Friday, January 4, 2013

Fiscal cronyism

I thought of a nice thing to say about the "fiscal cliff" outcome. At least the tax rates are "permanent." We will be spared the annual last-minute crisis when the "Bush tax cuts expire."  Further tax increases will take a new initiative, not a scheduled cliff.

The exact opposite happened on the special-deal side: all the "temporary" special deals got extended for a year, a recipe to tell lobbyists they'd better stay on Congress' and the Administration's good side through next year, and a lovely way for long-run budget numbers not to reflect actual spending.

Daniel Henninger's excellent Wall Street Journal column covered this aspect well:
The section titled "Business Tax Extenders" gets ink because it is so ripe for "Daily Show" ridicule.

Jon Stewart merely has to read the text: "Credits for certain expenditures for maintaining railroad tracks." A "seven-year recovery period for motorsports entertainment complexes." "RIC qualified investment entity treatment under FIRPTA." Hollywood can expense $20 million of production costs "incurred in economically depressed areas of the U.S.," which must mean most of Manhattan is an "economically depressed area." I've got to get in on this. How about an energy tax credit for walking to work?

Reading through the list, you feel like a sap...a rational working stiff would throw over his 9 to 9 slog to try this: "Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible for a production tax credit."

The "We're Green!" advertising slathered everywhere by appliance makers and apartment developers is built on tax breaks dug out of the general fund: There's a $650 million credit for makers of clothes washers, dishwashers and refrigerators.

... Some $30 billion to extend unemployment insurance,... Dependent-care credits, adoption credits, credits for tuition and tuition interest, school construction bonds, a "third child" credit and—why not?—a credit for plug-in electric motorcycles.

....The bill's "Medicare extensions" output new money for "work geographic adjustments," "super-rural" ambulance services, "low-volume" hospitals, and entities engaged in "certain activities relating to health-care performance."

Inspired, I went back to the bill's summary at In addition to a lovely full list of goodies, notice how much of the back end of the bill involves health care. Look for a lot more of this in the future.

And remember -- this only addresses the corporate welfare that was scheduled to end Dec 31. The rest of the iceberg swims on.

Herewith, the summary of the "American Taxpayer Relief Act of 2012," dedicated to the charming commenters on my last post who don't think there are any clever deals for well connected wealthy people to avoid taxation. (I incorrectly said "loopholes" in the original post, a poor choice of words corrected by comments.)  There's no need for commentary, just read it.

(Updates: After reading Mark Steyn on the same topic, I think I'll just go back to writing equations. More seriously, my son asked me this morning, "So, dad, is it a good thing they stopped us from going over the fiscal cliff or not?"  Now I'm not so sure. OK, "middle class" people would have gone back to the income taxes they paid in the 1990s. But as liberals like to remind us, those weren't so bad. But all of these shenanigans would have been put to rest.)

Sec. 1. Short title, etc.
Sec. 101. Permanent extension and modification of 2001 tax relief.
Sec. 102. Permanent extension and modification of 2003 tax relief.
Sec. 103. Extension of 2009 tax relief.
Sec. 104. Permanent alternative minimum tax relief.

Sec. 201. Extension of deduction for certain expenses of elementary and secondary school teachers.
Sec. 202. Extension of exclusion from gross income of discharge of qualified principal residence indebtedness.
Sec. 203. Extension of parity for exclusion from income for employer-provided mass transit and parking benefits.
Sec. 204. Extension of mortgage insurance premiums treated as qualified residence interest.
Sec. 205. Extension of deduction of State and local general sales taxes.
Sec. 206. Extension of special rule for contributions of capital gain real property made for conservation purposes.
Sec. 207. Extension of above-the-line deduction for qualified tuition and related expenses.
Sec. 208. Extension of tax-free distributions from individual retirement plans for charitable purposes.

