The Senate Finance Committee’s ranking member is not amused.

ObamaCare’s Premium-Assistance Glitch: Orrin Hatch Edition is a post from Cato @ Liberty - Cato Institute Blog

In this November 16 op-ed, Jonathan Adler and I explain how the Obama administration is trying to save ObamaCare (“the Affordable Care Act”) by creating tax credits and government outlays that Congress hasn’t authorized.  (The administration describes this “premium assistance” solely as tax credits.)  This week, the administration tried to reassure everybody that no, they’re not doing anything illegal.

Here’s how IRS commissioner Douglas H. Shulman responded to a letter from two dozen members of Congress (emphasis added):

The statute includes language that indicates that individuals are eligible for tax credits whether they are enrolled through a State-based Exchange or a Federally-facilitated Exchange. Additionally, neither the Congressional Budget Office score nor the Joint Committee on Taxation technical explanation of the Affordable Care Act discusses excluding those enrolled through a Federally-facilitated Exchange.

And here is how HHS tried to dismiss the issue (emphasis added):

The proposed regulations issued by the Treasury Department, and the related proposed regulations issued by the Department of Health and Human Services, are clear on this point and supported by the statute. Individuals enrolled in coverage through either a State-based Exchange or a Federally-facilitated Exchange may be eligible for tax credits. …Additionally, neither the Congressional Budget Office score nor the Joint Committee on Taxation technical explanation discussed limiting the credit to those enrolled through a State-based Exchange.

These statements show that the administration’s case is weak, and they know it.

When government agencies say that a statute indicates they are allowed to do X, or that their actions are supported by that statute, it’s a clear sign that the statute does not explicitly authorize them to do what they’re trying to do. If it did, they would say so. (A Treasury Department spokeswoman offers a similarly worded rationale.)

In our op-ed, Adler and I explain why the statutory language to which these agencies refer does not create the sort of ambiguity that might enable the IRS to get away with offering premium assistance in federal Exchanges anyway. (Nor does the fact that the CBO and the JCT misread portions of this 2,000-page law create such ambiguity.) That’s because there is no ambiguity in that language. There is only a desperate search for ambiguity because the law clearly says what supporters don’t want it to say.

Finally, the fact that these two statements are so similar shows that the administration considers this glitch to be a serious problem and wants everyone on the same page.

Washington & Lee University law professor Timothy Jost is an ObamaCare supporter and a leading expert on the law.  He is also too honest for government service, for he has acknowledged that ObamaCare “clearly” does not authorize premium assistance in federal Exchanges, and that it is only “arguabl[e]” that federal courts will let the administration get away with offering it. (Again, in our op-ed, Adler and I explain why that argument falls flat.)

After reading the administration’s statements, Adler writes, ”If that’s all they got, they should be worried.”

A Weak Defense of an Illegal Fix to an ObamaCare Glitch is a post from Cato @ Liberty - Cato Institute Blog

If you looked at the new CBO report on the budget, you may have noticed that federal spending this year will be $3.6 trillion.

In fact, federal spending this year will top $4 trillion. But virtually all reporters and budget wonks (including me) routinely use the lower number when discussing total federal spending. I don’t think the higher $4 trillion number even appears anywhere in the CBO report.

The $3.6 trillion figure is “net” outlays. But “gross” outlays, or total spending, is quite a bit higher. The difference is caused by “offsetting collections” and “offsetting receipts.” These are revenue inflows to the government that are netted against spending at the program level, agency level, or government-wide level. Some examples are national park fees, Medicare premiums, and royalties earned on mineral deposits. There are hundreds of these cash inflows to the government that offset reported spending.

Details on these revenue offsets can be found in Chapter 16 of OMB’s Analytical Perspectives (pdf). In fiscal year 2010, net federal outlays were $3.456 trillion, but gross outlays were $4.057 trillion. Thus, gross outlays were 17 percent larger than widely reported net outlays.

In FY 2011, OMB expects gross outlays to be about 15 percent larger than net outlays. Thus, gross outlays this year will be $4.1 trillion, compared to net outlays of $3.6 trillion. As a share of GDP, gross outlays will be about 27.3 percent of GDP, compared to net outlays of 23.8 percent.

Accounting for offsets in this manner is a long-standing convention, but it is one of the sneaky ways that Washington tries to hide its large intrusion into the economy. Certainly, the CBO and OMB should include more prominent presentations of gross outlays in their regular budget updates.

For citizens and reporters, a rule-of-thumb to remember is that total federal spending is 3 to 4 percentage points of GDP larger than usually reported by officials.

Federal Spending Hits $4.1 Trillion is a post from Cato @ Liberty - Cato Institute Blog

The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline.

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each year. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned.

