Context From The Talk

When a Tax Cut Isn't a Actually a Tax Cut

There are definitional problems to deciding what counts as taxes, especially in modern tax systems in the United States and major democracies. It used to be the case that America funded itself primarily in the early days from tariffs, local government, some sales and property taxes, and things of that sort. With the birth of the modern income tax, that started to change in 1913. And then increasingly, starting in the Depression and continuing in various bursts in the '60s and in the '90s and the last eight years, the government has expanded transfer payments to people. So that now the largest amount of spending, the biggest share of government spending in all democracies goes on payment to people not providing things like defense or building roads, things of that sort. Not purchases within services but transfer payments to people.

And so starting about 30 or 40 years ago, the government started putting in refundable credits to people. We have something called the earned income tax credit. It is designed to try to boost the income of low income workers. Part of it reduces any income tax liability they have, including all the way down to zero, comes as a tax reduction. But if they actually get money back, the government sends them a check so their earned income tax credit is larger than their regular income tax liability, so they get an unbalanced check that counts as spending. That's probably the best you could do as an arbitrary convention. But now think of politicians, how they use this. If we raise a bunch of taxes on one group and turn around and give it as refundable credit to another group, that may show up as no increase in the government sector at all.

So, you've got to pay attention to what's actually going on in the numbers and how they're being treated because they can be manipulated to make the government look larger or smaller. Or they could just do so because of historical accident, how things were done. Taxes and spending get most of the attention. The deficit and debt used to but are getting less than they should. Deficits and debt are alternative means of the government financing its spending.

If the government borrows a dollar today it's committing itself to paying interest payments into the future and the present discount of value of those interest payments equals that dollar. So, unless spending is altered, borrowing today is just implying future taxation. So, you need to pay attention to that. So in some ways looking at the tax burden in a country that runs large deficits will understate the accruing revenue obligations of the government, which are better measured by spending in any change in unfunded future liabilities. That makes for the most fundamental point I can make today. Because borrowing implies future taxes, the only real tax reform that is permanent is spending control. You can rejigger your tax code today, and we should and we might, and hopefully we will. I had a discussion with that on Tuesday with Paul Ryan. He's optimistic, let's keep our fingers crossed.

Michael Boskin, 2017 Hoover Institution Summer Policy Boot Camp