Thursday, October 02, 2008

Earmarks and Tax Loopholes

One of the issues that is being discussed in this election, and which was brought up a number of times in the first Presidential debate, is the issue of earmarks.

Earmarks involve putting an item in a bill that sets aside a bit of money to engage in a special project such as building a bridge or a section of highway, where the money then gets spent in the legislator's congressional district. In the Presidential debate, the contestants seemed to agree that these earmarks came to a total of $18 billion in the past year.

However, I wondered why the contestants did not mention the many other ways in which a legislator can negotiate special favors on behalf of specific groups or individuals. Why the focus on just earmarks? This $18 billion is trivial compared to the manipulations that are possible using other methods.

Tax Loopholes and Tax Cuts

Here is a rhetorical trick that I am quite tired of hearing in political discussions – the rhetoric of tax loopholes and tax cuts.

If you create a special tax break for some group or business, those who are in favor of the break like to call it a "tax cut" and to brag about it accordingly. At the same time, if a legislator is opposed to this particular break, she calls it a "tax loophole" that she promises to close. When she advocates closing this loophole, the proponents of the break then say that she is "voting in favor of raising taxes."

We see this currently in the financial bailout bill, and in plans to end particular subsidies to energy companies. One of the ways in which the financial bailout package was sweetened (in order to attract more votes) was by putting in special tax breaks for those alternative energy.

In passing this legislation, those who supported it can then go home and say, "I voted to cut taxes." They do not dare mention that what they did was vote to create tax loopholes through which special interest groups can then pay less taxes. They simply use the more generic claim of "I cut taxes." They make the claim as if to say, "You are paying less to the government because of what I have done."

However, this is typically not true. "You" do not have the means to take advantage of these tax cuts – only those with the resources to hire tax accountants and tax lawyers have that privilege. Even then, the loopholes they exploit will have to be large enough to cover the cost of the tax accountants and lawyers.

In other words, these types of government favors are for the rich – for those who can afford the lobbyists to get it passed, the marketing firm to persuade the public, and the tax lawyers and accountants to keep it legal.

Similarly, if any candidate threatens to close those loopholes and remove their special breaks, we can count on the special interest group that is benefitting from that loophole to accuse that the plan is to "raise taxes." In Colorado, we have a proposition on the ballot that would eliminate hundreds of millions of dollars in subsidies to oil companies (who are making tens of billions of dollars in profits). Of course, the oil industry is running advertisements saying that this is a plan to "raise taxes by hundreds of millions of dollars" and that the customers can rest assured that the costs will be passed onto consumers.

There is so much spin involved in these types of debate that one cannot read (or write) about them without getting dizzy. The winner of these conflicts tends to be the person who can create the scariest advertisements, and that tends to be the people who have the most money – who can pay for the most expensive commercials and the market research that goes into making sure that those commercials are effective.

Technically, there is little practical difference between a $300 million tax break and a $300 million tax subsidy. There is no difference between saying, “You all have to pay the same amount – then we will give Group G $300 million out of the money we collect,” and saying “You all have to pay the same amount, except for the members of Group G, who will be allowed to pay $300 million less.

Which means that, if it is good for the economy and for the people at large that an industry get a $300 million tax break, then it is also good for the people at large that they get taxed $300 million in order to give the industry in question a tax subsidy. An advertisement that says, "Keep our $300 million tax break" is no different than an argument that says, "Tax yourselves $300 million more and give the money to us."

It only looks different.

And looks are what is important in political spin.

An 'earmark', then, is a piece of legislation that says, "Tax the people $X and give it to this group over here." A tax loophole is little different from saying, "Tax the people $X so that this group over here can keep its money."

There is no particular virtue in being opposed to earmarks, as McCain claims to be, and being "in favor of lower taxes" in the form of tax subsidies to particular individuals.

I would bet that, if you added up the value of all of the tax loopholes that exist – the "tax cuts" as their proponents like to call them – it amounts to far more than $18 billion in special favors.

The discussion over earmarks is a diversion – a distraction – a concern over a trivial matter such as spilled coffee while ignoring the multi-vehicle pileup with death and injuries in which the coffee was spilled.

I am not saying that all tax loopholes are a bad thing. I would not say that all earmarks are bad either. Many of the earmarks that legislators approve are for things that would get done anyway under more general legislation such as improving infrastructure. The difference is between giving $18 billion to an agency and letting it decide which infrastructure to improve, and giving $18 billion to an agency and a list of infrastructure improvements for it to make.

What I am objecting to is the political language that plays upon the false attitude that earmarks are different from tax breaks in some significant way – that a person who is opposed to earmarks but in favor of tax loopholes is somehow being consistent when, in fact, she is not being consistent at all.

Even though not all earmarks are bad, and not all tax loopholes are bad, an argument can be made for getting rid of both of them completely. The argument says that, "Getting rid of all $18 million in earmarks may get rid of some good earmarks, but it will get rid of more bad than good."

Similarly, closing hundreds of billions of dollars in tax loopholes may close some good loopholes, but it will close far more bad loopholes and, thus, be a net benefit. It would, of course, be to our advantage to allow the good earmarks and eliminate the bad – and allow the good loopholes and eliminate the bad. However, if we seem incapable of having $X billion in good earmarks and loopholes without generating 10 x $X in bad earmarks and loopholes, we may benefit from ending the practice entirely.

This is an empirical question, and it would take an empirical study to support any conclusions.

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