What is a tax increase?

Today’s vote in the Senate to terminate the 45 cents a gallon refundable tax credit to ethanol blenders was welcomed in some quarters.  In others, it was the source of fear and loathing.

The point of contention is whether the elimination of a tax subsidy is tantamount to a tax increase.  This is the continuation of a conversation that was started last month when Republican leadership, in an effort to win an argument, offered the thought that reducing certain oil and gas tax advantages were the same as tax increases.

But are they really?

The simple reality is that subsidies, whether administered through the tax code or through spending programs, are wrong.  They are wrong because they are instances of theft typically perpetrated by a very small group of taxpayers on all taxpayers.  They are also corrosive because they migrate economic and other decisions from individuals to governments.

Pretty much everyone on the right side of the political spectrum agrees with this characterization.  However, there are some who believe that while tax subsidies should not be created because they are morally bad and inherently corrosive, those that are already in place can only be eliminated in those instances when the revenues in question are essentially rebated to all taxpayers.

These people know full well that such an approach is very nearly impossible (which is why it has not happened in living memory).  In short, they are prepared to acknowledge that subsidies are theft.  But they are perfectly comfortable in insisting that efforts to correct this moral bad have to be arranged in such a way as to ensure that they cannot be done.

For me, at least, the irreducible minimum is that the creation of these subsidies is itself a violation of the just order.  In each instance, a small, well-organized group carves a subsidy out of the body politic.  Repeal of such things, apart from any other consideration, results in a restoration of the original and intended order, and is therefore a desirable end irrespective of who gets what.

But let’s think about the specific instance.  Today’s disagreement involves ethanol.  There is no argument that the subsidy (totaling about $6 billion per year) is ridiculous and indefensible.  What is in question is whether the Senate should couple the elimination of the tax subsidy with an attendant and comparable decrease in the tax burden for all taxpayers.

Two thoughts occur.  First, the scale and scope are completely mismatched.  In a budget of 3.5 trillion dollars, 6 billion is less than one-fifth of one percent.  It is a rounding error.  If the Senate wants to true-up this rounding error at some point in the future, it should feel free.  But why waste the time and effort now.  In short, call me when the numbers climb above 1 percent (in total or in any specific moment).

Second, in a budget that is $1.4 trillion in deficit, it is probably important to remember that we are all thieves.  We are stealing from our children.  Viewed in this light, it seems comical to suggest that somehow we are “due” this measly, meaningless 6 billion dollars.

Finally, I am sensitive to the notion that federal government employees (like Congressmen) tend to spend whatever money they have available.  The answer is to work more diligently to make them responsible.  We have tried the Reagan idea of starving the beast.  It has failed.  The Democrats have discovered that they, too, can spend money they don’t have.  The idea that the current legislative crew is constrained by what they have or don’t have  is clearly contradicted by close to 40 years of experience.

The bottom line?  Intentionally or not, a rigid insistence on real-time, one-for-one offsets of tax subsidies (while ignoring subsidies on the spending side of the ledger), leads us to where we are — a place where it is difficult to get rid of a tax subsidy that everyone agrees is a disaster because they fear retribution from our version of Talmudic scholars.