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

New CBO Numbers Confirm – Once Again – that Modest Spending Restraint Can Balance the Budget is a post from Cato @ Liberty - Cato Institute Blog

I testified yesterday before the Joint Economic Committee about budget process reform. As part of the Q&A session after the testimony, one of the Democratic members made a big deal about the fact that federal tax revenues today are “only” consuming about 15 percent of GDP. And since the long-run average is about 18 percent of GDP, we are all supposed to conclude that a substantial tax hike is needed as part of what President Obama calls a “balanced approach” to red ink.

But it’s not just statist politicians making this argument. After making fun of his assertion that Obama is a conservative, I was hoping to ignore Bruce Bartlett for a while, but I noticed that he has a piece on the New York Times website also implying that America’s fiscal problems are the result of federal tax revenues dropping far below the long-run average of 18 percent of GDP.

In a previous post, I noted that federal taxes as a share of gross domestic product were at their lowest level in generations. The Congressional Budget Office expects revenue to be just 14.8 percent of G.D.P. this year; the last year it was lower was 1950, when revenue amounted to 14.4 percent of G.D.P. But revenue has been below 15 percent of G.D.P. since 2009, and the last time we had three years in a row when revenue as a share of G.D.P. was that low was 1941 to 1943. Revenue has averaged 18 percent of G.D.P. since 1970 and a little more than that in the postwar era.

To be fair, both the politician at the JEC hearing and Bruce are correct in claiming that tax revenues this year are considerably below the historical average.

But they are both being a bit deceptive, either deliberately or accidentally, in that they fail to show the CBO forecast for the rest of the decade. But I understand why they cherry-picked data. The chart below shows, rather remarkably, that tax revenues (the fuschia line) are expected to be back at the long-run average (the blue line) in just three years. And that’s even if the Bush tax cuts are made permanent and the alternative minimum tax is frozen.

It’s also worth noting the black line, which shows how the tax burden will climb if the Bush tax cuts expire (and also if millions of new taxpayers are swept into the AMT). In that “current law” scenario, the tax burden jumps considerably above the long-run average in just two years. Keep in mind, though, that government forecasters assume that higher tax rates have no adverse impact on economic performance, so it’s quite likely that neither tax revenues nor GDP would match the forecast.

Debunking the Left’s Tax Burden Deception is a post from Cato @ Liberty - Cato Institute Blog

Congressional Republicans have said that spending cuts must be at least as large as an increase in the debt ceiling. Negotiations over lifting the debt ceiling are ongoing, but the “magic number,” so-to-speak, would be around $2 trillion in spending cuts.

Cutting $2 trillion in federal spending sounds like a lot, but it’s actually relatively small because the cuts would likely occur over ten years. According to the Congressional Budget Office’s most recent budget baseline, the federal government will spend almost $46 trillion over the next ten years.

The following chart shows what $2 trillion in spending cuts over the next ten years looks like when measured against the CBO’s baseline. Even with the cuts, federal spending would still increase by $1.8 trillion:

Rather than actually cutting spending, federal spending (and debt) would continue to grow – just at a slightly lower rate. And as Chris Edwards continues to warn, there is a strong possibility that some or all of the “cuts” could be phony.

$2 Trillion in Cuts in Perspective is a post from Cato @ Liberty - Cato Institute Blog

The federal government is approaching its legal borrowing limit, and fiscal conservatives in Congress are wondering what spending reforms they can extract in return for supporting a debt-limit increase. Various sorts of balanced budget amendments and debt limits relative to GDP are being kicked around. I support those ideas, but I fear that they may be too complicated to gain traction right now.

A simpler idea would be to impose a statutory limit on annual spending growth of 3 percent. If total federal outlays in a year were $4 trillion, the government couldn’t spend more than $4.12 trillion the next year. It would be that simple.

Such a limit would be easy for policymakers and the public to understand and enforce. It would put ongoing pressure on Congress to cut discretionary programs and reform entitlements. With spending growth limited to 3 percent, the budget would be balanced in just over a decade and growing surpluses would be generated after that. The federal government would shrink as a share of GDP. The math is simple: federal revenues and GDP are expected to grow substantially faster than the 3 percent spending limit over the next decade and beyond.

I want Congress to enact major cuts to spending, not just to limit spending growth. But one advantage of an annual growth cap is that it would lock-in any spending cuts that are made, and thus spending would be ratcheted downwards.

Under such a limit, the OMB and CBO would issue regular reports showing spending for the coming fiscal year relative to the projected legal cap, which would make it clear to political leaders, reporters, and voters how much needs to be cut. The president would also be required to propose a budget each year that fit under the estimated legal cap. If the beginning of a new fiscal year arrives and spending is still expected to be above the limit, the president would be required by law to impose an across-the-board cut to bring spending into line.

