The Giveaway and Takeaway Sides of the Government’s Budget

Written by: Eugene Steuerle

Take Away Slides

In a recent column, I noted that elected officials want to brag about what they do for their constituents—what spending they have increased and what taxes they have cut. Good budget policy must adapt to that psychological impulse when creating processes that restore and maintain a sustainable system of spending and taxes.

This column is a bit of a technical primer—an intro that perhaps should have been written before that last column. The traditional textbook presentation of outlays being covered by taxes on the other side of the ledger no longer works well in explaining budget policy. It especially fails when trying to engage in budget reform. Instead, the analyst and reformer must understand how the giveaway and takeaway sides of the budget work, even when elected officials do not comprehend how these items fit together and affect their constituents.

When the first Congress met under the new Constitution, the first committee it established was Ways and Means in the House of Representatives. The Constitutional framers weren’t worried about legislators finding items to spend but rather about the failure of government under the Articles of Confederation to raise revenue. As a result, several threats of revolt arose, including when some Revolutionary War soldiers and veterans marched into Philadelphia with their muskets, demanded the pay and pensions they had been promised, and forced legislators to disband temporarily.

In other words, the new Congress’s first task was to address the unsavory or takeaway side of the budget—coming up with ways and means to pay its bills, whether to soldiers at home or lenders from abroad.

That was then.

Today, the House Ways and Means Committee and its sister tax-writing committee, the Senate Committee on Finance, have extended their jurisdiction well into the savory side. They oversee Social Security and share jurisdiction with other committees over Medicare and Medicaid. While they also have responsibility for taxes dedicated to these programs, the spending increases they have scheduled over time far exceed the taxes they’ve scheduled to cover the costs. The takeaway requirements for modern Congress extend beyond those of traditional Congresses in that unsustainable growth rates in some programs must also be addressed.

They have found other ways to offer giveaways as well. The tax-writing committees control tax expenditures—tax cuts that often could but are not designed as direct expenditures. These include charitable deductions, energy credits, and child-care allowances. Almost any functional area of spending policy has a parallel program somewhere in the tax Code. In some places, tax subsidies are more significant in aggregate than the direct outlays of the corresponding agency. For instance, the value of tax subsidies for housing exceeds the entire Department of Housing and Urban Development budget.

Just as tax expenditures effectively put spending into the tax code, expenditure taxes offer a way to put taxes into outlay programs. These implicit taxes in direct spending programs derive from the phase-outs of benefits and phase-in of higher premiums or other charges as income rises. For instance, when a household’s income increases by $1,000, everything from Pell Grants for higher education to SNAP (formerly food stamps) to Medicare benefits (net of premiums) tends to be reduced in value. Expenditure taxes arise in innumerable outlay programs and effectively act as an additional income tax on the recipients of those benefits.

Expenditure taxes are also used to reduce tax expenditures. For instance, Congress requires the maximum earned income tax credit to be reduced as income rises above certain levels. That is, for some taxpayers, the EITC reduces their tax liability, but then the EITC phase-outs reduce the amount of tax reduction.

Are you confused enough?

Then, join your members of Congress, who should address rationally and consistently all these various ways of giving and taking money from the public.

To sum up, so far, An elected official has four ways to engage in giveaways: (1) direct spending increases, (2) tax expenditure increases, (3) tax cuts, and (4) reductions in expenditure taxes. Financing these giveaways involves a similar number of potential takeaways: (1) direct spending cuts, (2) reductions in tax expenditures, (3) tax increases, and (4) expenditure tax increases.

My main point is that elected officials, no matter which committees they serve, want to be known for what they give to people, not just what they take away. They, too, want bragging rights to giveaways, and they have little interest in being credited with takeaways.

Let me end with one example of how this dynamic can help explain their actions.

Tax expenditures have a unique political advantage. The budget offices account for them as tax reductions rather than spending increases. For instance, a $1,000 tax subsidy for buying an electric car lowers tax liabilities, whereas a $1,000 direct grant for purchasing an electric vehicle increases spending. Rather than higher government spending, the public sees smaller government taxes.

Similarly, expenditure taxes reduce benefits rather than increase taxes. Congress can provide a universal child credit and raise taxes on higher-income individuals to pay for some of it. It can also phase out a universal child credit, thereby imposing a higher tax rate on higher-income families with children to offset the credit they would otherwise receive. Rather than higher government taxes, the public sees smaller government spending with a phase-out.

My purpose in laying out these wonky details is more than to explain the actions of Congress. Given our vast budget mess, I believe that the only way to get good budget reform—one that seeks out much better ways to spend, tax, and achieve sustainability—would be to start with broad principles on what is being sought and some integrated plan for getting there. Then, let the political compromises come into play. The alternative and predominant approach involves stacking up the least politically difficult ways of addressing current shortfalls of taxes relative to spending. However, at this point in our history, I am skeptical that such patchwork repair can create good tax policy, good spending policy, and sustainable budgets—the three simultaneous objectives of budget policy at its best.

Related: Major Budget Reform Must Accommodate Legislators’ Need To Give Away Money