A Bit on the Debt Ceiling

I understand the desire to cut back on government spending. Indeed, I share it. But politicians flirting with not raising the debt ceiling by the August 2nd deadline are playing a very dangerous game. And as the Reading Rainbow guy used to say, you don’t have to take my word for it.

69 Responses to A Bit on the Debt Ceiling

  • So if I understand correctly, on August 2nd interest rates start going up as the Treasury needs to roll over debt. Don’t know how long the Treasury can keep that up. A few day? Weeks? Months?

    Reagan on the debt ceiling:

  • I agree with President Obama (version 2006.1 Beta). The debt ceiling should not be raised until tea party extremists allow him to continue to spend $1.4 trillion more than revenues each year, and also authorize him to raise taxes (just for the evil rich), and spend more and more money (purposeful repetitive silliness here). SARCASM: off.

    Lessee, they’ve raised the debt ceiling 62 times, or is it more?. And, the US financial condition (accelerating downward trajectory toward national bankruptcy) each time got worse. Then, they get in a black man and they want him to fail . . . [Sorry]

    “They” have kicked this can down the road too many times. Soon, if something real is not done to reduce deficits and lower the national debt trajectory, the US will default and [shriek] receive a credit rating agency downgrade.

    FYI: These rating agencies rated AAA about $3 trillion of mortgage-backed CDO’s rated then they defaulted en masse. That is the cause for the Dodd-Frank prohibition for banks from using them for credit decisions.

    The link says sane conservatives (ad hominem: you’re a nut if you disagree) want the debt ceiling raised. Is one definition of “insanity” doing the same thing over and over and expecting a different outcome?

    Oh, . . . Both sides are obdurate here. yet, two out of three Americans agree with the House that lowering the deficit/national debt is vital. Seems the elites and academics split the other way.

  • So we are in essentially a no win situation? we have to raise the debt ceiling in order not to default. But raising the debt ceiling only puts us in more debt, because, let’s face, we have no restraint, we max out our credit every time. Which will then cause us to raise the debt ceiling yet again. Which will then put us in more debt because we have no restraint, etc., etc. …. :evil:

  • The link says sane conservatives (ad hominem: you’re a nut if you disagree)

    Yes.

    I heard Thomas Sowell interviewed the other day on one of the talk radio stations. His view was that the debt ceiling should be repealed entirely, so that people wouldn’t get the mistaken idea that you could limit spending by not raising it. When even Tom Sowell says not raising the debt ceiling is a bad idea….

  • T Shaw,

    I agree that getting spending more in line with tax revenues (primarily through spending cuts) is vital — but risking what amounts to a voluntary default on our current debt would be an absolutely boneheaded way to achieve that. I can understand if most people who answer polls don’t understand that, but the scary thing is when it’s unclear how many congressmen do.

  • BA: Then, whom is to blame for the impasse? Giuliani says 90% of the blame goes to Obama.

    They’re coming to put the “jacket” on m . . .

  • Well, there’s always the option of defaulting on federal payments other than debt service – not that it would be any wiser or more feasible to do so. You kinda want to avoid sudden disruptions like, say, not giving the military their paychecks. But hey, at least we’d keep interest rates low!

  • It seems to me that there was a bill that would have both raised the debt ceiling and cut spending passed in the House this week. Someone threatened to veto it and someone else insisted on having it tabled. So, the House at least did its job. If we default it’s on the President and the Senate for failing to be reasonable.

  • Mandy,

    You are correct.

    The Democrat Senate shot down the Repub House “Cut, Cap and Balance” in a straight party-line 51-46 vote. Senator DeMint will bring it forward again.

    From “Never Yet Melted”, “Richard Minter, Forbes, notes that we have no choice, we are going to have to stop increasing the beast’s rations. But that is a real problem for democrats, whose entire raison d’etre is the delivery of more federal money in return for support.”

  • Of course we wouldn’t have this debate right now if the Democrats had been able to pass a budget during the two years they completely controlled the federal government and if their solution to our fiscal problems didn’t consist of borrowing as if tomorrow will never come. The Republicans have brought forward proposals to curb our spending spree and Obama and the Democrats in Congress simply refuse to come up with any serious proposals of their own. Republicans shouldn’t budge an inch and force Obama to either give way or add “default” to his list of economic accomplishments. If we do default it will be by his choice since federal debt payments constitute a paltry 164 billion of federal revenue of 2.3 trillion. We do not need to borrow in order to meet our debt payments. Of course this is merely a scare tactic that the most worthless president in my lifetime has seized upon along with his threats to not pay the military or social security recipients.