In the past, I’ve proposed a spending growth cap equal to the sum of inflation plus population growth. (This sum is expected to be about 3 percent in coming years). But a fixed and explicit percent cap would be even simpler and easier to enforce. A fixed percent cap would also encourage policymakers to support a low-inflation policy by the Fed because the lower was inflation, the higher the budget limit in constant dollar terms.

The chart shows the proposed spending in Obama’s new budget compared to spending capped at 3 percent. The spending cap line assumes that the GOP’s discretionary cuts are put in place this year. It also assumes that spending grows at the maximum 3 percent each year, but if spending were restrained more than that, the cap would ratchet down to a lower level. The chart also shows projected federal revenues based on CBO data, assuming the extension of current income tax cuts and AMT relief. (See page 22).

Limiting spending growth to 3 percent is a modest goal, but over time the results would be quite dramatic compared to Obama’s no-reform spending plan. Spending in 2021 would be about $1 trillion less than the president is projecting—$4.7 trillion rather than $5.7 trillion. As a share of GDP, Obama’s 2021 spending of 23.9 percent would be cut to 19.9 percent. And the budget would be closing in on balance that year with revenues at 18.6 percent of GDP with tax relief in place. (Figures based on OMB GDP).

At DownsizingGovernment.org, I’ve proposed spending cuts that would take the federal government down to 15 percent of GDP or less. But getting a new budget mechanism signed into law takes centrist support, and I think that a 3 percent growth cap to balance the budget in a decade or so is a reasonable goal that could gain broad agreement.

Finally, it makes sense to include in such a budget law the ability of policymakers to spend over the cap temporarily for emergency war funding with a two-thirds vote in both House and Senate. Without such a temporary escape hatch, Congress would likely simply repeal the law when it entered a costly war.

I’ve discussed a spending growth cap in more detail here and here and here. Dan Mitchell has made similar observations about spending growth rates. The folks at One Cent Solution are recommending a tighter cap.

Federal Budget Cap at 3% is a post from Cato @ Liberty - Cato Institute Blog

House Republicans engineered a continuing resolution for fiscal 2011 that would trim $61 billion in “regular” discretionary budget authority versus fiscal 2010. The Obama administration and the Democratic majority in the Senate balked at the cuts, and a two-week continuing resolution will be passed in order to avoid a “government shutdown” and give the sides more time to reach an agreement.

Based on the Congressional Budget Office’s score of the continuing resolution containing $61 billion in funding cuts, and the CBO’s recent budget projections, both discretionary and total federal outlays (actual spending) would still be higher in fiscal 2011 versus fiscal 2010.

Keep these charts in mind the next time you hear or read that the Republicans’ supposedly “major spending cuts” will lead to reduced economic growth and hundreds of thousands of jobs lost.

Spending Still Increases with GOP Cuts is a post from Cato @ Liberty - Cato Institute Blog

This is how a front-page story in this morning’s Washington Post portrayed the cause of this year’s $1.5 trillion deficit:

Record U.S. Deficit Projected This Year
CBO forecasts tax cuts will push budget gap to $1.5 trillion

The still-fragile economy and fresh tax cuts approved by Congress last month will drive the federal deficit to nearly $1.5 trillion this year, the biggest budget gap in U.S. history, congressional budget analysts said Wednesday.

Federal spending and federal tax revenue play equally important roles in creating the federal budget deficit.  Yet the Post blames the deficit only on inadequate tax revenue.  Federal spending isn’t too high, the Post implies, tax revenue is too low.

This may not be an example of media bias.  But it is an example of why supporters of limited government believe that major news organizations like the Washington Post are biased toward bigger government.  At a minimum, the Post has some explaining to do.

As If Gov’t Spending Had Nothing to Do with It is a post from Cato @ Liberty - Cato Institute Blog

When it comes to reining in federal spending, House Republicans and the president have one idea in common: freezing nondefense discretionary spending. That category accounts for about 18 percent of total spending, so let’s see how such a freeze would affect the overall budget.

Today the Congressional Budget Office released updated budget figures and baseline projections of federal spending through fiscal 2021. Projecting the budgetary future is obviously an inexact science, and the CBO’s baseline reflects unrealistic assumptions. However, it does allow us to get an idea of the impact of a nondefense discretionary freeze on total federal spending.

Three proposals have been put forward:

• In his State of the Union address, President Obama proposed freezing nondefense discretionary spending for five years, beginning in fiscal 2012, at fiscal 2010 levels.

• The conservative House Republican Study Committee and Sen. Jim DeMint (R-SC) recently proposed freezing nondefense discretionary spending for ten years, beginning in fiscal 2012, at fiscal 2006 levels.

• Ever since the release of its “Pledge to America,” the House Republican leadership has been talking about returning spending to fiscal 2008 levels. They apparently have non-security discretionary spending in mind, which is an even smaller category than nondefense discretionary. It’s not clear if they intend to freeze it at the new lower level.

