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Democracy, Economics, Paternalism

Spending vs. Tax Cuts: Both Mismanaged And In Need of New Approaches

I recently read a post by James Kwak titled, The “Me Too” Party, explaining the effect of Democrats losing the war on taxes.  Essentially, he says that there has been a “transformation of the Democratic Party into the party of tax cuts. Except, that with the Republican Party as the real party of Texas-sized tax cuts, the Democrats can never be more than the kid brother, half-hearted, talking-out-of-both-sides-of-its-mouth party of tax cuts.”

True enough.  And as Kwak mentions, the bipartisan agreements regarding tax cuts “have conditioned the public to expect tax cuts as their constitutional right.”

A friend of mine responded to the piece by noticing that Kwak didn’t take into account the effect that (perceived) mismanagement of funds has on the public’s aversion to tax cuts.  He proposed that, as a result, another approach might be to limit benefits for social programs to lower and middle income individuals.  Essentially, means test everything as a way of backdoor taxation…one problem though: means testing typically weakens support for programs and policies, which is one reason why Social Security and Medicare are the two most popular programs in the US.

That being said, I feel like a major missing piece to the puzzle in this discussion is that Democrats are essentially attempting to utilize tax cuts in the way that they used spending before.  In the past, liberals attempted to spend on programs that liberals designed to help those that liberals deemed needed help.  Fast forward to today, and the new reliance on tax cuts (or should I say incentives) is essentially the neo-liberal vision of designing tax incentives to help those that neo-liberals deem need help.  The former is more explicit, the latter results in “nudging” people to behave “better.”  But the goals are the same.  Unfortunately, so are the origins, which is top down design and administration without the requisite knowledge to truly get it right, as are, in large part, the results…

Which brings us to mismanagement of funds.  Mismanagement of spending is a real issue.  Similarly though, mismanagement of tax incentives is as much of a real issue as well.  I would argue that the source of the mismanagement problem lies not with spending vs. tax cuts, but with the approach for how solutions, programs and policy are arrived at in the first place.  Namely, paternalistic approaches are almost lucky not to fail while more inclusive approaches would yield higher success.

The only real difference is that the mismanagement of tax incentives is not as obvious and glaring as the mismanagement of spending.  And, of course, the former tends to get wasted on the corporate sector while the latter gets wasted on (poor) people.  But sooner or later, as people started to perceive the mismanagement of spending, they will also begin to notice the mismanagement of tax incentives.  At that point, liberals and neo-liberals may find they have no levers to pull at all.

Which makes it imperative to find a new approach to more success…soon!

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