  • I liked the Gang of 6 plan which was close to the Bowles-Simpson plan and supposedly the secret Obama plan. James Capretta at NR had some valid procedural criticism. If it were an ironclad bill, there would be no reason not to support it except for stupidity. Not raising the debt ceiling will result in a Democratic sweep in 2012. I know, I know “No, it won’t. It will result in 100 years of Republican dominance thanks to their steadfastness.” But I was just talking about reality.

  • “Not raising the debt ceiling will result in a Democratic sweep in 2012. I know, I know “No, it won’t. It will result in 100 years of Republican dominance thanks to their steadfastness.” But I was just talking about reality.”

    Reality comes in more than RINO lenses RR. Not raising the debt ceiling would lead not to a default but rather a cold dash of reality that business as usual is no longer possible. Adding a trillion dollars plus a year to the national debt is simply not feasible either long term or short term, and business as usual is Obama’s policy.

  • MAc is 100% right as always.

    Instapundit cites recent a Rasmussen poll result.

    Obama – 41%

    Ron Paul – 37%

    Another poll: two of three Americans agree with the House “Cap, Cut and Balance” plan.

    Maybe Obamba and Paul will exchange poll places when the O-ster reveals his secret plan.

  • Not raising the debt ceiling would lead not to a default but rather a cold dash of reality that business as usual is no longer possible.

    That cold dash of reality would be ruinous for the economy. If you think things are bad now, just try cutting a trillion or two dollars of government spending cold turkey like that and see what happens. That would be like an enemy destroying half our manufacturing capacity overnight. Remember that Y = C + I + G + X, and even though a lot of gov’t spending is transfer payments, that “G” is an awfully big number by itself. What would make up the difference if we suddenly stopped it? And it’s not just federal employees that wouldn’t get paid — payments on defense contracts would stop, for example, and employees all the way down the supply chain would lose their jobs. (Believe me, there are mom and pop machine shops that are nth-tier subcontractors on this stuff.) We don’t typically think of those kinds of businesses as people feeding at the gov’t trough, but that’s exactly the kind of ripple effect that not being able to borrow or otherwise raise revenues would have.

    Gov’t spending is certainly too high, but the answer isn’t to force the tough choices in such a reckless fashion. Instead of playing political games of chicken with the debt ceiling, what our elected officials should be doing is pursuing a steady, long-term strategy of aligning spending with revenues, with the goal of eliminating our borrowing addiction.

    One could argue that Sen. Bozo and Rep. Doofus have never shown such fiscal restraint, and one would be right. However, the alternative of slashing almost half of gov’t spending overnight is not the answer.

  • If we don’t start cutting spending now J. Christian, it will never get done. Our current path is one leading to debt repudiation in the not too distant future as we amass a debt that is simply unpayable. Unless a gun such as the debt ceiling is placed against their heads, there is no will to cut spending in Congress, at least among the Democrats. It is fanciful to expect anything else but kicking the can down the road by Congress unless a crisis arises that forces them to take action.

    If we simply rolled back federal expenditures to 2006 levels we would have a balanced budget. Such a demonstration of fiscal sanity would have an immensely positive impact on this nation’s economy and more than offset any negative impact from slapping hogs away from the federal trough. Such radical slashing of federal expenditures has been the norm in this country’s history. For example, in 1946 Federal expenditures were 55 billion with a substantial deficit. In 1947 expenditures were slashed to 38 billion with a surplus. The idea of a huge bloated federal budget is a novelty in this nation’s history and like so many of the ills that afflict us these days, a legacy of the sixties.

  • Never fear, the deep thinkers at Daily Kos have a solution not only to the debt ceiling but also the entire national debt:

    http://www.dailykos.com/story/2011/07/21/996876/-Beyond-the-Debt-Ceiling:-The-$30-Trillion-Plan-for-Ending-Borrowing-and-the-National-Debt?via=tag

    This idea is actually quite popular among the “reality based community”.

  • but risking what amounts to a voluntary default on our current debt would be an absolutely boneheaded way to achieve that.

    Regrettably, ‘absolutely boneheaded’ seems to describe a critical mass of the House Republican caucus. If the discussions I have had in fora such as this are any guide, these politicians move in a matrix of people for whom that is a descriptor.