Using the CBO’s latest figures, I calculated baseline spending from fiscal 2012-2021 under ten year freezes in nondefense discretionary spending at fiscal 2006, 2008, and 2010 levels:

Note:   To make an apples-to-apples comparison, I extended the proposed Obama freeze at fiscal 2010 levels from five years to ten years, and I assumed a ten year freeze at fiscal 2008 levels for the House Republicans. Also, projected annual interest payments on the debt are excluded. Therefore, the chart refers to “baseline program spending,” which is the sum of nondefense discretionary, defense, and entitlement spending.

The chart makes it excruciatingly clear that freezing nondefense discretionary spending at the levels specified or implied by Republicans and Democrats is only a start toward needed reforms in the federal budget. Congress also needs to cut defense spending, and spending on Social Security, Medicare, Medicaid, and other entitlement programs.

Nondefense Discretionary Spending Freezes is a post from Cato @ Liberty - Cato Institute Blog

Grousing about the GOP’s timidity in the battle against big government will probably become an ongoing theme over the next few months. Two items don’t bode well for fiscal discipline.

First, it appears that Republicans didn’t really mean it when they promised to cut $100 billion of so-called discretionary spending as part of their pledge. According to the New York Times,

As they prepare to take power on Wednesday, Republican leaders are scaling back that number by as much as half, aides say, because the current fiscal year, which began Oct. 1, will be nearly half over before spending cuts could become law.

This is hardly good news, particularly since the discretionary portion of the budget contains entire departments, such as Housing and Urban Development, that should be immediately abolished.

That being said, I don’t think this necessarily means the GOP has thrown in the towel. The real key is to reverse the Bush-Obama spending binge and put the government on some sort of diet so that the federal budget grows slower than the private economy. I explain in this video, for instance, that it is simple to balance the budget and maintain tax cuts so long as government spending grows by only 2 percent each year.

It is a good idea to get as much savings as possible for the remainder of the 2011 fiscal year, to be sure, but the real key is the long-run trajectory of federal spending.

The second item is the GOP’s apparent interest in retaining Douglas Elmendorf, the current director of the Congressional Budget Office.

Many of you will remember that the CBO cooked the books last year to help ram through Obamacare. Under Elmendorf’s watch, CBO also was a relentless advocate and defender of Obama’s failed stimulus. And CBO under Elmendorf published reports saying higher taxes would improve economic performance.

But Elmendorf’s statist positions apparently are not a problem for some senior Republicans, as reported by The Hill.

The new House Budget Committee chairman, Rep. Paul Ryan (R-Wis.), gave a very public endorsement of the embattled head of the Congressional Budget Office during his first major speech as committee head Wednesday night. …“You’re doing a great job at CBO, Doug,” Ryan said after receiving the first annual Fiscy Award for his efforts at tackling the national debt. He added that he looked forward to crunching budget numbers with him in the future.

In the long run, the failure to deal with the problems at CBO (as well as the Joint Committee on Taxation) may cause even more problems than the timidity about cutting $100 billion of waste from the 2011 budget. Given the rules on Capitol Hill, it makes a huge difference whether CBO and JCT are putting out flawed numbers.

I’ve already written that fixing the mess at CBO and JCT is a critical test of GOP resolve, and I actually thought this would be a relatively easy test for them to pass. It is an ominous sign that Republicans aren’t even trying to clean house.

Republican Sellout Watch is a post from Cato @ Liberty - Cato Institute Blog

One could argue that exempting ObamaCare from the PAYGO requirement is appropriate given the defects in current budget rules.

By law, the CBO must follow certain rules when doing cost estimates of legislation and projecting federal spending under current law. Under those rules, CBO projects ObamaCare will reduce the deficit. No question.

But Congress often defeats those budget rules by passing legislation with “pay fors” (i.e., spending cuts) that make the budget look better, yet are highly unlikely to be sustained because they are politically implausible. A good example of this is the “sustainable growth rate” formula, where Congress promises to ratchet down the government price controls that Medicare uses to pay physicians in future years. Congress has consistently reneged when those cuts come due. The pretense of future cuts that Congress writes into law makes 10-year budget projections/deficits look better than actual, unwritten policy would suggest.

This is a recognized problem. When the CBO believes that the law and actual policy are at variance, they actually do two types of cost projections: one based on the law as written and one based on the policy they think Congress is likely to adopt, based on past performance. They call the latter their “alternate fiscal scenario.”

ObamaCare opponents submit that this law is one of those instances where law and policy are at variance. So even though ObamaCare will reduce the deficit under existing budget rules, the spending cuts (actually, reductions in future spending growth) in the law were never going to take effect anyway. The CBO, CMS, and even the IMF have all discredited the idea that ObamaCare would reduce the deficit, because they all question the sustainability of ObamaCare’s spending “cuts.” Exempting ObamaCare repeal from PAYGO rules is appropriate if those rules have failed to protect taxpayers.