Sec. 301. Extension and modification of research credit.
Sec. 302. Extension of temporary minimum low-income tax credit rate for non-federally subsidized new buildings.
Sec. 304. Extension of Indian employment tax credit.
Sec. 305. Extension of new markets tax credit.
Sec. 306. Extension of railroad track maintenance credit.
Sec. 307. Extension of mine rescue team training credit.
Sec. 308. Extension of employer wage credit for employees who are active duty members of the uniformed services.
Sec. 309. Extension of work opportunity tax credit.
Sec. 310. Extension of qualified zone academy bonds.
Sec. 312. Extension of 7-year recovery period for motorsports entertainment complexes.
Sec. 313. Extension of accelerated depreciation for business property on an Indian reservation.
Sec. 314. Extension of enhanced charitable deduction for contributions of food inventory.
Sec. 315. Extension of increased expensing limitations and treatment of certain real property as section 179 property.
Sec. 316. Extension of election to expense mine safety equipment.
Sec. 317. Extension of special expensing rules for certain film and television productions.
Sec. 319. Extension of modification of tax treatment of certain payments to controlling exempt organizations.
Sec. 320. Extension of treatment of certain dividends of regulated investment companies.
Sec. 321. Extension of RIC qualified investment entity treatment under FIRPTA.
Sec. 322. Extension of subpart F exception for active financing income.
Sec. 324. Extension of temporary exclusion of 100 percent of gain on certain small business stock.
Sec. 325. Extension of basis adjustment to stock of S corporations making charitable contributions of property.
Sec. 326. Extension of reduction in S-corporation recognition period for built-in gains tax.
Sec. 327. Extension of empowerment zone tax incentives.
Sec. 328. Extension of tax-exempt financing for New York Liberty Zone.
Sec. 329. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
Sec. 330. Modification and extension of American Samoa economic development credit.
Sec. 331. Extension and modification of bonus depreciation.

Sec. 401. Extension of credit for energy-efficient existing homes.
Sec. 402. Extension of credit for alternative fuel vehicle refueling property.
Sec. 403. Extension of credit for 2- or 3-wheeled plug-in electric vehicles.
Sec. 404. Extension and modification of cellulosic biofuel producer credit.
Sec. 405. Extension of incentives for biodiesel and renewable diesel.
Sec. 406. Extension of production credit for Indian coal facilities placed in service before 2009.
Sec. 407. Extension and modification of credits with respect to facilities producing energy from certain renewable resources.
Sec. 408. Extension of credit for energy-efficient new homes.
Sec. 409. Extension of credit for energy-efficient appliances.
Sec. 410. Extension and modification of special allowance for cellulosic biofuel plant property.
Sec. 412. Extension of alternative fuels excise tax credits.

Sec. 501. Extension of emergency unemployment compensation program.
Sec. 502. Temporary extension of extended benefit provisions.
Sec. 503. Extension of funding for reemployment services and reemployment and eligibility assessment activities.
Sec. 504. Additional extended unemployment benefits under the Railroad Unemployment Insurance Act.

Sec. 601. Medicare physician payment update.
Sec. 602. Work geographic adjustment.
Sec. 603. Payment for outpatient therapy services.
Sec. 604. Ambulance add-on payments.
Sec. 605. Extension of Medicare inpatient hospital payment adjustment for low-volume hospitals.
Sec. 606. Extension of the Medicare-dependent hospital (MDH) program.
Sec. 607. Extension for specialized Medicare Advantage plans for special needs individuals.
Sec. 608. Extension of Medicare reasonable cost contracts.
Sec. 609. Performance improvement.
Sec. 610. Extension of funding outreach and assistance for low-income programs.
Sec. 621. Extension of the qualifying individual (QI) program.
Sec. 622. Extension of Transitional Medical Assistance (TMA).
Sec. 623. Extension of Medicaid and CHIP Express Lane option.
Sec. 624. Extension of family-to-family health information centers.
Sec. 625. Extension of Special Diabetes Program for Type I diabetes and for Indians.
Sec. 631. IPPS documentation and coding adjustment for implementation of MS-DRGs.
Sec. 632. Revisions to the Medicare ESRD bundled payment system to reflect findings in the GAO report.
Sec. 633. Treatment of multiple service payment policies for therapy services.
Sec. 635. Adjustment of equipment utilization rate for advanced imaging services.
Sec. 636. Medicare payment of competitive prices for diabetic supplies and elimination of overpayment for diabetic supplies.
Sec. 637. Medicare payment adjustment for non-emergency ambulance transports for ESRD beneficiaries.
Sec. 638. Removing obstacles to collection of overpayments.
Sec. 639. Medicare advantage coding intensity adjustment.
Sec. 640. Elimination of all funding for the Medicare Improvement Fund.
Sec. 641. Rebasing of State DSH allotments.
Sec. 642. Repeal of CLASS program.
Sec. 643. Commission on Long-Term Care.
Sec. 644. Consumer Operated and Oriented Plan program contingency fund.

