversely, many of our mostly costly forms of social provision today camouflage government’s role as a provider of social benefits. They do this by channeling benefits through the tax code, as does the Home Mortgage Interest Deduction, for example, and/or through subsidies to private organizations, such as employer-provided health insurance benefits, for which recipients are not required to pay taxes. These latter, indirect policies are the ones I call the “submerged state.” It is easy for citizens to miss government’s role in these policies, and to assume that only the market at is at work.
Now as it happens I am against deductions and all other loopholes as a matter of course. But I do not define "things not taxed" as the government acting as "provider of social benefits". Mettler, it seems, does:
The difference between the direct and indirect social welfare policies, however, is illusory. From an accounting perspective, they are the same thing: both impose costs on federal spending and add to federal deficits.
This is only true if you start from the assumption that 100% of national income belongs to the government, which then distributes according to a mix of "indirect" tax breaks and "direct" spending programs. I.e., it's only true if you believe that there is an implicit 100% tax rate, from which the government deducts differing percentages based on a number of criteria. In that case a tax deduction and a spending program are the same thing.

But if you start from the assumption that 100% of national income does not belong to the government then this makes no sense at all. If I buy a house and the government does not tax a small portion of the amount I pay for it -- I still pay taxes on the purchase of the home... I just get to deduct the interest -- I am hardly "getting" anything from the government. I'm just not having something taken away.

And in that case the only thing that adds to federal deficits are spending increases. Think of a scenario: there is a tax rate of 0%, and no federal spending. The government decides to pass a child tax credit equal to 5% per child. Does this add to the federal deficit? No, because 5% of 0% is 0%. Under this scenario the child tax credit is meaningless. Now suppose the government was to keep taxes the same but spend 5% on the child. The deficit goes up.

In most cases, tax breaks distribute resources by permitting people to pay less in taxes, rather than by paying out dollars or providing services. That aspect of their design makes it easy to construe them as tax cuts rather than as social provision. But this, too, is a false distinction. “Social tax expenditures” assist people with particular circumstances, granting them resources to which others are not entitled. This is in stark contrast to across-the-board tax cuts to all Americans.
That's true. People without children cannot claim child tax credits. And the child tax credit is a politically-motivated tax exclusion designed to encourage better care for children (or, perhaps, having more of them). But it is qualitatively not the same as a spending program that is also intended to benefit children. The latter redistributes income from some people to other people. The former does not. The latter increases the budget deficit. The latter former does not. See? It's a very important distinction.

Note also that according to Mettler's definition a progressive tax code is a government "social provision" because the tax does not apply equally to everyone.

You could make the same argument about some of the other programs Mettler discusses. The GI Bill could be considered part of the compensation contract that the military makes with service members. I know my siblings in the military (there are currently five of them) think of it that way. Many wouldn't join the military just for the salary; the fact that part or all of their college education is included in the package is what tips the scales.

If you look at the famous table that Mettler produced in her paper, the programs that people tend not think of as government programs are things in which there is no redistribution happening. All of them are tax credits (except for student loans, which are paid back usually with interest). The things that people do think are government programs are the things in which there is redistribution happening. Mettler recognizes this:
In short, the fact that citizens often fail to recognize these policies as government social provision is attributable not to some fault of citizens, but rather to the characteristics of the policies themselves.
Precisely. And the characteristic of the policy is what is important. A policy of not taxing 100% of income is not a government intervention. It is the absence of a government intervention. A policy of not taxing mortgage interest is similarly a lack of taxing mortgage interest. People have different attitudes about whether these are "social provisions" from the government because they have different definitions of what constitutes a social provision from the government. Remember the outcry when Obama started talking about "tax expenditures" a few months back? That's because people immediately recognized what he was talking about: he wanted to raise taxes and redistribute the proceeds to others. So the phenomenon Mettler is describing is at least partially about semantics, not just cognitive dissonance.

I do not write this to disparage Mettler's research program, which I find very interesting and valuable. And the phenomenon she describes certainly happens sometimes. But I see the tendency to use the accounting that Mettler uses, which presupposes that 100% of national income belongs to the government, from a lot of political scientists. I've never understood it. It goes against all of the common principles pertaining to the nature and role of liberal government in a democratic society.


Richard Bridger said...

I’m with Mettler, I think.

1. The government doesn’t own everything. But it does have a legal right and ability to tax 100% of everything if democratically elected representatives choose to do so.

2. In the real world, government revenue is formed of two things: 1) where they get it from, 2) where they put it. It is not just 2) which is a social provision. 1) is also a social provision, because if people aren’t paying a tax then the money has to come from somewhere.

So the potential social provision of government is not just about the benefit given by government, it’s also about the burden placed by it. That doesn’t imply the government owns everything – just that there are two sides to the governmental coin, and the choice of what makes up each side are politically motivated decisions about how the government should aim to benefit people, whether by adding to the benefits or lowering the burdens.

I’m pretty sure that’s why richer people generally vote for lower taxes. They don’t (just?) want to stop money going to the poor – they want to stop it coming from them!

Kindred Winecoff said...

Thanks for the comment, Richard.

I don't necessarily disagree with anything you wrote. But I think a big problem that Mettler does not address is the one of perceptions. Mettler is arguing, from Pierson, that these "indirect" government programs are not properly understood as government programs because of a lack of transparency. In other words, people are ill-informed. She says this has "all sorts of implications for democratic citizenship", and is crafting an argument that this "submerged state" has been captured.

In many areas I'm very sympathetic to this argument. And sometimes there is true ignorance, eg the famous Tea Party sign "Keep your government hands off my Medicare"*. But in the case of the GI Bill or the mortgage interest deduction, people may say that they aren't government programs because they do not have a redistributive component.

This really does hinge on views of the world. Both major political parties (and many of the minor ones too) talk about government programs as redistributive policies. Practically no one except for a handful of American political scientists takes the view of distribution and government that Mettler is advancing.

There's a reason for this: it goes against the liberal democratic tradition where government interventions are the things that need to be justified, not the absence of government intervention. That view is embedded in the founding documents of this country, and every other constitutional democracy that I'm aware of.

As I said at the top, Mettler's view implies that any tax rate below 100% is a government-run social program. That conclusion does not capture the actual dynamics of politics, nor the way people think about politics. The default position in any issue area is "no government", and we bargain politically over how far we're going to stray from that.

*Even this view is more coherent than most imagine. What the person was saying was "don't redistribute my health insurance benefits to others". Obviously Medicare is a government program, but petitioning the government not to interfere with it as currently constructed is not an absurd view.

The Government Does Not Own 100% of Everything
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