Is Ending Subsidies a Tax Increase?

Grover Norquist believes ending government handouts must be offset by tax cuts.

HuffPo runs an interesting story under the provocative headline “Grover Norquist Rebuked by GOP.”

Grover Norquist’s grip on the Republican Party’s tax policy slipped dramatically on Tuesday, a development that is likely to have significant repercussions on the debate over spending, revenue and the federal deficit.

Norquist, the head of Americans for Tax Reform and a leading party power broker for a generation, drew a hard line in the sand against repealing ethanol subsidies, arguing that ending the tax breaks is equivalent to a tax increase and therefore a violation of The Pledge — a document nearly every Republican has signed promising never to vote to raise taxes.

Thirty-four Senate Republicans walked nonchalantly across that line on Tuesday, voting to move forward on an amendment sponsored by Sen. Tom Coburn (R-Okla.) that would repeal the subsidies.

Norquist has been vicious in his recent talks on Coburn, charging that his amendment means he “lied his way into office” and is breaking the pledge.

Coburn was unmoved. “I think you all think he has a whole lot more hold than I think he has,” Coburn told reporters before the vote. “I don’t disagree with him on a lot of principles. The fact is it’s not a good position to put yourself in when you say, ‘Here’s a tax expenditure that nobody needs, and yet we have to give somebody else a tax cut to take away this.'”

Late on Friday, as it became increasingly clear the Republican conference was shifting toward Coburn, Norquist performed a bit of legislative gymnastics, releasing a statement saying that it was okay to support the Coburn amendment — the same measure he’d savaged for weeks — as long as Coburn also supported an amendment from Sen. Jim DeMint (R-S.C.) that would cut the estate tax and repeal ethanol subsidies. DeMint was asked whether he’d vote for the Coburn amendment regardless of whether he was able to also vote for his amendment. He said he is offering his amendment to avoid making that decision, but that he would vote down the final bill.

Given that HuffPo is a Democratic-leaning outlet, I was naturally skeptical of the slant. But it’s accurate. The linked Americans for Tax Reform statement is titled “Coburn Amendment half-baked without DeMint Fix.”

Americans for Tax Reform today reiterated its support for full, tax revenue neutral repeal of all government granted advantages and preferences to the ethanol industry. To this end, ATR is pleased to support Senator Jim DeMint’s amendment which repeals the Renewable Fuel Standard (ethanol mandate) and kills the death tax. This amendment fills in the gaps left by Senator Tom Coburn’s ethanol amendment and overwhelms the Coburn tax increase with a more significant tax reduction. The Coburn amendment repeals the ethanol tax credit and tariff but in a way that raises net taxes and grows government spending. The DeMint amendment abolishes the death tax which is a significantly larger tax cut than the Coburn amendment’s $6 billion tax increase. [emphasis mine – jhj]

[…]

The DeMint amendment which abolishes the death tax insures that repealing the ethanol tax credit is done in a way that prevents additional money from flowing to the appropriations committees. ATR has always opposed all forms of government support of ethanol. Our goal has been to repeal the ethanol tax credit, tariffs and the mandate totally…without raising taxes.

So . . . ATR enthusiastically agrees that the subsidy is a waste of taxpayer money but opposed ending it because doing so would yield more money for the appropriations committees? That’s the same idiotic logic that calls increasing spending less than an agency asked for a “spending cut.”

I understand the logic of calling the repeal of the Bush tax cuts a “tax increase.” Aside from being a good political hammer, it actually makes sense from an economic point of view since it’s an across-the-board rate increase that nobody can rightly be said to be paying for. Those in the top brackets are paying less than they would if the rates returned to Clinton era levels but they’re still paying more than those in the lower brackets and no one is paying more. (That it’s legitimately a “tax increase” doesn’t end the debate on whether it would nonetheless be a good idea, but it’s irrelevant to this discussion.)

In the case of a targeted subsidy, however, some people and businesses are paying less than their peers because the government is favoring some activity in which they engage. It’s true that the individuals and businesses losing the subsidy will pay more in taxes than they would have had the subsidy continued.  But eliminating the subsidy so that they pay exactly the same as others in their situation isn’t “raising taxes” any more than my giving a beggar a dollar today and not giving him one tomorrow constitutes a “pay cut.”

Even if all agree that the subsidy was either always a bad idea or has outlived its usefulness, there are reasonable arguments to be made against eliminating it in one fell swoop. But that the appropriations committee will get more money isn’t among them.