    What is curious about this all is that (with the exception of Illinois and California) the state governments of all stripes seem to be able to cope passably with the fiscal difficulties they have faced. The central government, on the other hand, has conducted itself in such away as to discredit just about every component of the political class. They are all unfit to govern. We are about to learn that the hard way and are about to learn also that the institutional architecture of the central government is not so well engineered.

  • Most states require a balanced budget Art, they can’t print money and they don’t control the Fed to magically conjure it out of thin air. In short, they have to do it, and with the Republicans controlling most state legislatures and state houses there is the political will to do it. Where the Republicans control neither the legislature nor the state house, California and Illinois are prime examples, the flight from fiscal reality continues unabated.

    This crisis over increasing the debt ceiling is the most leverage proponents of fiscal sanity on the Federal level have to force the President and the Demcrats in Congress to do anything about the massive borrowing that is destroying the nation’s economic future.

    We are in this mess because for the past five decades we have been ignoring the first rule of a national debt set forth by Secretary of the Treasury Alexander Hamilton in his 1789 report to Congress on public credit:

    “Persuaded as the Secretary is, that the proper funding of the present debt, will render it a national blessing: Yet he is so far from acceding to the position, in the latitude in which it is sometimes laid down, that “public debts are public benefits,” a position inviting to prodigality, and liable to dangerous abuse,—that he ardently wishes to see it incorporated, as a fundamental maxim, in the system of public credit of the United States, that the creation of debt should always be accompanied with the means of extinguishment. This he regards as the true secret for rendering public credit immortal. And he presumes, that it is difficult to conceive a situation, in which there may not be an adherence to the maxim. At least he feels an unfeigned solicitude, that this may be attempted by the United States, and that they may commence their measures for the establishment of credit, with the observance of it.”

  • Will Rogers: “It ain’t what you don”t know that gets you in trouble. It’s what you know that ain’t so.”

  • You neglect a few things.

    1. A legislative body just might ignore the law, which Harry Reid and his confederates in the U.S. Senate have done with regard to the budget process. State legislatures have tended to be more circumspect about disregarding provisions of state constitutions and such.

    2. There are 11 state governments where the Democratic Party controls the executive and legislature, not two. California is in the crapper even though it has had a Republican governor for 23 of the last 28 years.

    3. The PBS talking heads last night were discussing some comments recently made by Christine Gregoire, the Governor of Washington. She apparently said she had to make what she termed ‘terrible’ decisions with regard to fiscal policy, but she made those decisions. Her federal counterparts are very resistant when they do not refuse outright. It is a different institutional culture.

    4. Modes of federal taxation are more procyclical than is the case on the state level. Federal tax collections as a ratio of domestic product are now at 0.149, about as low as they have been in the last 50 years or so. Some of the expenditure has been to service debt accumulated in attempting to resolve a banking crisis (always an expensive proposition) and some has been a result of demographic factors & price dynamics in medical care. A great deal of our trouble is the Democratic Party’s spending electives, but there is a great deal else as well.

    5. This is not going to be pretty, and advocates for the Republican congressional caucus have elected for the most part to behave as if the markets will not react. What is worse, it is coming to a head in conjunction with a sovereign debt crisis in Europe. The European institutions might have taken steps to immunize their banks, insurance companies, and defined-benefit pension plans by building a fund to buy preferred stock and issue indemnities. They apparently have not.

  • Mac,

    The Bernank and Tax Expert Geithner don’t need to raise taxes nor the elevate the debt ceiling nor mint trillion denominated platinum coins.

    They can simply make a book entry at each Federal Reserve Bank

    Aggregate national journal entry:

    Debit Credit
    Cash/effectively a Checking Account $30T
    Due to the American people $30T

    No. They will not draw checks on the accounts that cover “it all.” They will print $30T in crisp, new Federal Reserve Notes. And, that’s how it’s done now. Brilliant! Problem solved.

    Now, I’m having a stroke contemplating how much a bottle of hootch will cost.

  • “1. A legislative body just might ignore the law, which Harry Reid and his confederates in the U.S. Senate have done with regard to the budget process. State legislatures have tended to be more circumspect about disregarding provisions of state constitutions and such.”

    States can ignore laws all they want to Art, I could point out some doozies here in Illinois, but they can’t ignore they don’t have money which is why Illinois is staring at de facto bankruptcy.

