On the idea of a “taxpayer’s receipt”

October 1, 2010

There’s a new white paper out from Third Way, a progressive think tank, that is making a lot of headlines on various blogs for its proposal that all taxpayers receive an itemized “receipt” showing where their taxes go. As an example of what the receipt would entail, look at the graphic from Third Way.

Intuitively, this is a nice idea. It lets the average person see very clearly that the cost of some things (like war and social program entitlements) is enormous compared to the cost of other things (like the salaries of members of Congress). It lets the average person develop a more-informed opinion about how certain spending cuts would affect the budget. And, not unimportantly, it reminds people that the federal taxes pay for actual, you know, things. That cost actual money.

However, there are significant drawbacks to this idea, at least as currently proposed. Enough so that I don’t think I would endorse this as good policy, and I worry that fixing the concerns would destroy the gains achieved through teh simplicity of the Third Way example. Here are five concerns:

1) The Third Way example is hopelessly simplified. Notice that the example is from a citizen who pays $5,400 in taxes. But the itemization only adds up to $3,219. That means that 40% of this example citizen’s taxes are unaccounted for on the receipt. Where are they going? Well, lots of places. Just as an example, the only legislative branch spending on the entire list is the salaries of Members of Congress. But the salaries of Members of Congress are only about 2% of the total spending on the legislative branch. The other 98% goes toward paying congressional staff, legislative branch agency staff (like the Library of Congress, CRS, GPO, and GAO), and upkeep of the buildings. And lest we not forget, the legislative branch’s overall price tag last fiscal year was 4.65 billion dollars. That sounds like a lot, until you realize it’s less than one-tenth of 1% of the federal budget (the rest is largely executive branch, entitlements, and debt interes)t, and roughly 1/200 of the budget of the single largest department, Defense.

The point is that there are literally hundreds upon hundreds of unspecified item on the list. A true itemization would be ridiculously long, and would thus create a second problem: how do you group things? This is a huge headache. Should the war in Iraq and Afghanistan really be separated from DoD? Would you generally categorize things at the Department level or agency level? Why should EPA get it’s own line? What about “GM bailout?”  This is a rabbit-hole you do not want to head down. And probably the last thing we need as the basis of endless political debate.

2) I’m not sure mixing revenue streams is a good idea. The basic point is that you can’t determine the spending priorities of the federal government based on your individual receipt, for a number of reasons. First, and most importantly, FICA taxes and income taxes are combined on the Third Way sheet, which will give taxpayers at most income levels a false impression of the relative costs of entitlements compared to discretionary spending. FICA taxes pay for social security and medicare, and are constant on roughly the first $105k of income, and then drop to zero. Meaning they are regressive. Income taxes, on the other hand, are progressive, in that a higher percentage of taxes is paid on larger marginal dollars.

Which means that if you don’t make a lot of money, most of your taxes go toward social security and medicare. If you make a ton of money, most of your taxes go to discretionary spending. Consequently, the less money you make, the more the Third Way receipt looks like Social Security and Medicare are the biggest part of the budget. If you make millions of dollars, defense will look far and away like the biggest portion of the budget. In reality, defense and social security are currently virtually the same proportion of the budget, around $660 billion.

This is a bad distortion problem. Not just because it reveals that the tax burden of different Americans ends up going to different places (more on that later), but because many people will infer that their tax burden corresponds to the budget of the United States. And will form opinions about tax policy and spending choices based on that. And that’s trading general ignorance for incorrect facts. Not an improvement, in my mind.

Clearly, the “taxpayer’s receipt” is not a budget document. But will be inferred that way. (A secondary problem in using this as a budget document is that other revenue stream — namely corporate taxes — are not even on the radar.)

3) Deficit spending probably needs to be accounted for. It’s probably not legitimate to have a taxpayer’s receipt that doesn’t somehow show the taxpayer’s share of the annual deficit. After all, if the taxpayer is showing X expenditure for all of these services, but the services are being financed by borrowing that accounts to 5x, there’s really no point to handing out the receipts except to fool people. Certainly some rows or columns could be added showing what the necessary tax burden would need to be to fully fund the government, but even that wouldn’t get at the heart of the problem here: people are getting a dollar worth of government services for 80 or 90 cents right now. Who wouldn’t think that’s a good deal?

4) Would tax expenditures be included? Who the hell knows.  This is the correllary to not including deficit spending. Tax expenditures is a budgetary concept that only makes sense if you are talking in the sandbox of deficits and overall budgetary spending. But it’s crucial to the overall concept of fiscal normalcy in the federal budget. Again, this points to the taxpayer’s receipt not being a budget document, but does nothing to quell my fear that it will be interpreted that way.

5) The politics of the receipt would be ugly at best. Forget the problems of choosing what gets itemized and what does not. That’s insane to think about. Talk about interest group pressure! And leave aside whether to include budgetary stuff like deficit spending and tax expenditures. And forget the incentives the receipt would give politicians to craft policy toward the receipt instead of, you know, good public policy. Instead, think about this: a sizeable number of Americans — roughly 40% of all filers —  pay zero federal income taxes. Zero. That is, the entire federal tax burden of most of the working class in the United States is the FICA tax. Which means that every line on the receipt would be $0 except for social security and medicare/medicaid. It would tell the middle and upper classes that they are funding the discretionary government, and it would expose to the working class the regressive nature of the FICA tax. Perhaps that would be a good thing. But it’s political dynamite.

So I can’t endorse the taxpayer’s receipt. We have an annual budget of the United States, which runs thousands of pages and comes full with supplementary material  that includes enough condensed summaries and charts to make the cows cry uncle. It’s big for a reason: budgeting and taxation is complicated. Trying to reduce it to a receipt is likely to cause more harm than good.


2 Responses to On the idea of a “taxpayer’s receipt”

  1. Ray on October 1, 2010 at 4:31 pm

    Some of your points are good ones and could improve upon the idea. But I have a hard time imagining the harm. What are the imagined harms that come from a too-simplified receipt?

  2. [...] On the idea of a “taxpayer's receipt” | Matt Glassman [...]

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