Asymmetrical Information

The targeted tax exemption to businesses for medical expenses has got to be a major source of distortion in both the ammount and kinds of medical services we consume. For example, I expect it is a major contributor to the overuse of antibiotics.

I dunno, the way this one manages to combine a stupid structure with dishonest packaging has to put it right up there.

Surprised you didn't catch this one. How about the business exemption for insurance costs for employees, that employees don't get for themselves?

Without it, maybe we'd have a robust system of private personal, portable health insurance, and more choice, rather than the bureaucratic scheme we have today. (Compare it to auto insurance, which I know is by no means perfect, but no-one is calling for nationalizing it either.)

Size matters Jane. As does context.

Do you really want to compare the fiscal merits of Bush 43 V. Clinton?

... Clinton's "targeted tax cuts" that cost a bunch of money, subsidized things that people were mostly doing anyway, and introduced high levels of structural complexity and rigidity into the tax code.

Both parties do this now, and I agree that it stinks. If you want to do social policy, write people checks (or write other people checks to provide services) and raise taxes to cover the cost. If you don't want to write checks, don't do social policy. Doing it through the tax code makes tax compliance more burdensome for both the taxpayer and the IRS, makes it effectively impossible to monitor whether the policy is working, and almost always disproportionately benefits the wealthy.

I particularly dislike the 529 plans. These are tax-free investment accounts that permit essentially unlimited contributions so long as the money is used to pay educational expenses. The people who are in a position to contribute vast amounts to 529 plans by definition have ample resources to help their children pay for college and don't need the tax break.

Full disclosure: I've set up a 529 plan myself. How could I not?

hi jane,
how about the last one?

Alkali:

The EITC disproportionately benefits the wealthy? None of your criticisms make much sense. If you write someone a check, there’s obviously no guarantee that he’ll spend it in the way you intend. That’s one reason why tax credits tend to be better than cash handouts. And I don’t see why you think the costs imposed by a new tax credit are likely to be greater than the costs of setting up and administering a new benefit, or why the former would be more difficult to monitor than the latter.

Ack. I guess that flat tax never is going to happen, is it? They never are going to attempt to reform this system.

It's weird to be only 32 and figure that I'll die of old age before some things change that *really* need changing. The War on Some Drugs is another one. A market-based healthcare system is another. (Tying health insurance to employment is lunacy).

I have to agree that this is a really bad tax cut. It isn't nearly big enough. But at least the senate suspended the dividend tax.

I don't know much about this tax cut, but worse tham having this tax cut is having none at all, or having tax increases, which is what Congress usually gives us.

Sigh. Even Our Jane falls into the classic error. She claims "Clinton's "targeted tax cuts" that cost a bunch of money." Tax cuts don't cost anyone anything. They certainly don't cost taxpayers anything, even from the government side, a reduction in revenue is not really a "cost," now is it?

T.Hardin --

I think what Megan may be getting at is that "tax cuts" like the kinds she alluded to can have true economic costs (not just a reduction in government revenue). Think for a second about a credit afforded to a business to entice it to engage in an activity the market doesn't naturally support. Isn't there an opportunity cost associated with encouraging businesses to make decisions that have nothing to do with smart economics (other than getting a tax credit)? Don't such artificial incentives built into the IRC give rise to incredible inefficiencies? Credits luring businesses to invest in ventures that no one in their right minds would invest in, save for the sexy tax treatment?

Listen, I'm all for tax cuts...the bigger, the better. I'd dearly love to keep a lot more of what I earn. But the IRC is rife with incentives that contribute to inefficient use of business resources.

I don't think Michael's point is uniformly, or even generally, true. What investments did Clinton's tax cut encourage businesses to make that turned out to be deeply unwise?

Tax breaks encourage companies to do things that may not be profit-maxmizing in the immediate future, but that can have long term benefits both for the company and the country. We possibly would not have AIDS drugs now without the (Republican) government having given incentives to pharmaceuticals, which initially had no interest in AIDS because they figured it was affecting only a small subpopulation that wouldn't be profitable. Same with drugs for children -- it's just much more profitable for companies to find Viagra than life-saving drugs that will be used by a small group.