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FILED UNDER: Economics and Business, US Politics
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. john personna says:

    I understand the logic of calling the repeal of the Bush tax cuts a “tax increase.” Aside from being a good political hammer, it actually makes sense from an economic point of view since it’s an across-the-board rate increase that nobody can rightly be said to be paying for.

    lol. This remembrance works better when we don’t use the word “temporary” in it.

  2. john personna says:

    (double lol, since “temporary” actually meant there literally would be no “repeal” only a call for “extension.”)

    Other than that, Norquist has always been a great fool, good to see him lose his clown-following.

  3. Jeff says:

    These things are not subsidies they are deductions. A subsidy would be when the government pays you money you otherwise would not have. A subsidy implies that the government is giving you money it already has from other sources. A deduction allows you to keep more of your own money.

    They are not the same thing …

  4. john personna says:

    I found this in an academic abstract, Jeff:

    Using an experimental economics design, we examined whether the form of the subsidy (tax deduction or direct subsidy) affects tax reporting. Despite the economic equivalence of the two forms of subsidy, we found that taxpayers disadvantaged by not receiving a direct subsidy reported more income than taxpayers disadvantaged by not receiving a tax deduction.

    I’m sure they may feel different to you, but economists agree on their definition of equivalence.

  5. hey norm says:

    Taxes are at a near-historic low and we have never seen the benefits promised by Norquist and his acolytes. When is this country going to say enough? I don’t like paying taxes anymore than anyone else. But I also don’t want to live in a country that resembles Texas…where the air and water is foul, education is a joke, and health care is only for the wealthy – and that’s the choice false prophets like Norquist and Ryan are posing.

  6. James Joyner says:

    @john personna: I understand that the increases were sold as temporary, even though the strategy was that they would become de facto permanent precisely because allowing the cut to expire would amount to an increase in tax rates. I’m just saying that it’s a different animal altogether since it’s literally letting people keep their own money whereas ending a subsidy merely puts them on equal footing with others.

  7. sam says:

    “These things are not subsidies they are deductions. ”

    Jeff, Jeff, tomayto, tomahto.

  8. john personna says:

    Given my comment to Jeff, I certainly have to admit economic equivalence. As you say, it is the question of moral equivalence, and what deal congressmen thought they were getting:

    From Recession Watch 2008:

    President says immediate, temporary tax cuts for businesses and individuals are needed to keep economy on track.

    “Democrats welcome President Bush’s willingness to work together with Congress to provide urgent relief to the millions of Americans facing economic hardships,” she [Pelosi] said in her statement. “We have agreed on the need to provide assistance immediately, and Congress will continue to work with the administration to stimulate the economy in a way that is timely, targeted, and temporary.”

    Frankly, I find this idea that everyone should have known the “temporary” request was BS more than a little revisionist.

  9. Dave Schuler says:

    As I understand Mr. Norquist’s position he’s in favor of minimizing federal income taxes. Not optimizing them. Not rationalizing them. Not making them fairer. Minimizing them.

    Of course he’d think that something that produced additional revenues should be offset by cuts.

  10. john personna says:

    R: We need temporary tax cuts.

    D: OK

    R: Fooled you! They’re permanent.

    D: No, they’ll expire

    R: Only if you don’t extend them

    D: So?

    R: And failing to extend is the same as repeal

    R: TaDa!

    D: Idiot

  11. TG Chicago says:

    I agree with john personna. Remember that (rather bad) idea of having a gas tax holiday? Putting aside the fact that it’s unwise overall, imagine if President McCain had given us a gas tax holiday during June, July, and August. Then in September he’d either have to make the gas tax holiday into a permanent vacation or he’d be tarred as a damn, dirty tax increaser.

    But how could you call him a tax increaser when your overall tax payouts would be lower that year than if he had done nothing? It’s ridiculous.

  12. Liberty60 says:

    I think the real pernicious idea is that taxes are somehow an intrinsic evil, to be avoided or minimized always.

    They are nothing more than the price we pay for the things that government delivers, and as conservatives are fond of saying, there is no free lunch.

    If we want the infrastructure that only government can provide, then we have to pay the price, simple as that.

    The notion that we should seek to avoid taxes (while happily consuming government benefits like defense, roads, polices and fire, etc) is a form of welfare entitlement mentality.

  13. Fog says:

    Be easy on ol’ Grover, he has a consistent and understandable agenda. Did you think he was kidding when he said he wanted to make government small enough to drown in the bathtub? He just wants the country to live by the Golden Rule – He who has the gold makes the rules. It is NOT more complicated than that. Any segment of society that has the potential to interfere with the power of money must be eliminated or marginalized, which is why the plutocrats hate government and trade unions above all.

  14. ponce says:

    Every emperor falls eventually.

