Friday, April 27, 2012

I'm taking away your candy. Now vote for me.

"Politicians regularly decry the inefficiency and complexity that tax breaks introduce to the overall tax system, while merrily adding to the pile."  This week's Economist has an article [gated] that shows why it's so difficult for politicians to talk about tax while seeking your vote (which we now know is their perpetual state of being).  That's because it's hard to ask for support while threatening to take away someone's treasured tax break:

From the article:
Tax expenditures now look likely to play a central role in the economic debates that are raging in this year’s election. Mitt Romney has promised to slash personal and corporate rates and pay for the cuts by eliminating tax expenditures. To fend off accusations that his plan is fiscally irresponsible and a giveaway to the rich, he has promised that it would not add to the deficit or favour the rich over the poor and the middle class. 
A closer examination of tax expenditures, however, suggests that achieving those two goals will be difficult. ...
...Mr Romney has pledged not to raise the preferential rate on capital gains and dividends; 75% of those benefits go to the top 1% of households. That group also prospers most from Mr Romney’s proposed cut in the top income-tax rate, to 28% from 35%. So Mr Romney would probably have to target the rest of the upper quintile, the upper-middle class who gain from other big tax breaks for employer-provided health care, mortgage interest, retirement savings, state and local taxes and municipal bond interest.
More in the article.  The discussion reminds me of an article I read last year, The Behavioral Political Economy of Budget Deficits: How Starve the Beast Policies Feed the Machine, which talks about the "fiscal illusion" created when politicians talk tough and give tax breaks but still have a state to run:

reducing federal tax rates without coordinated reductions in federal spending actually produces long-term growth in spending. This perverse result is explained by a theory of “fiscal illusion.” By deferring the costs of government services and benefits through deficit financing, starve the beast policies have the effect of lowering the perceived price of government in the minds of many citizens...
Emphasis mine.  I think that perception effect is the kicker here.  You have to think candy is cheap in order to keep consuming it even though you know it's bad for you in the long run.  And see Deficits and Democracy, a classic article that stated the candy/vote connection succinctly with this opener:
Democratic governments have exhibited tendencies to run perennial budgetary deficits. 
Candy: it has to be paid for, now or later.

But by no means are these the first authors to make that connection: in the first footnote, the authors say this idea goes back to--who else--Adam Smith:
We should note at the outset that elements of our argument are over 280 years old, appearing in the final chapter (Book V, Chapter III) of Adam Smith's Wealthof Nations.  Smith identified incentives on the part of governments and citizens to prefer deficits and debt funding to current taxes in financing expenditures; see Smith [23, 878, et passim]. He also identified incentives which favor certain types of funding in cross-national comparisons (see note 9 of the present paper). Needless to say, Smith issued grave forebodings about great accumulations of debt which always ended, he claimed, in debasement of the monetary unit and bankruptcy. Protracted wars were also made possible by government's ability to incur debt. 
So Americans will likely keep their candy, and their line of credit, no matter who takes the election in the fall.

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