    “There are 11 state governments where the Democratic Party controls the executive and legislature, not two.”

    Correct Art, and almost all are in worse fiscal shape than States controlled by the Gop.”

    “California is in the crapper even though it has had a Republican governor for 23 of the last 28 years.”

    I would hardly call the Guvernator a Republican Art. He got into the office due to Gray Davis and the Democrats leading the State down the path to bankruptcy, and, after an initial attempt to return to fiscal sanity, he went along with the Democrat controlled legislature.

    The change is noted here:

    http://usliberals.about.com/b/2006/01/14/arnold-schwarzenegger-californias-newest-democrat.htm

    “A great deal of our trouble is the Democratic Party’s spending electives, but there is a great deal else as well.”

    The current crisis is almost entirely due to the Democrat party, although I would concede that prior to Obama the fiscal abyss we face was a bipartisan disaster. The problem currently is that the Democrats refuse to do anything to meet the crisis and have done their best to make the fiscal crisis worse.

    “This is not going to be pretty, and advocates for the Republican congressional caucus have elected for the most part to behave as if the markets will not react.”

    Of course the markets will react. If the Republicans force through a deal that substantially cuts spending the markets will respond positively. If Obama refuses to agree to such a deal and takes the country into default as a part of political theatre against the Republicans, the markets will react negatively.

  • Don,

    Do you think Tom Sowell views the world through RINO lenses?

  • No he is simply wrong BA. It is possible to be wrong without being a RINO, but being a RINO certainly greatly increases the chances of being wrong on an issue of public policy. Sowell is simply misreading the politics of this based upon a fairly simplistic look at the government shut down of 1995:

    http://www.nationalreview.com/articles/256801/republican-showdown-thomas-sowell

    What Sowell fails to appreciate is that our fiscal plight is much more dire today than it was in 1995, that Obama has been on the spending spree to end all spending sprees and the public knows it, that the economy is in the tank today which was not the case in 1995 and that Obama lacks the preternatural political skills of Clinton. We also do not have Gingrich making an ass out of himself by complaining about being given a proper seat near the President on Air Force One. I think Sowell is a good economist and a poor historian.

  • Actually, the ratio of federal expenditure to domestic product is close to what it was ca. 1984. We are not in virgin territory as regards spending levels.

    There is considerable dreck in the federal budget, but the dreck is not anywhere near 40% of the total. And, of course, the tax take is lower than it has been in decades. The insistence on the part of Republican legislators that there be no tax increase, even one enacted by excising deductions, is foolish.

  • Economic growth is the solution.

    Achieve consistent 3% (private sector) economy growth and tax receipts will climb. If they could get 5% so much better. Conversely, rising tax rates (and more regulations) hamper GDP growth.

  • T. Shaw,

    The only period of time in American economic history where we experienced economic growth rates on the order of 5% per annum for any sustained run of years was in the process of climbing out of the Depression and ramping up war production. Even 3% per year is not to be expected given the rates of labor force growth we are likely to have.

  • “We are not in virgin territory as regards spending levels.”

    We certainly are in regard to amassing huge debt, without a global world war, and not a clue as to how pay for it, and an economy that has been in the tank for years.

    As to reducing federal expenditures, here are some ideas:

    End federal involvement in education. That would save 121 billion dollars.

    Reducing defense spending by 10% would save 72 billion dollars. (I would prefer not to do it, but these are desperate times.)

    Ending Federal welfare programs would save 108 billion dollars. Ending housing assistance would be good for another 60 billion dollars.

    Ending “Other Spending” would save 141 billion dollars. Let’s say 40 billion of that is worthwhile, we will call the savings 100 billion dollars.

    Ending Foreign Military and Economic aid would save 62 billion dollars.

    Abolishing Homeland Security would save 46 billion dollars. The whole thing should be scrapped with anything useful funded, including the INS, for not more than 10 billion dollars under the Department of Defense or the Department of Justice.

    Every Federal Agency, other than the Department of Defense, to be subject to an across the board 10% decrease in funding.

    Abolish retirement at 62 to receive social security.