Sec. 701. 1-year extension of agricultural programs.
Sec. 702. Supplemental agricultural disaster assistance.

Sec. 801. Strategic delivery systems.
Sec. 802. No cost of living adjustment in pay of members of congress.

Sec. 901. Treatment of sequester.
Sec. 902. Amounts in applicable retirement plans may be transferred to designated Roth accounts without distribution.
Sec. 911. Budgetary effects.


  1. What's the total, as a % of GDP these add up to?

    1. Oh, anonymous! Again you ask the wrong question! I think the questions you were looking for are:

      Can I still write off my purchase of an electric golf cart?

      Can I still get a tax credit for my SUV purchase? (My lawyer gets a new one every couple of years because of that one. John, take note! Why hoof it to work when you can be paid to ride in style?)

      Is the vegetable garden in my backyard eligible for farm subsidies? also related: Am I ConAgra, because I can really rake in the tax loot if I am?

      Can I subsidize your energy consumption by installing generously subsidized solar panels?

      How much do Senators cost so that I can buy my very own and get the tax exemptions I want? (They are cheaper than you might think, actually)

      All that is stuff you can do now without moving your business to the Caribbean or launching your own options market making BD. Get in the game!

      Good luck!

  2. I don't know who all those "charming commenters" were in your earlier comments section; however, the items you list are not "loopholes". They are tax benefits very consciously put into the Code by our elected officials at the behest of certain interest groups. Come on, language matters. By calling this stuff "loopholes" we're really letting our elected officials and the whole favor-granting system off the hook. Put this misused term in the same corner as "marginal tax rate", please.

    Alas, this is nothing new. Boris Bittker wrote an entire law review article about it back in '73 titled "Income Tax Loopholes and Political Rhetoric".

    1. Suggest a better term and I'll use it. I don't want something like "preferences" that makes this sound even vaguely like sensible public policy. Your description of "the whole favor-granting system" is great. Now, a one-word replacement for loophole, which I grant is not right. Loophole suggests an unintentional way of avoiding taxes, exploiting something in the code which its writers did not intend. (Defective crumby trust?) These are above-board, completely intentional favors to specific and quite wealthy groups.

    2. One could come up with quite a number of possible terms, some not printable here.

      One widely-used term, created by Stanley Surrey and widely accepted among the "experts", is "tax expenditure". His idea was to create a term that encompassed all tax deductions, exemptions and credits in the Code that serve as the functional equivalent of "spending". The thought was that these items were no different than having someone pay the full tax and then having Treasury turn around and write a check for the amount of the tax benefit. Frankly, I don't like the term, partly because it is now used for stuff that really has nothing to do with spending. Most lay folks don't understand it. It has been hijacked, like "loophole" for rhetorical political purposes. The JCT is trying to work out a new nomenclature that distinguishes tax subsidies from other "tax distortions".

      To give the thing the proper pejorative flavor for a lay audience, you might consider "tax breaks", "tax giveaways", etc. Preceding that with "Congressionally mandated" might add appropriate description and emphasis. The fact that you might need to introduce the term by a short explanation should not dissuade you. Your purpose here, I assume, is to educate, not obfuscate. Brevity has its advantages, but not at the expense of meaning.

