I read a lot of books. A 40-minute ride on the metro helps. I go to the Arlington County or Falls Church libraries, head to my favorite Dewey decimal system number (336 – Public Finance) and browse in both directions from there.
Yes, I am the kind of book nerd that has a favorite Dewey decimal system number. I also enjoy reading fiction, most recently, The Handmaid’s Tale (Atwood), Rendezvous with Rama (Clarke), and the Beggars in Spain trilogy (Kress). As you can see, lots of science fiction, mostly Hugo and Nebula award winners.
I recently finished Taxes, Spending, and the U.S. Government’s March Toward Bankruptcy by Dr. Daniel N. Shaviro, of NYU Law School.
The book investigates the language we use to describe taxes, spending, welfare and deficits, as well as the consequences of that language.
For instance, what do we mean by “big government” as opposed to “small government”? Do we look only at the cash flows between the government and that taxpayers? What if the government only took in and spent 5% of GDP in its budget? Small government, right?
On the other hand, what if the government took in and spent 50% of GDP? Most people would say that’s a big government.
But what if the tax rates were very high, but there were a large number of credits, deductions and special rates for people that “behaved right” according to the government at the time, and that special tax treatment was always changing in order to incentivize certain behavior? Now it gets tricky, because of the words we use to describe the size of government.
Dr. Shaviro describes the ways that language has been used to conceal the true meaning of many public policies. For instance, the Earned Income Tax Credit is a way for the government to assist low-wage workers. Because it’s a tax credit, it makes government look “smaller”.
He also discusses deficits and the tricks that legislatures play to move the costs of policies outside of certain windows to hide the ensuing deficits. A fascinating example of this is the recent TIPRA changes for Roth IRAs. In order to balance short-term tax cuts within a 5-year window (under PAYGO rules, unbalanced tax cuts in a 5-year window required a “point of order” and 60 votes in the Senate), the Republican Congress passed a bill that removed the income cap on converting traditional IRAs to Roth IRAs in 2010. This brings in a ton of money for that year (the investor has to pay income tax on the money converted), which just happened to be at the end of the reporting period.
The problem with this scheme is that the pool of untaxed retirement savings is forever depleted, and the government loses more and more tax revenue outside of the window. The Tax Policy Center did a good analysis of it, but unfortunately I can’t find the fantastic graph that went along with it. Imagine a steadily increasing deficit from 2005 into infinity, with a one-year surplus spike in 2010 that’s the same height as the first four years’ deficits combined, and you’ve got it. Now draw a box around the first five years and you can see that your “budget is balanced”.
It’s crap, and Shaviro calls them on it. He suggests requiring supermajority (60 percent approval) for tax cuts or entitlement spending increases, and that massive revenue raisers that happen suddenly in the future don’t count. For entitlement spending, apply an infinite horizon or 75-year horizon for the supermajority requirement.
He suggests better reporting of budget data than just the simple deficit number. He recommends distributional information (how policies affect different income groups) as well as generational information (how policies affect different age cohorts, or people born around the same year).
I’m probably going to pick up “Do Deficits Matter” at some point, same author. I hope the answer is “yes”, since that’s what I’ve been assuming up until now.