Democrats call for ending the “Disabled Veterans Tax” and the “Military Families Tax.” The what? There cannot be any such thing as a Disabled Veterans Tax. It is a label dreamed up by people wanting special treatment, like the Republicans’ brilliant “Death Tax” for the estate tax. Maybe they deserve it, maybe they don’t. But why can’t we leave this bullying by terminology to Newt Gingrich?
The problem with tax credits in general is that they never appear in the budget, so they never get the same scrutiny as direct spending, although their impact on the deficit is exactly the same. By definition, they cost more than whatever benefit they are intended to achieve, since no one is going to be induced to spend an extra dollar on, say, dance lessons (because some member of Congress has decided that it would be good for the country if more people knew how to dance) unless the subsidy is worth more than a dollar.
Tax credits are the worst possible tax policy from the standpoint of economic growth. They are distortionary: they cause consumers to divert spending from higher-valued to lower-valued uses. They are a clumsy way to solve externality problems: if you want less of something, tax it. They are not transparent, so people have a very hard time finding out how much the government is spending on, say, dance lessons. And they may actually discourage work.
For almost everyone except rock stars, leisure and work are basically perfect substitutes: a decision to work less is a decision to consume more leisure. The basic intuition of supply-side economics was that if you cut the taxes on people’s labour, they would work more, since to them, the tax cut would essentially be the same as a wage increase. This intuition is simple, easy to grasp, and widely accepted. Unfortunately, it is also wrong.