      But, please, not "loophole". That's a term politicians love to use when they want the public to think that they pointing their big guns at something evil but at the same time invisible (have you ever seen a "loophole"?). If they were honest, they would turn that gun on themselves.

      I realize this is a futile battle on the language front. If Boris Bittker couldn't make a difference, I don't know how I possibly can. If you have the time, though, read the article. Some things don't change, unfortunately.

    3. Too bad "indulgences" is already taken.

    4. not one word but two..'deliberate loopholes'

    5. Meanwhile, over at the Tax Analyst blog at David Brunori directs us to an in-house promotional video created by Governor LePage of Maine. I took at look at that video and noted that the governor twice refers to creating "tax breaks" for companies in order to bring additional investment to that state (beginning at about minute 2:30). For example:

      "We created a tax break for capital investment which provides immediate tax relief for investment made in Maine by existing companies or new companies".

      I wonder why he didn't say "loophole"? Not only is "tax break" accurate in the sense that the provision was certainly no oversight, but the Governor is darn proud of it, and the bill seems to have had broad bi-partisan support, despite subsequent opposition rhetoric for "tax cuts for the rich."

      But, when politicians change their minds and want to eliminate that, I'm sure it will be called a "loophole", as if they never voted for it in the first place. One might argue that "loophole" sets the right pejorative tone, but I don"t think it is otherwise accurate at all, any more than giving tax relief to 70,000 "Mainers" at the bottom of the income scale was a "loophole". Not characterizing the latter or, say, the payroll "tax break" as a "loophole" is curiously something everyone seems to agree on.

  3. ....and I see we have here only a partial list of all the holes in the cheese :-)

  4. You say it's "nice" that the new tax rates are "'permanent,'" spar[ing us] the annual last minute crisis when the "'Bush tax cuts expire.'"

    Some readers might appreciate as historical perspective a reminder of why the Bush tax cuts were designed to expire. From Wikipedia:

    The Bush tax cuts had sunset provisions that made them expire at the end of 2010.
    [at which time congress voted a two year extension], since otherwise they would fall under the Byrd Rule.
    The Byrd Rule is a Senate rule that . . . allows Senators . . . to block a piece of legislation if it purports to significantly increase the federal deficit beyond a ten year term.

    In other words, the Bush tax cuts had a "scheduled cliff" because Bush administration economists and policy makers knew perfectly well that their proposed tax cuts would significantly increase the deficit beyond a ten year term but were bound and determined to push them through any way they could. Which makes one wonder now (speaking of cronyism) why many supporters of tax cuts that were known to be deficit generating at the time are in the forefront of the current anti-deficit stampede.

    1. I'm at the head of the stampede because the deficit isn't going to be reduced with tax hikes. These tax hikes dream of raising $62 Billion per year. The annual deficit is over $1 Trillion and rising. Put that in a bar graph and see how hilarious it looks. It's pointless to provide disincentive to produce if the clowns in the Potomac Swamp are determined to spend us into hell anyway.

      I have a question for you: How did Oblundercare escape the ax of the Byrd Rule? I suspect by way of Congressional Magic Accounting, which is a lie that keeps on taking.

  5. To answer your question, the CBO and JCT both determined that the ACA would reduce the deficit over the long term, rendering the Byrd Rule inapplicable.

    Note, too, according to the CBO, repealing the ACA would add $109 billion to federal deficits over the period between 2013 and 2022.

    I'm sorry if this conflicts with what you want to believe.

    Also, since being at the head of a stampede is a dangerous place, consider that it's the cost of health care that's driving our large projected deficits. If our per capita health care costs were in line with those of any other advanced country, we'd see not deficits but large budget surpluses in the future.

    And recognize that our large current deficits are caused almost entirely by the economic downturn resulting from the housing bubble's collapse.

    Then you'll be on safer footing.

    1. "it's the cost of health care that's driving our large projected deficits."