Now, if companies in the 1990s were given tax breaks to invest in new technology, that would have been stupid as hell because now we have excess. That is the kind of thing that should be left strictly to market forces because there is no apparent need, as opposed to desire, for more than the market would provide. I have a specific thing in mind that we have too much of -- not bandwidth -- something that companies laid down lines for -- errgh...

PG, why do you think that companies won't do things that have long term benefits? By that calculus, there is no private R&D.

On a broader level, why would the government be more adept at picking good projects than companies?

T. Hartin writes:

Sigh. Even Our Jane falls into the classic error. She claims "Clinton's "targeted tax cuts" that cost a bunch of money." Tax cuts don't cost anyone anything. They certainly don't cost taxpayers anything, even from the government side, a reduction in revenue is not really a "cost," now is it?

Let's work out the implications of that:

1. I favor a special federal law exempting me, and no one else, from paying any kind of federal taxes.

2. Exempting me from paying any kind of federal taxes "won't cost anyone anything." Accordingly, no one has any reason to object to such a law.

3. Accordingly, there is no reason for the government not to enact such a law, because I favor it and no one else would have any reason to object to it.

T. Hartin, do you support my proposal?

PG wrote:

Tax breaks encourage companies to do things that may not be profit-maxmizing in the immediate future, but that can have long term benefits both for the company and the country. We possibly would not have AIDS drugs now without the (Republican) government having given incentives to pharmaceuticals, which initially had no interest in AIDS because they figured it was affecting only a small subpopulation that wouldn't be profitable.

Perhaps, on the other hand without trying to artificially direct research into a disease that really only affects a small subpopulation and is for all practical purposes about 100% preventable, the federal government has arguably taken away research dollars that might have been spent on other diseases that affect a larger population group and which aren’t as preventable.

Don P writes:

The EITC disproportionately benefits the wealthy?

I grant you, that's an exception, and a rare one.

None of your criticisms make much sense. If you write someone a check, there’s obviously no guarantee that he’ll spend it in the way you intend.

Whereas if someone takes a tax deduction, it's guaranteed that he spent money in a way that entitled him to take the deduction? There has to be an enforcement mechanism in each case.

Why restrict the inquiry to supposedly stupid tax cuts? All the really, really incredibly stupid government actions involve tax increases and spending.

The luxury tax rammed thru by the Dems back around 1990 has to be THE most incredibly stupid tax policy ever. It bankrupted half the boat industry, put thousands of workers on unemployment and was an incredible drain on the federal treasury. It raised very little revenue and caused the loss of substantial amounts of corporate and individual income tax revenues while also causing large expenditures for unemployment, etc.

Bottom line -- a tax which was a major showpiece of the Democratic party agenda which ruined the lives of thousands of people, damaged the economy, decreased government revenue and increased govt expenditures. The ultimate lose, lose, lose, lose proposition (although foreign boat manufacturers did see a small increase in sales).

The most despicable part of all this was that Jim Sasser and the rest of the Dem leadership were advised that this would happen. The Dems pushed it through anyway as part of their use of class warfare as an electoral issue. The perception that a luxury tax would hurt the rich (and thus gain votes) was more important than the reality that it would ruin the lives of workers and be a drain on the treasury.

I don't think the most vociferous opponents of these cuts want to argue that they are as bad as that -- and certainly cannot argue that they are based on such despicable motives.

I will leave all you economists to determine little break or incentive is the worst. However, the point of Bush's tax cut programs (plural) is to reduce the size of government (or slow the rate of growth). He hasn't been able to cut spending (hardly, with Defense and democrats protecting all domestic spending) but over a longer term, deficts will force government to cut things. The next step for Bush, I am sure, is to flatten the code. Think big picture, guys.

PG, why do you think that companies won't do things that have long term benefits? By that calculus, there is no private R&D.

-Jane Galt

This is not what PG said. PG was making a more nuanced argument about how government can encourage certain investment whereas businesses will oftentimes focus on short-terms gains instead.

