Tax and Spend Policy

It's amazing what a bit of perspective can do. The ability to look at a problem from a different angle can improve your understanding of it dramatically if you find the right angle. This is not a novel insight, of course, but the huge variety of possible perspectives in the world makes it hard to know where to start much of the time.

There's a fairly large category of political issues that boil down, at one level or another, to regulations. The government doesn't tax anyone or spend anything on these issues(other than a comparatively trivial amount on enforcement), they simply mandate that X happen or Y stop and let the details work themselves out. For a lot of problems, this isn't a bad way of doing things - if you're going to have rent control or supply management, it's much more practical to simply mandate them than to arrange a tax and subsidy system that'd replicate their effects. (This is not to say that you necessarily should have them, which is a whole separate debate. I'm just discussing the implementation if you're going to have them.)

These issues are still ones where the government is interfering in the economy in one way or another, however. They still move money around. Well, if the government is moving money around, why not pretend it actually is a tax and spend system instead, just to see if it looks any different?

I've touched on this a bit before, but it's useful in far more situations than retail monopolies. For example, consider the minimum wage debate we've been hearing so much about for the last several days months decades. The spending side is simple enough - the recipients of the policy are low-income workers who would otherwise be earning less than the minimum wage. They make more than they would, so you can think of that as being a government spending program, like the Working Income Tax Benefit.

The tax side isn't all that complex either. The money to fund this "spending" comes from a "tax" on employers, in the form of the higher wages they need to pay. Thing is, it doesn't hit all employers equally. I work for a big financial institution, and the number of minimum-wage workers we have is probably a rounding error. My employer will pay basically pay nothing towards this "spending". Instead, the burden of the "tax" falls purely on employers who hire low-wage workers. Also, unlike most taxes on business, it's not based on profitability. Even a business that's losing money will need to pay this "tax", while a business that's extraordinarily profitable will pay nothing extra despite their extra resources.

When you look at the policy through this lens, a lot of the arguments on the topic start looking pretty hollow. Yes, I'll accept that giving low-income workers more money will lead to more consumer spending, and that this spending will generally help low-cost retailers and the like. And sure, that sounds like it'll be a good thing. But that implies precisely nothing about how this "spending program" should be financed. If someone said to you that they wanted to finance the welfare system through a highly regressive tax on people who are helping those on welfare, you'd think they were nuts.

Taxes create less of whatever you tax. If you want to make people do less of a thing, force them to pay more for doing that thing. If you want them to do more of a thing, pay them for doing that thing. That's not right-wing dogma, either, it's the fundamental idea behind carbon taxes and other similar policies - you make the polluter pay, because it's a good way to get less pollution. Same thing here. And thus the policy is...you make the person hiring poor people pay, because you want them to have fewer jobs? Really?

So sure, let's say for sake of argument that Card and Krueger are right and the minimum wage doesn't actually hurt employment at all, because the beneficial effects of the increased spending by the poor outweighs the costs borne by the employers. Wouldn't it be even better if you got the same spending without the taxes falling on their employers? If you could get the benefits there, and also have most of the costs fall on sectors of the economy better able to bear those costs without harming low-income workers in the process?

A lot of people will oppose this because it's just another big tax-and-spend government policy, and most of them will be on my side of the ideological fence. But that method of thinking is a trap. A subsidy can still exist even if it doesn't show up in the annual budget that the House votes on. An expense is the same to the person paying it no matter where the money goes. A government-mandated system of one person giving more money to another person than they otherwise would is no different than a tax followed by a spending program, and it should be treated the same way. If you're okay with taxes, then by all means, you're allowed be okay with this too - I'm not telling you where to stand on tax policy (well, not in this particular post at least). But I'd say that the people who think there's a fundamental difference between the two are looking at things from the wrong angle.

People love their partisan debates, but a lot of the time the truth is that both sides are being kind of dumb. If you only ever look at things from the perspective of a partisan, you can easily miss that. Step back, break these ideas down, and see what they look like afterwards. If they can't handle that, you might still be pushing them for PR reasons, but you should at least admit what you're doing to yourself, lest you get too caught up in defending the indefensible.