PAYGO, the CBO, and Repealing ObamaCare is a post from Cato @ Liberty - Cato Institute Blog

Just in time for the holidays, the Congressional Budget Office has released its analysis of the costs and benefits of various alternatives to our current system of mortgage finance, particularly the role of Fannie Mae and Freddie Mac.

The report examines three possibilities:

1. A hybrid public/private model in which the government provides explicit guarantees on privately issued mortgages or MBSs;
2. A fully public model in which a wholly federal entity would guarantee qualifying mortgages or MBSs; or
3. A fully private model in which there would be no special federal backing for the secondary mortgage market.

The report doesn’t really push one option over another, but simply lays out the advantages and disadvantages of each.  Some highlights worth keeping in mind as the debate continues into the new year:

“Relying on explicit government guarantees…would also have some disadvantages…If competition remained muted, with only a few…firms participating in the secondary market, limiting risk to the overall financial system and avoiding regulatory capture could be difficult…federal guarantees would reduce creditors’ incentive to monitor risk. Experience with other federal insurance and credit programs suggests that the government would have trouble setting risk-sensitive prices and would most likely end up imposing some cost and risk on taxpayers. In addition, a hybrid approach might not eliminate the frictions that arise between private and public missions.”

“Privatization might provide the strongest incentive for prudent behavior on the part of financial intermediaries by removing the moral hazard that federal guarantees create.  By increasing competition in the secondary market, the privatization approach would reduce the market’s reliance on the viability of any one firm. Private markets may also be best positioned to allocate the credit risk and interest rate risk of mortgages efficiently, and they would probably be more innovative than a secondary market dominated by a fully federal agency. Further, privatization would eliminate the tension between public and private purposes inherent in the traditional GSE model.”

It is worth remembering that over the years, the CBO has actually been quite strong in warning against the dangers of the GSE model.  Sadly Congress simply chose to ignore those warnings.  Here’s hoping that the CBO has little more influence on this issue than they’ve had in the past.

CBO on Fannie, Freddie and Mortgage Finance Options is a post from Cato @ Liberty - Cato Institute Blog

I hit a nerve with my post, “There Ain’t No Such Thing as a Tax Expenditure.”  To recap: The federal tax code has credits, deductions, exemptions, and exclusions that reduce tax revenue.  By convention, budget experts call that forgone revenue a “tax expenditure,” a “tax subsidy,” or even “backdoor spending in the tax code.”  This is incorrect.  To claim that forgone tax revenue is a government expenditure implies that the money at stake actually belongs to the government, which is graciously letting taxpayers keep it, rather than to the people who earned it.  Government is not spending that money; it is merely not extracting that money from the private sector.  Statists deliberately use terms like “tax expenditure” precisely because that erroneous impression obscures their efforts to raise your taxes.

Less than an hour after posting, Matthew Yglesias of the Center for American Progress Action Fund called me “daringly inaccurate.”  (Why be timid?)  The Manhattan Institute’s Josh Barro devoted a very thoughtful 1,155 words to the topic at NRO.

Yglesias explains in an email:

I understand why you might want to object to the “tax expenditure” phrasing, but surely we can agree that there’s such a thing as a “tax subsidy,” right? If the government declares that fuel-efficient hybrid cars are now tax-deductible, that’s a subsidy to the makers and purchasers of Priuses.

I’m afraid I cannot agree to that.

• The term “tax expenditure” is nonsense because not taking Peter’s money, conditional on Peter buying a Prius, is not the same as spending the same amount of money on a Prius.  The outcome may be exactly the same.  But no one can spend money that he doesn’t possess.
• The term “tax subsidy” is likewise nonsense because a subsidy involves giving something to someone else.  Not taking Peter’s money, conditional on Peter buying a Prius, is not a subsidy to Peter.  The government is not giving Peter anything.  Nor is it a subsidy to Paul, even though he profits from Prius sales: the government is not giving anything to Paul, either.  Again, the outcome may be exactly the same as a government subsidy.  Notably, Paul’s income rises.   Yet it does not rise because Paul received a subsidy.  Paul’s income rises because the state used coercion in a different way: to alter, for Peter, the cost of a Prius relative to other uses of Peter’s income.
• To see the absurdity, consider what it would mean to eliminate a “tax subsidy.”  All else equal, eliminating an actual government subsidy reduces the tax burden.  Eliminating a “tax subsidy” increases someone’s tax burden.  Which is the whole point, isn’t it?

Barro makes more of our disagreement than actually exists.

