Policy

How Much Is This Tax Cut Gonna Cost Me, Doc?

Those who fret about the cost of a tax cut are looking at the question from the wrong end of the telescope.

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You walk into a shoe store. The salesman runs up to you. "Great news!" he beams. "We've just slashed our prices 20 percent!"

"Yikes!" you say. "I can't afford a price cut like that! I'm outta here."

"No, no — maybe you didn't hear me," the clerk says. "We're cutting our prices 20 percent. Cutting, not raising."

"I heard you just fine," you say. "I'm not paying an outrageous increase like that!" And you storm out the door.

The preceding scenario makes no sense — except in the bizarro world of government finance. For that is precisely how many people speak, when they speak of taxes.

Take The Washington Post, which tore into Paul Ryan the other day for dancing around a question about tax cuts.

"Paul Ryan wants to tell you about the wonders of the 20 percent cut in tax rates that he and running mate Mitt Romney propose," the paper intoned. "He doesn't want to tell you how much it will cost." The paper went on to praise Chris Wallace of Fox News for repeatedly asking Ryan "this basic question" and "citing projections of a 10-year cost of $5 trillion."

The Post is not alone. The New York Times likes referring to the "cost of the Bush tax cuts," for instance. So do liberal organs such as ThinkProgress, the American Prospect, and The Nation. Not long ago, the Annenberg Center's FactCheck.org said Romney's tax-cut proposals "would cost $480 billion a year" (that's the answer the Post wanted Ryan to cough up).

In his State of the Union address, President Obama said the U.S. was "poised to spend nearly $1 trillion more on what was supposed to be a temporary tax break." After Wednesday night's presidential debate, analysts on NPR discussed how Romney planned to "pay for" his tax cuts. Inside the Beltway, wonks even talk of "tax expenditures"—by which they mean exemptions, loopholes, and similar devices that lower a taxpayer's total bill.

Now, from a government accountant's perspective, there is little difference to the Treasury between spending $14 billion on a Ford-class aircraft carrier and reducing revenue $14 billion by lowering taxes. If the federal government is running a deficit, then the deficit goes up by $14 billion no matter which route you take. Likewise, a 20 percent price cut on shoes will impose a cost—not on the customers, but on the store or the shoe company.

But, funny thing. A few days ago The Tax Policy Center released a study looking at what would happen if the U.S. goes over the "fiscal cliff," the point at which automatic spending cuts occur and the Bush (and other) tax cuts expire. And look how it was covered:

"Expiration of Tax Cuts Would Be Costly to Taxpayers," wrote The Boston Globe. "The Fiscal Cliff Will Cost a Median-Income Family $2,000," said The Atlantic. "What will falling off the 'fiscal cliff' cost your household?" asked CNBC.

And The Huffington Post, which in August ran this headline — "Bush-Era Tax Cuts Will Cost U.S. Nearly $1 Trillion Over Next Decade" — last week said the expiration of those tax cuts would "Cost (a) Typical Middle-Class Family $2,000."

The upshot of all this is that the Bush tax cuts have "cost" billions of dollars—and the failure to extend them will cost billions more. You could chalk this up to Glass-Half-Empty Syndrome: No matter what happens, we're all hosed. But the real explanation is not as bad as that. It's worse.

The real explanation is that those who fret about the cost of a tax cut are looking at the question from the wrong end of the telescope. They identify with the tax collector, not the taxpayer. Like the accountant for a shoe company, they're not thinking about how much money you stand to save — but how much they stand to lose.

You might think of a tax break as allowing you to keep more of your own money. That's not how Beltway types see it. When they talk of "tax expenditures," they are operating on the assumption that all wealth belongs to the government first. When the president says the country is "spending" money on tax breaks, he speaks as if the dollar in your pocket got there not through your hard work – but through his generosity.

Well, one could say, in a democracy everyone has a say in our government, so we are all in some sense the owners of the shoe company. So cutting taxes really does "cost" us in that sense. You keep telling yourself that, Vladimir Ilyitch. Most people who go into a shoe store think about the price on the tag, not the Nike stock in their 401(k).

So perhaps Ryan should have said something like this: "Tax cuts don't cost money — they save money. Government spending is what costs money. If you think cutting taxes costs money, then you must think raising taxes saves money. By that logic, a 100 percent tax rate would mean Washington isn't spending anything at all. And that, my friend, is absurd."