Governments have an interesting approach to economics: If they don’t pay a cost, it doesn’t exist. Therefore, shifting a cost to someone else is as good as making it disappear.
It is a marvelous financial idea, especially for those who chafe at budget constraints — and nobody knows budget constraints, or is better at dodging them, than the federal government.
We can see this peculiar economics perspective at work in congressional legislation. In the past, the biggest numbers, in terms of dollar cost, were found in pure form in the “unfunded mandates,” which allow Congress to take credit for and control programs that someone else has to pay for.
More recently, we’ve seen a preference for mixing in unfunded mandates with cost shifting. The best example of this is in health care reform, where much of the alleged savings for the federal government consisted of mandating private sector costs and dishing off federal costs to someone else. The important thing is to make the cost disappear from the budget so it can then count as “savings.” That simple process is what makes it possible to add medical care for 26 million people and still save money.
Unfunded mandates and cost-shifting are forms of hidden, or stealth, taxation, and a part of an overall reality avoidance program that allows the federal government to avoid addressing serious budgetary imbalances.
The federal government is very much on the hunt for additional revenue, and this could be troublesome for the economy. We are already having problems with the speed of economic recovery and persistent unemployment in the private sector, so moving more money from employers to the government would seem unwise. However, imposing “corporate tax reform” — which is apparently what a tax increase will be called — is, according to Treasury Secretary Geithner, on President Obama’s agenda.
Federal Reserve Chairman Bernanke recently made a case for continuing to stimulate the economy in this way until it moves out on its own. But even if we buy into that argument, it would seem preferable to finance it through the financial markets rather than a tax on employers.
There are two good reasons for that. First, a boost in business taxes would cast a chill over a private sector that is recovering but still suffers from the occasional shivers. Second, the financial markets respond quickly, which allows the Treasury Department and the Federal Reserve to know right away if and when it is saturating the market for U.S. federal debt. The negative effects of a tax increase can take months or even years to become clear.
Whichever funding method is used, we are undoubtedly looking at years of federal deficits, even under the most optimistic spending and revenue forecasts. Economists and others are left looking back with fondness to the years 1999 and 2000 when the federal budget actually showed a surplus. It is quite possible that an economist might not see another such event in his or her professional lifetime.
The merits and risks of persistent deficit spending are well known. What isn’t often discussed in an economics context is that the federal government’s relentless search for tax revenue could unleash its capacity for mischief, too — and our still-vulnerable economy would probably react badly to that.
The most worrisome mischief areas involve time-warp tomb-raiding and virtual money.
The federal estate tax expired this year so that people who die in 2010 get to do so tax free. The Congress has the power to turn back the clock, though, and could pass a retroactive estate tax so the money could be retrieved for the Treasury.
It wouldn’t be the first time. Retroactive legislation has have been legal ever since 1798, when the U.S. Supreme Court, in Calder v. Bull, declared that the Constitutional protection against such things only applied to criminal law. Congress has used this kind of time-warping more than a dozen times, the last one just seven years ago.
It wasn’t too long ago either that the federal government was considering an income tax on the imputed rental value of your house — in other words taxing the virtual rent money you might have gotten from a tenant, if there were one. The idea was flightless at the time, but the government wasn’t as starved for cash as it is now.
The problem with aggressive and unfair tax schemes like these, as with cost-shifting and unfunded mandates, is that they create an adversarial relationship between government and the people. The power and productivity of our economy, though, is based on a respectful relationship with government and its responsibilities. If the government and the people become adversaries it would be hard to pick a winner, but easy to identify the loser: our economy.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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