Some companies understand that the research for which they are involved will have little short-term benefit. (HP is a good example - funny that most tech companies are loathe to imitate their business model.)

Counter examples include the atom bomb, which gave rise to nuclear energy. The space program - can't even begin to say how many sectors of the economy have been affected by this, most notably communications. Jet propulsion brought about widespread airline travel. DARPANET was the military predecessor to the Internet. The Interstate Highway system which has become not just an economic byway, but a cultural centerpeice as well.

The dynamic between public and private sector investment in this country and been the bedrock of phenomenal innovation. It's silly to suggest that only of either would have acheived the same (or better) result in the same time frame.

What's the Most Potent Way to Stimulate the Economy? It is nearly 18 months old but might have some relevancy here.

Alkali:

Whereas if someone takes a tax deduction, it's guaranteed that he spent money in a way that entitled him to take the deduction? There has to be an enforcement mechanism in each case.

There is an enforcement mechanism for tax deductions, which is documentation and auditing. The IRS can check to see how much you paid in mortgage interest, for example. If you take the deduction without having paid the interest, you're subject to criminal penalties.

Clinton raised taxes on the wealthiest and we got eight years of more jobs, rising stock prices, and a strong economy.

Dubya cut taxes on the wealthiest and we got three years of fewer jobs, falling stock prices, and a weak economy.

So if Dubya cuts taxes on the wealthiest yet again, we will get what???

How stupid are the American people?

We'll see.

"Dubya cut taxes on the wealthiest and we got three years of fewer jobs, falling stock prices, and a weak economy."

Has somebody already forgotten 9/11? Clinton failed miserably to spend the necessary money to fight terrorism. George W. Bush's administration has already eliminated the Iraqi threat. The costs of fighting terrorism are not cheap.

Tom Strong said:
> Clinton raised taxes on the wealthiest and we got eight years of more jobs, rising stock prices, and a strong economy.

During a huge economic upsurge that started before his administration. I'd like to know how you can link the raised taxes to those other events. Lets also not forget that there was a quantum shift going on with the Internet and information technology - sa the Internet came out from _under_ the government control, and companies began to use it.

There was also a major ponzi scheme that started due to a vast number of reasons, one I found interesting was the fact that the Boomers, nearing retirement, began shoving huge amounts of investement into the stock market, due to lack of planning for retirement, large debt loads (and wanting a easy, fast way to pay those off), and attempts to retire early. That massive influx of capital, which was very much in evidence after the dot-com IPOs started, as people tried to get in on the deal, I think has far more to do with the job creations and stock market increase than anything to do with taxes.

Also note the Dot-com collapse started under Clinton. So how did he cause it? (If he was responsible for it, then he's due the blame for the collapse).

> Dubya cut taxes on the wealthiest and we got three years of fewer jobs, falling stock prices, and a weak economy.

Which was starting before the tax cuts were even proposed. So how did the tax cuts cause them? And of course, lets not forget that little minor war that got started. That largely resulted due to failures in foreign policy of the previous administration.

> So if Dubya cuts taxes on the wealthiest yet again, we will get what???

Heck, I don't know, but lets find out. (It will be interesting if Bush gets re-elected, and the economy starts booming again, how much amnesia will start to occur. I guess there's lots of historical evidence for that not to be surprising)

> How stupid are the American people?

Well, I guess that depends if we have to average you in or not.

Addison

If I read one more person assert that, "Tax policy x caused the nation's economy to do y", I think I'm gonna increase the strength of my whiskey from 100 to 130 proof. Most depressingly, even people with doctorates in economics engage in this fatuous flim-flammery. I think DeLong once wrote that the Clinton tax increase caused 33% to 66% (what, not 37% to 61%?) of the surpluses in the second half of the 90s. Yes, there are examinations of isolated industries in which tax policy can have a more observable causative effect, like the luxury boat industry example above, but when people start drawing conclusions about casuation on something as complex as the entire U.S. economy, it is nearly akin to a meterologist saying that the 3 bean chili served at the last meteoroligists' convention had an observable causative effect on the weather of Las Vegas. The fact that a mathematical formula is trotted out to "prove" it to be the case only adds to the veneer of empiricism that covers a thick base of partisan preferences.