  15. Rob in CT says:

    Sure, ending a tax deduction is a tax increase. Depending on the deduction in question, it might be a narrow tax increase or a relatively broad one (mortgage rate deduction, anyone?). That’s not to say it shouldn’t be done, or that it couldn’t be designed to be revenue neutral.

    Norquist’s starve-the-beast mentality is crazy, and I’d be very happy to see the GOP ditch it. They can still advocate for lower taxes (and they will), and they can still advocate for tax policy that is better for the rich (and they will).

  16. Liberty60 says:

    I stopped being a Republican in the mid-90’s, after watching 12 years of Reagan-Bush- Gingrich leaders consistently pound the drum for smaller government, all the while making it larger.

    They aren’t serious about smaller government, and never were- they only use that as a trope.

    What they are serious about, is being the “double Santa Claus” party- one that hands out tax cuts to friends and family, while spending wildly on goodies like defense contracting that nobody wants or needs.

  17. magoo says:

    Remember, the ultimate goal for Norquist is not to cut taxes – the ultimate goal is to shrink government, which entails NEVER increasing its revenue, and never increasing revenue implies never raising taxes. Tax reform, then, is a twice-removed mechanism, not an end in itself.

    But if his real goal is ultimately smaller government, inconsistencies quickly emerge. Why is there is no pledge to prohibit subsidies? From a strictly financial view, why tolerate that loophole? If it’s a mistake to subsidize in any specific instance, why prevent a correspondingly specific elimination of said subsidy? If one can pass a stand-alone law that subsidizes, why can’t one pass a stand-alone law that repeals said subsidy? It’s asinine.

    Why can the subsidy ‘enter’ govt on its own, but has to leave the govt partnered with another piece of legislation? I don’t get it – close the front door AND the back door at the same time. But no, Norquist insists on locking that back door but leaves the front wide open.

    That bizarre inconsistency further perverts Norquist’s own conservative, small govt principles.

    Norquist may claim to want to conserve individual liberty, but he’s really doing something else. His reform ends up conserving govt ability to interfere – he is preserving political intrusion by the govt all the more firmly. It clogs up the process to whittle away govt by adding more bureaucracy – the subsidy cut has to be paired up with another piece of legislation that itself will complicate things, require more committees, time, delays, posturing, trading favors, loopholes in order to get votes, etc.

    Refusing to allow subsidy cuts, cements whatever social engineering of markets that the govt is currently engaging in. It freezes the status quo as best it can.

    Why not make conservatives pledge to actually make govt smaller? Why pledge to a tertiary mechanism, instead of to common principles? (Because it’d never work!)

    But to focus on this one mechanism so rigidly, he guarantees that the whole will be corrupted further. Bush didn’t raise taxes, but he increased Medicare dramatically. Both decisions are technically in conformity with the Pledge. The Pledge might have seemed like a good short-term measure, a good place to start, to get the foot in the door. But the spirit of the law has been lost and now we have this ludicrous obsession with its letter. For a religious party, it’s odd to see such Pharisaic legalism utterly rule the terms of public debate.

    (Just like it seemed so odd that the GOP, the party of the South, who bitterly resented Yankee cultural oppression after the Civil War ended right up into the present, would then UNHESITATINGLY assume that we could nation-build in Iraq. If the South believes anything, isn’t it that govt can’t unilaterally decide local traditional matters? The defeated South still resents such intrusion. Yet it emphatically embraced the same cultural unilateralism in Iraq – concerning religion! The very thing they claim to possess that the secularist humanists are lacking!)

    I keep trying, I really do, but I just can’t understand mainstream Republican policy at any level of analysis.

  18. Steve Verdon says:

    Right here we have, in a small example, everything that is wrong with the notions of:

    1. Good government,
    2. Smart bureaucrats/policy makers
    3. Discretionary policy.

    From a pure theory standpoint I can go on at length of when and why subsidies can be good. That they should be an essential part of any rational policy.

    But we don’t live in the theoretical world. We live in a world where the policy makers (i.e. politicians and to a lesser extent bureacrats–at least the upper level ones) are craven and venal. They ultimately are seeking their own betterment either via more power, more money, or both. So you end up with subsidies where none should be in place, taxes where you most likely want subsidies, and all sorts of other moronic nonsense.

    Then we get people bickering back and forth over the issue like it is somehow important. In the end it doesn’t matter. Republicans and Democrats are the wings on the same predatory bird of state that is, in the end, living off the rest of us. After their term they toddle off to Wall Street, or a lobbying firm, or some other large corporate entity to work at helping with various rent seeking activities. They’ll grow fat and rich…off of the rest of us.