    I think this would give us a pretty good start on amputating a substantial portion of the Federal budget.

    http://www.usgovernmentspending.com/budget_pie_gs.php?span=usgs302&year=2012&view=1&expand=30104041702080005051&expandC=&units=b&fy=fy12&local=s&state=US#usgs30250

  • As I said, there is a great deal of dreck in the federal budget, though I think the budget of the Department of Education is about half the figure you quote. The thing is, the Republicans only control 1/2 of the legislature. There is a limit to what they can accomplish in these circumstances and grave dangers accompanying their methods.

  • The figure I gave was total Federal spending on education Art. The Department of Education’s budget for 2011 is 77 billion. The Republicans are in opposition and there is a limit to what they can accomplish. However, this country is headed to a fiscal and economic iceberg, and the Republicans have to establish to the voters of this country that they are doing their very best to change the nations course. Then it will be up to the voters to decide in 2012.

  • Art Deco, federal spending as a percentage of GDP is at the highest since WW2. Granted, it isn’t that much higher than it was in the 80’s.

  • It is about 24%. In 1984, it was 23.5%. Federal spending during the Korean War was higher, I believe.

  • Compared to subsequent years, the Korean War looks normal but it marked a new normal of higher spending and revenue.

    Spending was 25% of GDP in 2009. 23.8% in 2010. The previous post-WW2 high was 23.5% in 1983. Post-WW2 average is 19.6%. Post-Korean War average is 20.1%. While social programs make up a large part of spending, as a percentage of GDP, Social Security is very stable and Medicare is growing rapidly but at a steady pace. The sudden run ups in spending correlate to military build ups and fiscal stimulus. The rest of government, i.e., non-military discretionary spending isn’t much of a problem. If you want to dramatically cut spending you have to look at Medicare and defense.

    Revenue was14.9% in 2009 and 2010, the lowest since 1950. On the other hand, it was 20.6% in 2000, the highest since WW2 when it peaked at 20.9%. Post-WW2 average is 17.7%. Post-KW average excluding the last 2 years is 18%. As a percentage of GDP, revenue is less volatile than spending. Absent tax cuts/hikes, revenue growth should closely match GDP growth. While income taxes and tariffs have been declining, the Social Security tax has been making up for it. It’s clear from the numbers that tax cuts don’t pay for themselves. If you want more revenue, it’s pretty straight forward.

    The hidden story is the growth of state and local government. State spending on health care and local spending on education have exploded. States have been increasing income taxes, both personal and corporate. Local governments have been raising fees and business taxes. Sales and property taxes have been steady. And most of this isn’t to make up for less federal spending (though there’s some of that particularly in education).

  • You can add Grover Norquist to the list of folks who think not raising the debt ceiling would be a disaster. Of course, Grover is noted for being a something of a milquetoast, so I’m sure he just doesn’t realize that Republicans are perfectly positioned to benefit from a default.

  • I think Mr. Boehner offered an extension of some months duration yesterday and was told no deal by Harry Reid. It seems the TEA Party caucus is holed up in Galveston saying ‘nothing’s going to happen’ as the storm surge barrels in and Harry Reid is ready to push down on that plunger betting the ensuing explosion will take out someone other than his crew. Most dismaying.

  • I thought Grover was keeping himself busy defending ethanol subsidies, the federal boondoggle to end all federal boondoggles.

    http://www.huffingtonpost.com/2011/06/14/grover-norquist-ethanol_n_876887.html

  • I believe Art (correct me if I’m wrong) is fond of noting something along the lines of America being saddled with the worst political class in our history. If the last few weeks haven’t proven it, nothing will.

  • Don,

    You raise a good point. There is a lot of government spending hidden in the tax code as tax credits and deductions. Ethanol would be one example, but there are plenty of others. A lot of conservatives have mistakenly treated getting rid of these tax expenditures as if they were the same as increasing tax rates (i.e. treating them as being of the devil). So, for example, some conservatives have rejected the Gang of Six proposal on the grounds that it raises taxes, even though the proposal reduces tax rates, because it also eliminates tax expenditures like the ethanol one you mentioned.

    What’s striking about Norquist is that he has been one of the staunchest opponents of eliminating tax expenditures (without corresponding tax cuts), and yet even he thinks that not raising the debt ceiling would be a bad idea.

  • It is hard to take issue with the proposition that eliminating tax ependitures is different from and superior to raising rates, as long as the term “tax expenditure” is properly defined. And therein lies the rub — it is not that easy to define. Theoretically it describes in disparity or departure from a hypothetically perfect tax base — whether based on income, consumption, wealth, or some more idiosyncratice option. For instance, sales tax exemptions for manufacturing machinery are often tagged as tax expenditures, but that is probably not correct. The term has utility, no doubt, but is often employed too readily without sufficient discernment. That said, ethanol subsidies would and should satisfy pretty much any knowledgable person’s definition.