George W. Bush's administration has already eliminated the Iraqi threat.

And what threat would that be?

Certainly, there are some cyclical elements in the business cycle on which fiscal policy will have no effect. Thus, the U.S. economy began to pull out of the recession under Bush I and began its decline under clinton.

Yes, the economy began to pull out of the Bush I recession before Clinton's election. But this probably has much to do with the Fed's looser monetary policy at the time. Clinton's economic policy was brilliant because from 1993 with the introduction of his budget plan, he showed a commitment to ballancing the federal budget which would reduce the crowding out effects of an ever-expending government debt, reduce long-term interest rates, work to resolve the huge FTD, which increases confidence in invrestments and the Dollar. Clinton's policies not only assuaged investors but also the Fed, who didnt have to fear inflation during the Clinton years. Whether or not the Republican Congress had an effect on Clinton's fiscal austerity, clearly he knew what he was doing when he adopted the budget-ballancing mantle as his own. And it certainly proved helpful in increasing confidence in the U.S. economy.

In contrast, bush's fiscal policies seem aimed at doing whatever they can to undermine such confidence.

As for the fact that the dot-com bubble burst on clinton's watch, that had more to do with the economy coming back to earth than with poor clinton policies. Perhaps his policies allowed for too much growth and he should have pushed for contractionary policies to curb over-investment (taxes) which the Republicans would have never allowed...

In any case, it is clear that the economic downturn that we continue to experience has not been softened by Bush's economic policies. The argument can be made that his policies have made the situation worse and that the Democrats would have done better. Just look at the Democratic stimulus plans in the Senate....they're actually stimulative unlike Bush's package. The only thing Bush ahs done to help the economy is to expand government spending (but as any decent fiscal conservative knows, such expansion is a double-edged sword).

If our economy miraculously recovers from its death spiral, I assure you, Bush will have nothing to do with it...unless he and his economic team are bludgeoned into sanity by the sheer idiocy of their fiscal program.

Certainly, there are some cyclical elements in the business cycle on which fiscal policy will have no effect. Thus, the U.S. economy began to pull out of the recession under Bush I and began its decline under clinton.

Yes, the economy began to pull out of the Bush I recession before Clinton's election. But this probably has much to do with the Fed's looser monetary policy at the time. Clinton's economic policy was brilliant because from 1993 with the introduction of his budget plan, he showed a commitment to ballancing the federal budget which would reduce the crowding out effects of an ever-expending government debt, reduce long-term interest rates, work to resolve the huge FTD, which increases confidence in invrestments and the Dollar. Clinton's policies not only assuaged investors but also the Fed, who didnt have to fear inflation during the Clinton years. Whether or not the Republican Congress had an effect on Clinton's fiscal austerity, clearly he knew what he was doing when he adopted the budget-ballancing mantle as his own. And it certainly proved helpful in increasing confidence in the U.S. economy.

In contrast, bush's fiscal policies seem aimed at doing whatever they can to undermine such confidence.

As for the fact that the dot-com bubble burst on clinton's watch, that had more to do with the economy coming back to earth than with poor clinton policies. Perhaps his policies allowed for too much growth and he should have pushed for contractionary policies to curb over-investment (taxes) which the Republicans would have never allowed...

In any case, it is clear that the economic downturn that we continue to experience has not been softened by Bush's economic policies. The argument can be made that his policies have made the situation worse and that the Democrats would have done better. Just look at the Democratic stimulus plans in the Senate....they're actually stimulative unlike Bush's package. The only thing Bush ahs done to help the economy is to expand government spending (but as any decent fiscal conservative knows, such expansion is a double-edged sword).

If our economy miraculously recovers from its death spiral, I assure you, Bush will have nothing to do with it...unless he and his economic team are bludgeoned into sanity by the sheer idiocy of their fiscal program.

Sean might want to go have a look at what's actually happening to long-term interest rates.