      Right, and by pulling healthcare out of the market and making it a public good we take strong mechanisms for cost control and innovation and trade them for lousy ones.

      "If per capita health care costs were in line with those of any other advanced country..."

      You can't control costs with magic. Other countries pay less for services because they pay less for services, and they get what they pay for. That other countries enjoy favorable health outcomes says more about how lifestyle factors affect health and how you get diminishing returns on a lot of healthcare spending. If we capped our healthcare spending we probably wouldn't see outcomes worsen much, either. Let rich people finance cutting-edge medical technology through private means. Our public programs should be about creating a safety net, a minimum standard; they are NOT a replacement for the market.

    2. That other countries enjoy favorable health outcomes says more about how lifestyle factors...

      Well, that and the fact that they all have parallel private health care provisioning for which they pay out of pocket. Not all that egalitarian, but (whaddaya know) needed to reduce looooooong wait lists and get access to expensive procedures simply not provided by the collective.

  6. Aha! Thank you. That is stunning.

    No, it does not conflict with with what I know to be true. You have confirmed the liberal use of Magic Math. You cannot reduce the cost of provisioning merely by increasing demand (access). Just doesn't work. Unless you use Magic Math. NONE of the government's schemes have ever come close to costing what congress said they would to sell them to the public and only a dreamer and a fool would believe this time Magic Math will work.

    ...consider that it's the cost of health care that's driving our large projected deficits. If our per capita health care costs were in line with those of any other advanced country, we'd see not deficits but large budget surpluses in the future.

    Your government is running an annual deficit in excess of $1 Trillion. Even using Congressional Magic Accounting designed to severely understate costs, the CBO only calculated a deficit reduction of $143 Billion over a nine year period (source: White House blog). Even if that reduction were real (it's not), the CBO's own estimates show that Oblundercare's savings don't even rise to the level of a rounding error in the annual deficit. So, please explain to me how a $1 Trillion deficit is meant to be eliminated and a surplus created by an annual spending cut of $15.8 billion?

    I understand the appeal of following down the rabbit hole countries which have bankrupted themselves with their giant welfare I don't.

    And recognize that our large current deficits are caused almost entirely by the economic downturn resulting from the housing bubble's collapse.

    Huh? You mean we didn't have deficits before 2008? And Obama didn't jack up spending in 2009 and keep it elevated (and is now demanding more in 2013)? They're all a result of the unfortunate events of 2008?

    Irrespective of wildly fluctuating tax rates since the 1930's, tax revenue has averaged 18% of GDP. A reasonable person (possibly one who is not a victim of the American public school system) would expect that tax collection would look roughly the same in the future. Federal spending, on the other hand, has zoomed from around 20% of GDP in 2007 to 24% since Oblamebush ascended to power (it's actually more than that, as John Cochrane points out in an earlier recent post, but I'm feeling generous toward the clowns tonight). And the GDP has, since the Times of Troubles in 2008, continued on its upward trajectory and is now respectably higher than it was before woe befell us. So, unless higher GDP spells "economic downturn" to you or you have some really good reason to believe that tax revenue will for some reason be a higher as a percentage of GDP than it has been the last 80 years, I'd say our current TRILLION dollar annual deficits are a function of increased out of control spending, not so much the burst bubble.

    BTW, the reason the 2003 tax RATE cuts had sunset provisions had nothing to do with the byrd rule. The republicans didn't have enough votes in the senate to make them permanent.

    1. @Methinks
...consider that it's the cost of health care that's driving our large projected deficits. If our per capita health care costs were in line with those of any other advanced country, we'd see not deficits but large budget surpluses in the future.

      "I understand the appeal of following down the rabbit hole countries which have bankrupted themselves with their giant welfare I don't."

      Right. You don't understand. Other advanced countries certainly have their fiscal woes, but in the area of health care it costs them a lot less per person than we are paying to achieve comparable results. If we could bring our health care cost down to their levels, voila, projected deficits disappear.

      And recognize that our large current deficits are caused almost entirely by the economic downturn resulting from the housing bubble's collapse.