• We agree targeted tax preferences are harmful.  (I argue, for example, that the tax exclusion for employer-sponsored health insurance operates more like a tax hike than a tax break because, among other atrocities, it denies the typical parent control over $10,000 of her earnings.)
• We agree they expand government power.
• We agree government should account for them.  (Along those lines, the Congressional Budget Office has developed a concept it calls the “federal budgetary commitment to health care,” which is the sum of all federal health spending and all tax revenue forgone due to health-related tax loopholes.  The CBO calls them “tax expenditures” —  grrrr.  I dislike “budgetary commitment” for the same reason: the government can’t commit resources it doesn’t possess. But the CBO is on to something. We need an aggregate measure of “federal budgetary interference in the economy.”)
• Finally, Barro and I probably agree that Congress should simultaneously eliminate all such loopholes and reduce marginal payroll- and income-tax rates — perhaps to zero.

I reject the term “tax expenditure” — as distinct from the concept — because it is nonsensical and biases the debate toward more government control of the economy and our lives.   Barro asks what term I’d prefer. Until someone comes up with something pithier than “tax revenue forgone due to targeted tax preferences,” I’ll stick with that.

There Ain’t No Such Thing as a Tax Subsidy, Either is a post from Cato @ Liberty - Cato Institute Blog

I’ve already written about the terrible work of the Congressional Budget Office. The CBO did an awful job on the stimulus, for instance, repeatedly asserting that diverting money from the private sector to government somehow would create jobs. CBO also was a disaster on Obamacare, claiming that a giant new entitlement program would reduce budget deficits. And the legislative bureaucracy even has argued that higher tax rates boost growth.

That sounds absurd (and it is), but CBO is not the only taxpayer-funded bureaucracy on Capitol Hill producing this kind of nonsensical analysis. The Congressional Research Service just published a new report asserting that higher tax rates will boost economic performance. Here’s an excerpt from that CRS publication.

…it is ambiguous whether tax cuts lead to more or less work, saving, and investment. The expiration of the tax cuts would nevertheless reduce the budget deficit, absent other policy changes, which economic theory predicts would have a positive effect on the economy in the long run.

To be fair, CRS doesn’t actually claim higher taxes are good for growth. And neither does CBO. But CRS and CBO both assert that there is no clear evidence that higher taxes hurt growth. Budget deficits, however, supposedly have a very negative impact on economic performance according to these Capitol Hill bureaucrats. More specifically, CRS and CBO believe that government borrowing leads to higher interest rates, and they think that higher interest rates reduce investment. And since investment is a key to long-run growth, this leads them to endorse any policy — including higher taxes — that reduces red ink.

Taking the CRS and CBO analysis to its logical extreme (and neither bureaucracy has stated that there are limits to their methodology), tax rates of 100 percent would be the most effective way of maximizing prosperity.

This video explains that the real problem is spending, and that deficits are just a symptom of a government that is too big. This is not to say that CRS and CBO are completely wrong. We have record budget deficits and very low interest rates today, but it’s possible that interest rates might be even lower without all the red ink. And it’s certainly true that interest rates are one of the many factors that determine investment choices, so there’s nothing wrong with including them in the equation.

But magnitudes matter. For all intents and purposes, CRS and CBO want us to believe that more government borrowing will have a very significant impact on interest rates and that those higher interest rates will have a very negative impact on investment. Yet neither bureaucracy offers any evidence for these linkages, in large part because the academic research shows that the relationships between deficits, interest rates, and investment are weak.

By contrast, CRS and CBO have no problem supporting higher tax rates — including more double taxation of income that is saved and invested. Yet there is considerable evidence that punitive tax rates have a significant impact not only on decisions to earn income and be productive, but also on decisions whether to consume today or to save and invest (and thus consume in the future). CRS and CBO also assume, rather naively, that politicians would use any additional revenue for deficit reduction instead of new spending.

Let’s call this the triumph of left-wing theory over real-world evidence. To add insult to injury, the sloppy analysis at CRS and CBO is financed by our tax dollars. So we pay bureaucrats so they can tell politicians to seize more money from us. Gee, what’s not to love about a scam like that?

P.S. If Republicans are actually serious about restraining government spending, CRS and CBO are target-rich environments. Just saying.

Our Tax Dollars Are Funding Bureaucrats Who Advise Congress that Higher Taxes Increase Prosperity is a post from Cato @ Liberty - Cato Institute Blog

While I’m glad Republicans are finally talking about smaller government, I’ve expressed some disappointment with the GOP Pledge to America. Why “reform” Fannie and Freddie, I asked, when the right approach is to get the government completely out of the housing sector. Jacob Sullum of Reason is similarly underwhelmed. He writes:

In the “Pledge to America” they unveiled last week, House Republicans promise they will “launch a sustained effort to stem the relentless growth in government that has occurred over the past decade.” Who better for the job than the folks who ran the government for most of that time? …Republicans, you may recall, had a spending spree of their own during George W. Bush’s recently concluded administration, when both discretionary and total spending doubled — nearly 10 times the growth seen during Bill Clinton’s two terms. In fact, says Veronique de Rugy, a senior research fellow at George Mason University’s Mercatus Center, “President Bush increased government spending more than any of the six presidents preceding him, including LBJ.” Republicans controlled the House of Representatives for six of Bush’s eight years.