  • Mike,

    I agree with you that it can get to be a tricky issue. This is why I think an absolute insistence on never raising taxes doesn’t work. Norquist has tried to maintain that position, and has ended up tying himself in knots, arguing against eliminating ethanol subsidies one day, then saying that he’s fine with letting the Bush tax cuts expire the next.

  • Agree, BA. I am no admirer of Norquist. There is no magical “right” maximum tax rate or maximun “right” size of government. These are prudential concerns, and reasonable men of good will can disagree in good faith. I favor smaller government with lower taxes, including lower tax rates, but not every tax increase is automatically unfair or unreasonable. As between removing ethanol subsidies versus increasing tax rates, it should be obvious that the former is the easier and more sensible policy decision — the fact that Norquist can’t see it that way demonstrates what happens when one contrives shakey principles to follow slavishly.

  • I rather suspect that the true reason that Grover is against deep sixing the ethanol subsidy has little to due with his alleged inability to distinguish between ending a subsidy and raising a tax.

    http://www.redstate.com/erick/2011/03/29/on-ethanol-conservatives-should-stand-with-tom-coburn/

    This stinks to high heaven and I am glad Coburn is hanging tough on this.

    http://www.bloomberg.com/news/2011-06-17/senate-ethanol-vote-signals-ill-wind-for-other-energy-subsidies.html

  • You may be right, Don, but I suspect that he knows the difference but his positions are informed by the rather crude “starve the beast” “the smallest government is best” prime directive. In other words, concerns about horizontal equity or fairness, or even economic efficiency, just take lower priorities than his prime directive. I have never been impressed with his thoughtfulness, but one cannot help but be impressed with his influence in GOP circles. He had a role in sabatoging much needed tax reform in GA.

  • Here’s my 4-STEP ACTION PLAN:

    (1) FIRE Rep. John Boehner and Sen. Mitch McConnell; replace them with Rep. Jim Jordan and Sen. Jim DeMint … .

    (2) CUT all Federal salaries by 15% beginning on October 1, 2011 … .

    (3) CUT the number of Federal employees by 15% beginning on October 1, 2011 … .

    (4) FREEZE the Federal Debt Ceiling at $14 Trillion … .

  • “There is no magical “right” maximum tax rate or maximun “right” size of government. These are prudential concerns, and reasonable men of good will can disagree in good faith. I favor smaller government with lower taxes, including lower tax rates, but not every tax increase is automatically unfair or unreasonable.”

    Couldn’t have said it better myself. Like I’ve said before, tax hikes should be treated like a declaration of war — a last resort to be used only when all else has failed or clearly will not work. If “all else” has not been tried, then don’t do it. However, to declare that one (as a head of state) will absolutely never raise taxes under any circumstances is as imprudent as saying that one will never, ever declare war under any circumstances.

  • Here’s my 4-STEP ACTION PLAN:

    ‘Cuz you got four years worth of beef jerky and canned goods stockpiled in a basement vault.

  • AD: “Four years worth . . . ” :?:

    In a collapse, America would have about a week away before mass violence, rapine and starvation. After a couple of months, there would be nothing left.

    Pray for the best. Prepare for an economic apocalypse.

    The debt ceiling will be raised and short term they will pay all amounts due. However, without a sharp reversal, insolvency and Greece-style default are inevitable. Greece has Germany and the ECU to save their bacon. The US does not have that.

  • Blackadder, ethanol is a subsidy, which is different than a tax credit. One allows you to keep more of the money you earn while the other takes money from one tax payer and gives to another.

    Don… nice arguments.

  • Tax credits are subsidies. Gasoline companies receive a tax credit for adding ethanol. Even if they were subsidies in the traditional sense, it makes no difference whether you keep money that other people cannot or whether you pay the taxes that everyone pays then get a refund that other people do not.

  • Subsidies can come in the form of a tax credit, but tax credits are not subsidies. There is a significant difference between the government allowing one person to keep more of their money and the government taking money from one person and giving to another. The former is tax abatement and the latter is called theft.

    True, the goals of both are the same, to encourage a behavior, but the means vary.

