Is Any Ol? Tax Cut a Good Tax Cut? No.

October 3, 2008

Imagine a proposal before the United States Congress to give a tax credit to owners of three-legged spayed dogs. Many Republican members would probably argue that this tax cut would stimulate the economy (and probably even pay for itself), and Democrats would support giving a helping hand to those kind-hearted caretakers of injured pets. In fact, this absurdity might pass unanimously.

Last night, in an interview with Larry Kudlow about the bailout, Republican Whip Roy Blunt criticized tax reformers who object to cluttering up the tax code with economically damaging credits, deductions and exemptions, usually targeted at a few people or businesses:

Blunt says he was upset with groups who oppose the new "sweeteners" to the bailout bill. That's a reference to groups like the Tax Foundation who are sick and tired of seeing taxpayers' money funneled to special interests through the tax code. Just because those funds are mailed out by the IRS instead of Department XYZ, they earn the name "tax cut," but that doesn't make them any better. Among people who are serious about tax policy, liberals and conservatives alike oppose these special interest tax policies.

But some groups do support policies like these, blindly favoring anything that someone calls a tax cut. (For an example, see the Americans for Tax Reform's blog, which Wednesday defended the idea that any tax cut is a good tax cut.)

The bailout bill that passed is loaded with "earmarks." We put quotation marks there because the term "earmarks" usually refers to targeted spending, not targeted tax cuts. But logically, let's walk through a hypothetical comparison.

Suppose Congress was about to pass an earmark that sent a government check to some person or company for $1 million as a reward for doing something that had no public good value (beyond private gains). But then at the last second, the earmark was withdrawn and replaced with a $1 million tax credit for the same person or business. Should angry opponents of the corrupt spending earmark be appeased? No. They were right that wasteful government spending forces higher taxes onto taxpayers, but so do wasteful government tax credits. The only real difference is that the IRS is implicitly writing the check instead of the Department of XYZ. From the perspective of the most taxpayers, and of economic efficiency in general, it doesn't matter which way that million dollars is delivered.

By blindly following the "all tax cuts are good" mantra, groups on the right can find themselves denouncing and championing two policies that are economically equal. What they should really be focusing on is the whole fiscal picture. Are these spending policies, whether done through appropriations or the tax code, truly reflecting public goods and policies that are in society's interest? And if they're concerned about the redistributive element of government policies (i.e. they object to refundable credits because they exceed their tax bill), the relevant question is instead how much do those individuals receive in spending minus what they pay in taxes? In other words, the total net fiscal incidence is what matters on the distribution issue, not their tax liability on one type of tax.


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