  19. Drew says:

    “In the case of a targeted subsidy, however, some people and businesses are paying less than their peers because the government is favoring some activity in which they engage. It’s true that the individuals and businesses losing the subsidy will pay more in taxes than they would have had the subsidy continued. But eliminating the subsidy so that they pay exactly the same as others in their situation isn’t “raising taxes”……..”

    I think this is undeniably true, and the correct way to look at it. One wonders when similar essays will come out wrt the mortgage interest deduction, green energy projects, the Volt and the like.

    I’m thinking left oriented commenters will observe “but that’s different.”

  20. David M says:

    This is long overdue and could potentially have two positive effects. First, the govt is running a deficit, so ending tax breaks without being required to create new ones to offset the revenue should help start to reduce the deficit. Second, allowing tax breaks to be closed is a small first step towards reducing the complexity of the tax code, something that everyone complains about, but the ATR pledge is preventing.

  21. Liberty60 says:

    I’m thinking left oriented commenters will observe “but that’s different.”

    Can’t speak for Saul Alinsky (we have not kept in touch lately) but this “left oriented” commenter sees it as exactly the same.

    Subsidies are subsidies; one can argue they are needed or not, have a good outcome or not, but a subsidy for windmills is exactly that, a subsidy.

    Whether the government sends someone a check or allows them to deduct taxes that others can’t, is irrelevant; whether government sends a check or provides a service that benefits one group over others is irrelevant- the action intended to foster one thing, and not others.

    In fact, most things are subsidized, either directly or indirectly. There is no such thing as a purely “Free Market”;

    For example, the agriculture industry is directly subsidized by crop price supports; These were intended to provide stability, and prevent the swings of a “free market”;

    the automotive industry was indirectly subsidized by the taxpayer financed freeway construction; This was intended to make personal vehicles convenient and easy to use and intended to foster the development of suburbs;

    Wal-Mart is indirectly subsidized by taxpayer financed ports, Coast Guard, freeways and streets that provide the transportation infrastructure it needs. These were all constructed to foster international trade.

    And everyone everywhere benefits from the civil order and stability that government provides via the military, police, fire and hospitals.

    “Free Market” is as much a unicorn as “Pure Socialism”- something that exists only in the pages of a fantasy novel.

  22. Steve Verdon says:

    the automotive industry was indirectly subsidized by the taxpayer financed freeway construction; This was intended to make personal vehicles convenient and easy to use and intended to foster the development of suburbs;

    Actually, the entire economy benefited from this one as freeways more appropriately fall under the category of public goods (subject to congestion).

    Wal-Mart is indirectly subsidized by taxpayer financed ports, Coast Guard, freeways and streets that provide the transportation infrastructure it needs. These were all constructed to foster international trade.

    Again, most of those thing are public goods (coast guard, roads, freeways, etc.).

    Now, public goods can be provided via subsidies to private firms/individuals, but all of your examples do not fit this situation. They were all provided via non-voluntary means (i.e. taxes).

  23. sam says:

    @Drew

    “I’m thinking left oriented commenters will observe “but that’s different.””

    How’re you on the Ex-Im Bank? Or is that different?

  24. Liberty60 says:

    Has there ever been a subsidy that wasn’t sold as “benefiting the common good”?

    I listed freeways as an indirect subsidy, since while I agree the entire economy benefitted, the passenger railroad industry would disagree.

    The Federal Interstate Highway System is a blatant example of the federal government picking a winner (automobile transportation) over a loser (passenger rail) and provinding a public good that not coincidentally benefitted the winner.

    The government could have just as easily decided to spend those billions on upgrading the nations rail lines and stations, instead of auto-centered highways.

    Had the mythical “Free Market” been left to its own devices without the power of eminent domain, would there have ever even been such thing as a “freeway”?

    The larger point I am trying to make is that government action brings benefits to the business community, whether through direct subsidies, indirect subsidies, or simply by creating the society in which businesses can flourish.

  25. Steve Verdon says:

    Has there ever been a subsidy that wasn’t sold as “benefiting the common good”?

    Yes. Positive externalities.

    The larger point I am trying to make is that government action brings benefits to the business community, whether through direct subsidies, indirect subsidies, or simply by creating the society in which businesses can flourish.

    They are not subsidies they are government provided goods, subsidies are paid to economic entities such as firms or individuals. Paying via taxes for freeways does not meet that definition.

  26. john personna says:

    They are not subsidies they are government provided goods, subsidies are paid to economic entities such as firms or individuals. Paying via taxes for freeways does not meet that definition.

