The Taxpayer Protection Pledge and Ethanol

An interesting dispute helped derail the efforts to eliminate government subsidies for ethanol.  Oddly enough, it appears that some of the credit can be awarded to Americans for Tax Reform. Grover Norquist, head of Americans for Tax Reform, has been a powerful voice for tax reductions over the years, convincing Republican legislators to sign the Taxpayer Protection Pledge, in which they pledge to their constituents to:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

At first glance, the opposition to new (and existing taxes) is in keeping with Norquist’s broader goal of reducing the role of government (as Norquist famously remarked: “I don’t want to abolish government. I simply want to reduce it to the size where I can drag it into the bathroom and drown it in the bathtub.”

The second provision of the pledge is odd for one who appears to embrace some form of libertarianism. The case against tax expenditures is relatively straightforward: For all practical purposes, they are government subsidies, albeit subsidies delivered to transfer-seekers via the tax system. When they are awarded to industry, they are little more than corporate welfare. When they are awarded to households, they overwhelmingly benefit the top quintile of the income distribution. Because they help create a revenue code that is more holes than cheese, they force higher marginal rates than would otherwise be necessary. Finally, they distort market signals and investment decisions.

Of course, none of this seems to matter once one has developed a fetish over taxation. To eliminate a tax expenditure—even if it is a naked subsidy for industry or agribusiness—is to increase taxes and hence a violation of the Taxpayer Protection Pledge.

This odd logic led Norquist, most recently, to oppose efforts in the Senate to cut $5 billion in subsidies to ethanol. As Manu Raju reports in Politico:

Norquist — head of the advocacy group Americans for Tax Reform — has for months ripped Sen. Tom Coburn (R-Okla.) for pushing a plan to slash more than $5 billion in ethanol subsidies, a move his group sees as a blatant tax hike. But instead of warning senators that supporting the Coburn plan would violate the group’s pledge not to raise taxes — which has been signed by virtually every Republican member of Congress — Norquist said that a vote for Coburn’s proposal was fine as long as senators also voted for a separate plan offered by Sen. Jim DeMint (R-S.C.) that would cut taxes.

The Coburn amendment was defeated on Tuesday. The transfers to agribusiness are safe!

Any meaningful efforts to address the long-term structural deficit will require increasing revenues and it makes great sense to begin the process with the elimination of many of the existing tax expenditures.  The elimination of these transfers could be combined with a reduction in marginal rates (as recommended by the Bowles-Simpson commission), although it would be my preference to defer rate cuts until we get our fiscal house in order. While I would guess that  Mr. Norquist rejects industrial policy and the vision of elite social engineering it embodies, he fails to realize that our system of tax expenditures constitute an industrial policy, albeit one that is painfully incoherent and defined by the legislative acumen of transfer-seekers capable of making mutually-beneficial exchanges with legislators (many of whom, undoubtedly, can view their actions as being perfectly compatible with the Taxpayer Protection Pledge).

To the extent that the Taxpayer Protection Pledge prevents legislators from eliminating tax expenditures, it will constitute a major impediment to fiscal stability.

3 thoughts on “The Taxpayer Protection Pledge and Ethanol

  1. We should also note that the Koch brothers endorsed the elimination of ethanol subsidies (from which they benefit) in the name of freer markets.

    A lot of libertarians don’t realize that such limited tax expenditures also tend to undermine coalition building for efforts to lower taxes broadly. If I can make a deal with my senator to insert an amendment to lower my own tax burden I will support whatever other new taxes may be in the bill. Additionally, it doesn’t help that the interest groups most likely to get these tax expenditures are large corporations which contributes to the perception that small government is really about tax breaks for large corporations. In Norquist’s case, it’s absolutely accurate.

  2. I shudder when I hear the phrase “tax expenditure.” Using the logic of those who like this phrase, a tax rate of 40% is a huge tax expenditure, because it allows a taxpayer to keep 60% of what they earn. Deductions and tax credits that allow taxpayers to retain more of their property help constrain the growth of government at least somewhat. That is Grover Norquist’s point. It is hardly consistent to oppose tax increases yet favor jiggling credits and deductions to generate more and more revenue for the government. Therefore, Norquist suggests the offset. The solution is comprehensive tax reform that eliminates special tax breaks while lowering rates, since the only negligibly effective means for 50 years of restraining government spending has been deficits and debt.

  3. Hmm, by the logic of statement 2, he would be for preserving social programs, unless cutting them is accompianed by dollar for dollar tax cuts. Of course, were the social programs to go, it would be someone else’s taxes which were cut, and not the beneficiaries of the programs, effectively a massive redistribution of income..

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