  • A refundable tax credit is the same as a subsidy. There’s really no difference between the two except in name.

  • A tax credit may not exceed total tax liability. A subsidy may, i.e. you can receive monies exceeding your tax liability. Some would call this profiting. I suggest you study the way these two examples work: agricultural and COBRA subsidies.

    Tax deduction tax credit subsidy.

  • Last line should have read …

    Tax deduction != tax credit != subsidy.

  • Kyle’s distinctions are legal but not substantive. Any departure from a Haig-Simons income tax base is a subsidy of some sort, if not legally, substantively. Limiting subsidies to the amount of one’s income tax liability does not make it less a subsidy,

  • A tax credit may not exceed total tax liability.

    If a tax credit is refundable then you get a “refund” of the full amount even if this is more than your total tax liability.

  • Sorry. Missed the “refundable” part. I am speaking of nonrefundable tax credits, which is usually the case.

    Mike, I assume you believe any tax cut is a subsidy. In fact, you could say anything less than 100% of your income to the government is a subsidy.

    Lowering the tax burden sometimes costs the government revenue, but is not the same as a subsidy. A subsidy is wealth redistribution whereas a nonrefundable tax credit and/or deduction is wealth retention. That is a substantive difference.

  • Mike, I assume you believe any tax cut is a subsidy

    Varying the tax rate according to economic sector constitutes a subsidy for the favored sector.

  • Varying the tax rate according to economic sector constitutes a subsidy for the favored sector.

    Only if you start with the assumption that all money is property of the state.

  • Kyle,

    I think you are missing the point. Suppose that Congress, in its infinite wisdom, decided to create a special tax deduction for people not named Kyle. To object to such a deduction doesn’t require you assume all money is property of the state.

  • Only if you start with the assumption that all money is property of the state.

    No, that is not the case. The only assumption is that some sort of tax is being assessed, either on enterprises or on households drawing income from enterprises or purchasing from them. Varying the rate of that tax confers a comparative advantage on the economic sector so favored.

  • I think you are missing the point. Suppose that Congress, in its infinite wisdom, decided to create a special tax deduction for people not named Kyle. To object to such a deduction doesn’t require you assume all money is property of the state.
    No, but calling the money the people get to keep a “subsidy” would be incorrect. It was their money in the first place. The government is not subsidizing their income by allowing them to keep more of it. If anyone is being subsidized in this scenario, it’s the government.

    No, that is not the case. The only assumption is that some sort of tax is being assessed, either on enterprises or on households drawing income from enterprises or purchasing from them. Varying the rate of that tax confers a comparative advantage on the economic sector so favored.
    I agree with everything you say here except the idea taxation is an assumption. It’s a certainty.

    I would add that not only does it give one party an advantage over the other by allowing them to keep more of their money, but taxation can be used to discourage behaviors by penalizing a party. Sadly, this taxing power has been abused in recent times.

  • but taxation can be used to discourage behaviors by penalizing a party. Sadly, this taxing power has been abused in recent times.

    There are externalities afoot in markets. Making use of excise taxes to render such costs internal to the producer (and consumer) is not an abuse of the power to tax.

    I agree with everything you say here except the idea taxation is an assumption. It’s a certainty.

    Unless you are running your government on some sort of royalty, there will be taxes. Particular instances of taxation are not certainties, however.

    If anyone is being subsidized in this scenario, it’s the government.

    You are confounding the manifestation of something in accounting with its economic effects.

  • Kyle,

    Let’s consider a couple of scenarios:

    1) Person A pays $10,000 in taxes. The government then turns around and cuts Person A a check for $2,000. This is a subsidy. Very bad.

    2) Person B pays $10,000 in taxes. The government then turns around and cuts Person B a check for $2,000. But it labels the check a “refund” for taxes paid. This, apparently, is not a subsidy, but is simply the government let people keep more of their money.

    It is senseless to treat the two scenarios differently. If you object to 1 but not 2, all that will happen is that the government will label more and more of their subsidy checks “refunds,” which is in fact what has happened. Ethanol subsidies, for example, take the form of a tax credit. The fact that it takes the form of a tax credit, however, does not mean it isn’t a subsidy.

  • There are externalities afoot in markets. Making use of excise taxes to render such costs internal to the producer (and consumer) is not an abuse of the power to tax.

    Any power can be abused, including the power to tax. Just because one has the authority to tax doesn’t mean there is no possibility of abuse.