    Huh? Isn’t the economics of it that if you can purport a dollar benefit then it is a subsidy. For instance, if Walmart had no access to interstate highways, they’d have to spend their money to provide the same benefits.

    Thus, users of interstate trucking are subsidized.

  27. Steve Verdon says:

    For instance, if Walmart had no access to interstate highways, they’d have to spend their money to provide the same benefits.

    Thus, users of interstate trucking are subsidized.

    No a subsidy is a direct payment.

    If you want to widen the definition as you are suggesting then pretty much any and all government spending is a subsidy. Defense spending, Air Traffic Controls, the judicial system, all ginormous subsidies. Every lawyer in the country is in reality nothing more than an obscene welfare queen or king.

    I’d rather stick with the more limited and useful definition. Separating things like public goods vs. subsidies/taxes.

  28. john personna says:

    I’d say the government definitely subsidizes air travel. That works for me.

    I’d put the cut-off somewhere down where support is less apparent and monies are less substantial.

  29. Steve Verdon says:

    I’d put the cut-off somewhere down where support is less apparent and monies are less substantial.

    Must be nice to be able to change definitions on a whim.

  30. john personna says:

    Shrug. Better than pretending trucking and flying are unsubsidized.

  31. Steve Verdon says:

    I didn’t say that. Why do you always feel so compelled to put words in other people’s mouths?

    Just because I don’t think public roads (i.e. public goods) are subsidies, doesn’t mean I don’t think trucking isn’t subsidized.

    By the way, I’ve changed the definition of unsubsidized to mean boxer underwear, so clearly trucking and flying are not unsubsidized.

    See what I did there? Probably not.

  32. john personna says:

    lol, the last 6 comments answer your question.

  33. Duracomm says:

    Presumably john personna and other commenters have heard of the federal gas tax. This is how users of interstates pay for the interstates they drive on.

    Road to Ruin Federal highway taxes should be spent on interstate highways, not urban transit.

    We invented the federal Highway Trust Fund in 1956, promising motorists and truckers that all proceeds from a new federal gas tax would be spent on building the interstate system. They aren’t.

    Congress has expanded federal highway spending beyond interstates to all types of roadways. And ever since 1982, a portion of those “highway user taxes” have been diverted to urban transit. Today, the federal role in transportation includes mandating sidewalks, funding bike paths, and creating scenic trails.

    As a result, spending exceeds gas-tax revenues and the Highway Trust Fund is broke. Some claim this is because the 18.3-cents-per-gallon federal gas tax needs to be raised.

    But drivers can fairly put the blame on the fact that 25 percent of gas-tax funds are diverted to non-highway uses.

  34. Duracomm says:

    Ending subsidies is important but the ethanol disaster will not end until the ethanol mandate is ended.

    The ethanol fiasco is a good illustration of the dangers of big government.

    Supply Worries Spur Corn Prices

    Worries about a lack of corn are driving up spot prices, forcing buyers to pay much more than benchmark prices for the grain they need now.

    On Friday, customers bought corn in Toledo, Ohio, at 35 cents over July futures, which settled at $7.0025 a bushel on the Chicago Board of Trade. Toledo is one of dozens of grain-trading hubs in the U.S. where prices are set based on cash deals, which are transactions for real corn to be delivered in the near future.

  35. john personna says:

    Duracomm, gas taxes do not cover the interstate highway system, and have not for some time.

    Highway advocates often claim that roads “pay for themselves,” with gasoline taxes and other charges to motorists covering – or nearly covering – the full cost of highway construction and maintenance. They are wrong.

    I think your article says that it’s even more confusing, but I think they are playing a math game to get that big ol’ 25.

    If NEITHER auto nor public transport is paid in full by transportation taxes, it’s easy to look at the total collected, and the total spend on public transport, and claim that it is a high fraction. Except what it really does is hide the transfer from general funds.

  36. john personna says:

    Duracomm, I take it you support increasing the federal gas tax, to pay for all federal highway spending?

    The Facts about Transportation Spending (Reason)

    Myth 1: Highways and roads pay for themselves thanks to gasoline taxes and other charges to motorists.

    Fact 1: They don’t. Gas taxes and other highway user fees pay less today than ever before.

  37. Duracomm says:

    I’m in favor of highways paying for themselves.

    There seemed to be a running theme on this thread that the only reason highways existed were because they were subsidized which was patently untrue and I wanted to correct that impression.

    There is no doubt that highway funding has been reduced because money that was supposed to be spent on highways has been utilized for non highway spending.

  38. john personna says:

    Sure, but when less money in total is taken in gas tax than is spent in total on roads, it isn’t just reallocation.