Thursday, March 24, 2011

Taxes, Information, and Democracy

-- Posted by Neil H. Buchanan

It is clear that few people have anything resembling a decent grasp of the federal budget. The public and the pundits tend to talk about "spending" in undifferentiated terms, with far too many treating spending by governments as the cause of -- rather than a necessary part of the solution to -- the ongoing effects of the recent economic collapse. The level of ignorance is such that polls show people simultaneously wanting the government to do more of almost everything, but to cut overall spending.

It is tempting, therefore, to want to educate the public. How can an ignorant electorate be a good thing? If only people understood that foreign aid -- to take the most outstanding example -- is a tiny part of federal spending, they might be shaken out of their complacent belief that the deficit could be erased simply by withholding our largess from ungrateful foreigners. Moreover, even those Americans with less chauvinistic views would certainly benefit from knowing how the government spends money. Or so the reasoning goes.

Senators Bill Nelson (D-FL) and Scott Brown (R-MA) have seized upon such logic, recently proposing the Taxpayer Receipt Act, which would require the IRS to send everyone who files an income tax return an "itemized receipt ... that lists where their payroll and income taxes are spent. The receipt would include key categories such as the interest on the national debt, Social Security, Medicare, Medicaid, national defense, education, veterans’ benefits, environmental protection, foreign aid – and, last but not least, Congress."

This is the type of idea that appeals to the purveyors of the conventional wisdom. The editorial page of The Boston Globe, for example, endorsed the idea enthusiastically, saying that it "should appeal to citizens across the political spectrum." President Obama is apparently on board. Who, after all, could be against providing people with more information? Informed debates are better than uninformed ones.

The problem is that, especially when the subject is something as complicated and wide-ranging as the activities of a national government, all attempts to provide information must be highly selective. Deciding what not to say is often more important than deciding what to say. Moreover, facts out of context can be highly misleading. The Taxpayer Receipt proposal is already set up to be slanted in favor of certain policy choices, and my suspicion is that over time it would become yet another area for partisan battle over how to manipulate public perceptions.

The basic idea is to highlight for people the biggest-ticket items, and some that are not so big, in the government's annual expenditures. This would make it clear, for example, that cutting funding for Planned Parenthood and public broadcasting -- or, I would add, freezing federal workers' salaries -- cannot be viewed as serious attempts to cut spending. The context, after all, is not to say, "Hey, folks, look at what the government does!" but rather, "We have to make big cuts in spending, so here's where to look."

In other words, the entire exercise takes for granted the highly dubious notion that the proper response to projected long-term increases in health care costs is not to reduce increases in long-term health care costs, but rather to cut everything else. This is worse than merely engaging in enabling behavior for health care inflation. Because the proposed receipt merely shows each year's spending, it necessarily understates the nature of any long-term problem. People would look at today's spending breakdown and try to figure out which items to cut, not being told that today's spending priorities do not drive the projections that show possible long-term problems.

The most predictable result of this problem is to bias the debate in favor of cuts to future Social Security benefits. Because everyone will see a pie chart with a big slice for Social Security, that will be an obvious target for cuts. Indeed, I suspect that this is the point, at least for a bipartisan group of politicians (including, by all evidence, President Obama) who are trying to build support to make major cuts in Social Security. Even Obama's former budget chief admitted that Social Security is a very minor piece of the long-term budget picture, but the proposed taxpayer receipt would make it look much larger.

Note also that the proposed bill directs the IRS to inform people about where all income and payroll taxes are spent. Including payroll taxes allows the receipt to include Social Security, but the receipt will not (apparently) include any information about our unique system for financing Social Security. People who are looking for areas to cut, therefore, will have no reason not to treat Social Security as merely a "big area of spending," ripe for cutting, rather than as a system with a dedicated financing stream.

Another non-neutral piece of information that the Act would provide is the "the amount of debt per American – which currently is more than $45,000." This piece of propaganda just will not die. The "your family's share" idea in the context of the national debt is simply meaningless. Debt-to-GDP is the meaningful way to assess debt (and even then, it must be understood in long-term context, not on an annual basis), but trying to convince people that they personally owe $45,000 because of the (presumptively frivolous?) activities of government serves a very specific agenda.

Still, one might argue that my objections merely amount to saying that there should be more information, rather than less. More information about projected spending patterns over time, more information about the interaction of taxes, spending, trust funds, etc. That, however, is exactly the point. We have all of that information already available. This exercise is only a matter of choosing what to highlight, knowing that most people will not go further, and knowing that calls like mine to add more information can be safely ignored, because we do not want to make this "too complicated."

Consider our experience with another piece of information provided to inform the citizenry about the government's activities. Every year, the Social Security Administration sends out a statement to millions of citizens, providing projections of the annual benefits to which a person will become entitled, under current law. It is an interesting document, in many ways. On page 1 of the statement, however, readers are told in grim language about the supposed impending insolvency of the Social Security trust funds, with language suggesting that action must be taken immediately to minimize the cost of the supposed long-term catastrophe.

We can learn at least three lessons from those statements. First, they demonstrate the selective nature of providing information, because they do not point out (among other things) that the Social Security Trustees' three forecast scenarios include one in which the trust funds are never depleted, preferring simply to state as a fact that the system will be insolvent in (under the latest forecasts) 2037.

Second, even though the information provided is accurate on its own terms, it can still mislead people. Specifically, although the statement correctly states that the result of the projected insolvency would be to reduce projected benefits by a bit more than 20% (from levels that are much higher than today's, in real terms), people apparently understand insolvency to be the same thing as bankruptcy. The common reading, therefore, appears to be that Social Security will disappear in 2037, not that it will have adequate revenues (even if Congress does not supplement those funds) to cover nearly 80% of projected benefits.

Third, the Social Security annual statements demonstrate how politicians treat the provision of supposedly neutral information. My research assistant was unable to track down exactly how the warning about insolvency was included in the Social Security statements in the first place, but she did find that there have been many bills proposed to make the language sound even more pessimistic/catastrophic. Numbers are hardly neutral, but any document resulting from the Taxpayer Receipt Act will surely also include some commentary. And that guarantees even more mischief.

Finally, consider the false notion of ownership that the receipt reinforces. The idea is that you, the taxpayer, "bought" something, so you have the right to see what you bought. And who is to receive the receipt? "[E]very taxpayer who files an income tax return." Not every American. Only those who have supposedly contributed to the kitty, to help buy what the government bought on our behalf. How far is that from saying that people have a right to influence their government only in proportion to their apparent -- and I do mean "apparent," because relative tax burdens are hardly an uncontroversial computation -- financial contributions to it? We might already be there and beyond, as anyone looking at our campaign finance system knows. Even so, it seems especially pernicious to tell people that they will be treated as less than full citizens if they do not pay federal taxes in any given year.