    1) Person A pays $10,000 in taxes. The government then turns around and cuts Person A a check for $2,000. This is a subsidy. Very bad.

    2) Person B pays $10,000 in taxes. The government then turns around and cuts Person B a check for $2,000. But it labels the check a “refund” for taxes paid. This, apparently, is not a subsidy, but is simply the government let people keep more of their money.

    The $2k was never the government’s. The citizen’s invoice was for $10k. As a reward for behavior the government would like to promote, it tells the citizen to keep $2k of the money he sent the government. He is getting back $2k of the $10k he sent the government. That is the $10k from his pocket. It was his money, not the government’s. He gave it over willingly as his duty requires. He profited nothing; he simply received a portion of what he sent.

    Now, if he paid $10k in taxes and received $12k back, that is a serious problem which happens way too much.

    I am 50/50 on the idea if he paid $10k and received $10k back. It depends on why he is getting the $10k back.

    A dollar has a life. It’s either productive or not. The dollar takes residence in the private market or public sector. Every dollar returned to the private market has a much better chance of being productive and beneficial to the country than one going to the government. So, I am not offended at the sight of every tax break. Some are worthwhile and many are not, e.g. ethanol subsidies.

  • Some are worthwhile

    Which ones, and why?

  • Art, are you about to argue a flat tax is the only fair tax system?

  • The $2k was never the government’s.

    The money was deducted from your paycheck and sent to Washington as taxes, where it was deposited with the treasury (and then likely spent). In what sense is this money “never the government’s”? Only in the sense that the government says the money was never theirs. What your view boils down to is that the money is your property if and only if the government says it is. If the government calls something a subsidy, then it’s a subsidy. If it does exactly the same thing but calls it a tax cut, then it’s not a subsidy, but a tax cut (except perhaps in the special case where the “tax cut” is more than the total of what you paid in taxes).

    If this were just a manner of semantics then it wouldn’t really matter. But you seem to think that having the government send people checks based on engaging in some government approved activity is bad if it’s labeled a subsidy but okay if it’s labeled a tax credit. By that logic, two individuals could receive the same amount of money from the government via the ethanol tax credit, and in one case in would be a government subsidy while in another it’s just letting people keep more of their own money, just because the initial tax burden of the second guy was a little higher than that of the first.

    Every dollar returned to the private market has a much better chance of being productive and beneficial to the country than one going to the government.

    This is only true if people are free to spend that dollar as they see fit, rather than as the government directs. A person who gets a welfare check has a lot more freedom as to how to spend that money than does a person receiving an ethanol tax credit. The former can spend the money however he wants, whereas the latter has to spend the money on ethanol or it will get taken away from him in taxes.

  • Art, If not fixed, then taxes must vary. As learned here, that would require unfair subsidies. I think there is value to a varying tax system.

    The money was deducted from your paycheck and sent to Washington as taxes, where it was deposited with the treasury (and then likely spent). In what sense is this money “never the government’s”?

    This is why I abhor payroll deductions. People begin to believe payment arrangements define the way the tax system works. If I was president, I would eliminate W-2’s and make everyone work 1099.

    The way the income tax system works at its most basic is you earn an income, and the government bills you for a percentage annually. That invoice comes due Apr 15th. Everything else works within that basic framework.

    Payroll deductions are one avenue of paying your taxes. You could simply cut a single check between 1/1 and 4/15. Or, you could pay quarterly, which is the most the IRS will allow if you annual income reaches a certain level. You could also pay every month, every week, and even every day. These are avenues to settle your invoice. They are payment plans and are not the tax system.

    In regards to the $2k, where did the government get the $2k? Certainly not from its profits. The $2k, if paid out, has to be an account receivable before it’s an account payable. If not paid out, i.e. a tax credit, it never reaches AR and there is no AP. They simply record less in AR. They never possessed the $2k.

    Non-refundable tax credits are not the same as subsidies. People profit from subsidies without regard for taxes due, e.g. cash for clunkers, etc. Non-refundable tax credits are a reduced obligation which may not exceed you tax invoice amount. You cannot profit from them. You can only retain more of what was yours to begin with.

    The welfare check is wealth redistribution. It’s a redistribution most people are willing to accept to an extent, certainly not the proportions we see today.

    I am not for ethanol subsidies. They are an attempt to create an artificial market condition with unhealthy results.

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