Tax credits are government spending

It’s always been weird to me that Republicans, and our politicians’ dominant ideology to a larger extent, are allergic to government spending but love cutting taxes or giving tax credits for pet goals.  It is best to think of tax credits as government subsidies and an opportunity cost: the government forgoes general revenue by spending it on pet goals before it even has the money.

This is why the best measure of a government’s size is spending as a percentage of GDP (America’s spends about 42% of GDP).  Think about it like this: when you go to the store and give $5 for a $4.50 purchase, the cashier may ask, “Would you like to donate that fifty cents to charity?”  You’re more likely to say yes because the money isn’t in your hand, so it doesn’t feel like spending.  But it is: the fifty cents is money you would have had to spend on whatever you like, including charity, so giving up the money before you have it is equivalent to spending the money on one narrow purpose.  The government gives up this $.50 every time it establishes a tax credit.

I’ve made this argument before and bring it up again because A) it’s important and B) Matt Yglesias just pointed out a recent study by Edmund Andrews that bolsters my argument.  Yglesias concurring with me:

The point is simply that if you establish a tax credit and pay for it by raising tax rates, that has the same consequences as establishing a direct expenditure and paying for it by raising tax rates. Similarly, if you establish a tax credit and pay for it by borrowing more, that has the same consequences as establishing a direct expenditure and paying for it by borrowing more.

Scary fact of the day from Andrews: tax expenditures (credits and breaks) cost the government $1 trillion per year.  In other words, we could solve our deficit and keep tax levels the same (satisfying even crazy Republicans) if we just removed all the leaks from our tax code.  In practical terms, I’m advocating for cutting government spending to balance the budget, a “traditionally” “Republican” idea.  Obviously, I support higher government spending, but I support it carried out in a very honest, obvious manner.

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