"Has somebody already forgotten 9/11? Clinton failed miserably to spend the necessary money to fight terrorism. George W. Bush's administration has already eliminated the Iraqi threat. The costs of fighting terrorism are not cheap."
Posted by David Thomson at May 17, 2003 01:41 PM

That still doesn't explain why Bush cut taxes and raised spending.

But never mind, I liked your post. You right-wingers really know how to stay on message! If anyone questions the administrations policies on any subject, you trot out 9/11. Very effective.

By the way, Cheney argued against the UN sanctions against Iraq while he was CEO of Halliburton. You know, back when he was in the private sector, creating jobs by firing people.

Well, that wasn't a bit condescending. Not at all like the usual Orbitron material.

Jack M. wrote "However, the point of Bush's tax cut programs (plural) is to reduce the size of government (or slow the rate of growth). He hasn't been able to cut spending (hardly, with Defense and democrats protecting all domestic spending)"

Sorry? How exactly are democrats protecting spending? You've got a clean sweep of republicans in power, and they still can't make the numbers add up. For all Bush's complaining about the spendthrift congress, he's done nothing to reduce spending, other than by attacking a few programs that annoy the right-wing base.

"Has somebody already forgotten 9/11? Clinton failed miserably to spend the necessary money to fight terrorism. George W. Bush's administration has already eliminated the Iraqi threat. The costs of fighting terrorism are not cheap."

Since when have the enormous outlays that accompany wars been a cause of recession, rather than a mitigator?

There's two possibilites regarding the culpability of Bush vs. the culpability of Clinton for the recession. The first would be that it's a Clinton recession and Bush is an incredibly ineffective president. Bush has had two and a half years to affect a change, but has not.

The other possibility is that the "Era of Responsibility" was more than a bunch of rhetorical bull and the recession is a Bush recession...in which case, Bush is an incredibly ineffective president.

Tom Strong --

Bush cut taxes for the "wealthy"? First, what's your definition of "wealthy"?

Second....Bush's tax cuts that passed in 2001 don't even become fully effective UNTIL 2006! For example, as of 2003, the top individual marginal Federal income tax rate has been reduced from 39.6% (in 2000) to...hold on to your hats...38.6%!! Oh, the horror!! So, how can the current state of the economy have anything to do with tax cuts that largely have not even been implemented?

Finally, please explain how a government that takes yet more money from its more productive citizens helps the economy. From each according to their ability, to each according to their need?

I'm still confused. What evidence do you have that companies are prone to misallocate research dollars, or have insufficiently long time horizons? More importantly, what evidence do you have that the government overcomes these problems? Leaving aside military and quasi-military spending, that list is pretty thin, and it's unlikely that the government was necessary for all of it; computer networking was an idea whose time had come, and it came. What your list doesn't show is all the money we spent on stuff we don't want as much as the other stuff we would have spent the money on. It's no indication that the government is an efficient investor; only that if you throw trillions of dollars around, you will have a few successes.

Go back and look at the archives of The Atlantic magazine at the end of the 80s or beginning of the 90s and you will find a series of articles by James Fallows or Robert Reich about how the Japanese were destined to outpace us economically, due to their government's significantly stronger efforts, compared to our's, in directing where capital is allocated. Funny, there isn't much written anymore that makes that assertion. Will the fantasies of the central planners never fade?

I think all attempts to "end the marriage penalty" without flattening the tax structure are about as bad as they get. As long as we stick to a progressive tax code, our only choices are (1) the marriage penalty, (2) the single penalty that preceded it, or (3) discrimination against single-income families. There may be good reasons for prefering #2 or #3 over #1, but general fairness is not one of them.

Xrlq- I have to disagree with you there. A single penalty is less unfair than a marriage penalty. One or the other is inevitable with a progressive tax. The justification for a progressive tax is usually that people that are more capable of paying taxes should pay more. A single person earning $100,000 is capable of paying more in taxes than a married couple making $100,000. There is plenty of evidence that high marriage rates are a social good; so all other things being equal, shouldn't the tax policy encourage rather than discourage marriage?

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