Thursday, July 21, 2011

It's Virtually a Law of Economics

That if you provide disincentives, such as taxes, you get less of something, and if you provide incentives, all the way from cash to tax breaks, you get more of it.  I've seen Economics defined as the study of incentives and how people respond to them (here, I think). 

Which leads to the disincentives proposed by the gang of six in an attempt to move the "debt ceiling" mythology forward (h/t to Ann Barnhard, and IOTW) (from Accounting Today).
  • The plan reportedly includes three separate tax rates, one at 8-12 percent, another at 14-22 percent, and a third at 23-29 percent, according to the Associated Press. 
  • The plan would also reduce tax breaks on mortgage deductions, 401(k) plans and IRAs, charitable deductions, child tax credits and other areas. 
  • The plan also proposes to close some corporate tax loopholes, lower tax rates for both individuals and businesses, and eliminate the alternative minimum tax. 
  • It would also cut $500 billion immediately from the deficit, and give Congress an additional six months to come up with other spending reductions.
Focusing on the blue item in the light of incentives and disincentives, it appears that, as a country,
  • we want to discourage home ownership, 
  • we want to discourage responsible saving for retirement, 
  • we want to discourage contributing to charity and 
  • we want to discourage having children.   

Note that all of these disincentives have the long term trend to make people more dependent on the government and less self-reliant. 

Next, remember a good working definition of "loophole" is "law" when used by someone the writer doesn't like.  A "corporate tax loophole" is nothing more than a corporation obeying the written law. 

By saying "cut $500 billion immediately from the deficit", they imply that's for 2012, and the deficit will thus be $1.1 billion (as closely as I can track it).  That's about number 13 in the ranking of the world's GDP.  We're still borrowing more than almost any nation can lend. 



5 comments:

Xenocles said...

Frankly I favor eliminating all deductions. It's far better than using the tax code for penalizing the out groups and blessing the favored behaviors of the day. The only deduction I favor isn't even a deduction, really it's just an exemption of the first XX dollars from taxation (where XX is a value representing a bare subsistence income). That's assuming we have to have an income tax at all.

Graybeard said...

Yeah, but nobody suggested that. I'd prefer a flat tax/fair tax without progressive increases, and zero percent corporate tax. No R&D tax credit, but no penalties for success, either. Think that might get some companies interested in building in America (once they're convinced we're no longer insane)?

But the purpose of the tax code ceased being collection of revenue long ago (if it ever was) and it's exclusively a social engineering tool. Used by the ruling class to reward contributors and punish opponents - or to gain favor.

Xenocles said...

The mortgage deduction really irritates me because as a renter (and I do plan to rent for the foreseeable future) I'm essentially subsidizing homeowners' mortgages. I wouldn't be sorry to see it go.

BS Footprint said...

@Xenocles:

I'm a homeowner and I'd gladly see the mortgage deduction go along with all the other tax exemptions, in exchange for a much lower overall tax rate.

It's time for the state to stop trying to encourage / discourage behavior by manipulating tax policy.

Graybeard said...

I paid my house off early, about 5 years ago, but IIRC, the requirements for expenses that made it worthwhile to itemize and get that deduction made it something we hadn't used in years. Without digging out old tax forms, I suspect I haven't had that deduction in 10 to 15 years.

Still, subsidizing homeowners deductions doesn't bother me as much as subsidizing the (just about) half of the population who pays no federal income tax at all. We all subsidize some part of the population, and will continue to as long as the tax code is aimed at social engineering and not revenue collection.