Redemption is a good thing, however, so maybe the GOP actually intends to do the right thing this time around. One key test is whether Republicans do a top-to-bottom housecleaning at both the Congressional Budget Office and the Joint Committee on Taxation.

These Capitol Hill bureaucracies are not well known, but they have enormous authority and influence. As the official scorekeepers of spending (CBO) and tax (JCT) bills, these two bureaucracies can mortally wound legislation or grease the skids for quick passage.

Unfortunately, that clout gets used to dramatically tilt the playing field in favor of bigger government. It was CBO that claimed that Obama’s stimulus created jobs, even though the head of CBO was forced to admit that the jobs-created number was the result of a Keynesian model that was rigged to show exactly that result . You would think that would shame the bureaucrats into producing honest numbers, but CBO continues to produce absurd job creation estimates regardless of the actual rate of unemployment.

CBO favors deficits and debt when it is asked to analyze proposals for more spending, but it rather conveniently changes its tune when the discussion shifts to tax increases. Since we’re on the topic of twisted economic analysis, CBO actually relies on a model which, for all intents and purposes, predicts that economic performance is maximized with 100 percent tax rates.

The Joint Committee on Taxation, meanwhile, is infamous for its assumption that taxes have no impact – at all – on economic output. In other words, instead of showing a Laffer Curve, JCT would show a straight line, with tax revenues continuing to rapidly climb even as tax rates approach 100 percent.  This creates a huge bias against good tax policy, yet JCT is impervious to evidence that its approach is wildly flawed.

And don’t forget that CBO and JCT both bear responsibility for Obamacare since they cranked out preposterous estimates that a giant new entitlement would lead to lower budget deficits.

Not that we need additional evidence, but the head of the CBO just repeated his higher-taxes-equal-more-growth nonsense in testimony to the Senate Budget Committee. With this type of mindset, is it any surprise that fiscal policy is such a mess?

Douglas Elmendorf said extending breaks due to expire at year’s end would increase demand in the next few years by putting more money in consumers’ pockets. Over the long term, he said, the tax cuts would hurt the economy because the government would have to borrow so much money to finance them that it would begin competing with private companies seeking loans. That, in turn, would drive up interest rates, Elmendorf said.

I’ve already written once about how the GOP sabotaged itself when it didn’t fix the problems with these scorekeeping bureaucracies after 1994. If Republicans take power and don’t raze CBO and JCT, they will deserve to become a permanent minority party.

Overhauling CBO and JCT Is a Real Test of GOP Resolve, not the ‘Pledge to America’ is a post from Cato @ Liberty - Cato Institute Blog

In a previous post, I promised to address the negative spin that the Kaiser Family Foundation put on its annual Employer Health Benefits Survey, released this month.  I do so in an op-ed that ran today at the Daily Caller.  An excerpt:

The Kaiser Family Foundation recently issued its annual survey of employer-sponsored health benefits, declaring: “Family Health Premiums Rise 3 Percent to $13,770 in 2010, But Workers’ Share Jumps 14 Percent as Firms Shift Cost Burden.” That’s half-right — but the other half perpetuates a myth about employee health benefits that stands in the way of real health care reform….

[Y]ou pay the full cost of your health benefits: partly through an explicit $4,000 premium and partly because your wages are $9,770 lower than they otherwise would be.

Kaiser therefore claims the impossible when it says that firms are shifting costs to workers.  Employers cannot shift to workers a cost that workers already bear. Yet this year, as in past years, the Associated Press, Bloomberg, CNN, Kaiser Health News, The Los Angeles Times, The New York Times, NPR, The Wall Street Journal, and The Washington Post uncritically repeated the cost-shifting myth.

The bolded sentence is Cannon’s Second Rule of Economic Literacy.  (Click here for the first rule.)

I have also collected a series of excerpts from past Kaiser Family Foundation surveys showing this is a persistent issue.  Here are a few:

1998: “Workers in small firms bear a much larger share of the financial burden for health benefits than employees of larger firms.”

2005: “The average worker paid $2,713 toward premiums for family coverage in 2005 or 26% of the total health premium.”

2007: “Annual Premiums for Family Coverage Now Average $12,106, With Workers Paying $3,281”

The folks at the Kaiser Family Foundation were exceedingly gracious when I approached them to discuss this issue.