Huh? You mean we didn't have deficits before 2008? And Obama didn't jack up spending in 2009 and keep it elevated (and is now demanding more in 2013)? They're all a result of the unfortunate events of 2008?"

      Yep. Take away the 2008 economic collapse with its consequent tax revenue losses, and take away bail outs, stimulus, and safety net expenses (which prevented an even more disastrous collapse), and we wouldn't see any huge deficit spike. (Then take away the cost of the Bush tax cuts and the cost of the war in Afghanistan and the deficit all but disappears.)

      "BTW, the reason the 2003 tax RATE cuts had sunset provisions had nothing to do with the byrd rule. The republicans didn't have enough votes in the senate to make them permanent."

      Yes, the Republicans didn't have enough votes (they would have needed 60) to make the Bush cuts permanent under normal rules, so they had to use the reconciliation process (just 51 votes needed for passage), and that's exclusively where the Byrd Rule applies, in the reconciliation process. And since the Byrd Rule additionally applies only to deficit creation extending beyond a ten year term, and it was clear their legislation would create such deficits, Republicans could only avoid having their bill blocked by adding the ten year expiration. In reconciliation without the ten year expiration any senator could have objected under the Byrd Rule and blocked the bill.

    2. So, what you're saying is, you can't really answer the question. Your ammo is all aggressive assertion. Okay.

      You also seem blissfully unaware that before Oblundercare, unlike Europe, the United States did not have a fully socialized system. Thus, if people decided they wanted to spend money on IVF or cosmetic procedures, that all came out of private pockets and not tax revenue. So, unless you're talking about the bankrupt ideas of Medicare and Medicaid, spending on health care does not reduce the deficit.

      I stand corrected on the Byrd Rule. I guess the Republicans weren't as adept at Magic Math and Magi Accounting as the Democrats and some people don't learn from history. Now, is this a rule that's named for the Democrat's KKK Grand Kleagle?

  7. Congratulations my fellow taxpayers and Americans!

    We now have a national tax code so complicated that no one understands it, or really knows if it is progressive or regressive or just bad and punitive to productive behavior (the latter is true, at least I think).

    And federal spending? Again no one really knows or understands it all, except that agency spending is runaway, and entitlements are becoming very expensive.

    So, take monetary policy--made behind closed doors by the mysterious FOMC, and quick tell me without looking at Wiki who are the 12 FOMC members, and how do they get there?

    Okay, so I don't understand our tax code, federal spending, or our monetary policy.

    Hey, I am only a citizen, why should anyone makes things clear to me?

  8. Question: When does a tax reduction have zero economic stimulus effect?
    Answer: When it is temporary.

    Allowing the cuts to just expire would have at least had the effect of allowing businesses to plan ahead.

  9. "American Taxpayer Relief Act of 2012" - Also known as the Lobbyist Employment Act of 2012.

  10. Maybe the word you're looking for is a "rent" ?

  11. John, what's the likelihood that given how money is raised and spent in American politics, that we'll ever have zero loopholes?
    If we agree that this likelihood is low, doesn't that call for high income taxes on the rich to compensate?

  12. What a marvelous idea, Anonymous! Only the high income taxes won't hurt the already rich and well connected. They'll overwhelmingly hurt people who are not rich and who lack the political connections to get special favours from our political overlords.

    This is why I hate calling it taxes on "the rich". They are income taxes on high earners, not "the rich". High taxes on high earners discourage people from taking the risks necessary to start a business or pursue a rewarding career because they reduce the return on those endeavors. They prevent people from GETTING rich. Now, why would you discriminate so against the poor?

    Today and always in America, people move in and out of the group of highest earners. There is no permanent wealthy class. High and progressive income taxes ensure a permanent, unchanging and protected elite. An American aristocracy. Yet another diseased idea progressives wish to adopt from Europe in the name of preventing the very thing they foster.

  13. i think this guy has a real good assessment of how power (and hence the cronyism) works in this country, and this is from '87!


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.