KFF/HRET Survey, Part III: Employers Can’t Shift to Workers a Cost that Workers Already Bear is a post from Cato @ Liberty - Cato Institute Blog

I hope the title of this post is an exaggeration, but it’s certainly a logical conclusion based on what is written in the Congressional Budget Office’s updated Economic and Budget Outlook. The Capitol Hill bureaucracy basically has a deficit-über-alles view of fiscal policy. CBO’s long-run perspective, as shown by this excerpt, is that deficits reduce output by “crowding out” private capital and that anything that results in lower deficits (or larger surpluses) will improve economic performance — even if this means big increases in tax rates.

CBO has also examined an alternative fiscal scenario reflecting several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. That alternative scenario embodies small differences in outlays relative to those projected under current law but significant differences in revenues: Under that scenario, most of the cuts in individual income taxes enacted in 2001 and 2003 and now scheduled to expire at the end of this year (except the lower rates applying to high-income taxpayers) are extended through 2020; relief from the AMT, which expired after 2009, continues through 2020; and the 2009 estate tax rates and exemption amounts (adjusted for inflation) apply through 2020. …Under those alternative assumptions, real GDP would be…lower in subsequent years than under CBO’s baseline forecast. …Under that alternative fiscal scenario, real GDP would fall below the level in CBO’s baseline projections later in the coming decade because the larger budget deficits would reduce or “crowd out” investment in productive capital and result in a smaller capital stock.

There’s nothing necessarily wrong with CBO’s concern about deficits, but looking at fiscal policy through that prism is akin to deciding who wins a baseball game by looking at what happened during the 6th inning. Yes, government borrowing drains capital from the productive sector of the economy. And nations such as Greece are painful examples of what happens when governments go too far down this path. But taxes also undermine economic performance by reducing incentives to work, save, and invest. And nations such as France are gloomy reminders of what happens when punitive tax rates discourage productive behavior.

What’s missing for CBO’s analysis is any recognition or understanding that the real problem is excessive government spending. Regardless of whether spending is financed by borrowing or taxes, resources are being diverted from the private sector to government. In other words, government spending is the disease and deficits are basically a symptom of that underlying problem. Indeed, it’s worth noting that there’s not much evidence that deficits cause economic damage but plenty of evidence that bloated public sectors stunt growth. This video is a good antidote to CBO’s myopic focus on budget deficits.

Congressional Budget Office Says We Can Maximize Long-Run Economic Output with 100 Percent Tax Rates is a post from Cato @ Liberty - Cato Institute Blog

The White House Office of Management and Budget homepage currently features the following quote from the president:

President Obama says he wants to “invest in our people without leaving them a mountain of debt.”

That’s a curious statement because the Congressional Budget Office’s analysis of the president’s current budget proposal projects that publicly held debt as a share of the economy would reach levels last seen at the end of the Second World War.

When the CBO’s numbers are plugged into a bar chart, the projected Obama debt levels (red bars) look like…the upward slope of a mountain (!):

To be fair, Obama’s predecessors — particularly the previous Bush administration — share in the responsibility for the mountainous rise in federal debt. However, that’s all the more reason for the Obama administration to work toward a peak instead of a steeper incline.

‘Mountain of Debt’ is a post from Cato @ Liberty - Cato Institute Blog

Like the swallows returning to Capistrano, the Congressional Budget Office follows a predictable pattern of endorsing policies that result in bigger government. During the debate about the so-called stimulus, for instance, CBO said more spending and higher deficits would be good for the economy. It then followed up that analysis by claiming that the faux stimulus worked even though millions of jobs were lost. Then, during the Obamacare debate, CBO actually claimed that a giant new entitlement program would reduce deficits.

Now that tax increases are the main topic (because of the looming expiration of the 2001 and 2003 tax bills), CBO has done a 180-degree turn and has published a document discussing the negative consequences of too much deficits and debt. A snippet:

[P]ersistent deficits and continually mounting debt would have several negative economic consequences for the United States. Some of those consequences would arise gradually: A growing portion of people’s savings would go to purchase government debt rather than toward investments in productive capital goods such as factories and computers; that “crowding out” of investment would lead to lower output and incomes than would otherwise occur.

…[A] growing level of federal debt would also increase the probability of a sudden fiscal crisis, during which investors would lose confidence in the government’s ability to manage its budget, and the government would thereby lose its ability to borrow at affordable rates. …If the United States encountered a fiscal crisis, the abrupt rise in interest rates would reflect investors’ fears that the government would renege on the terms of its existing debt or that it would increase the supply of money to finance its activities or pay creditors and thereby boost inflation.

At some point, even Republicans should be smart enough to figure out that this game is rigged. Then again, the GOP controlled Congress for a dozen years and failed to reform either CBO or its counterpart on the revenue side, the Joint Committee on Taxation (which is infamous for its assumption that tax policy has no impact on overall economic performance).

With Tax Increases Looming, CBO Does About-Face and Frets about Deficits and Debt is a post from Cato @ Liberty - Cato Institute Blog