Thursday, March 5, 2009


Aztec, that was one of your best posts ever. Solidly researched and persuasive. It was also an excellent example of a favorite, if disingenuous, tool of debaters -it was a red herring. I never mentioned the EITC at all.

As it happens, I agree with you completely on the value of the EITC. Of course, I would go much further. I would personally prefer a 100% EITC for everyone (i.e. no federal income tax at all on business or individuals). That's a total separate argument, so I'll spare everyone a Ronpaulesque journey into that topic.

So like any poor debater, I am going to allow myself to get sucked into your false rebuttal for the moment, to point out why your arguments for the EITC prove my point exactly.

1) It is less expensive. It is much less expensive for the government to forgo $2000 or $4000 in tax revenue from a working family than it is to flatly support an entire non-working family.

This is true. Unfortunately, the situation is not as simple as your present it. Instead of an EITC or government support, we currently have both. The government is forgoing the revenue and it is supporting additional services. The EITC might be great, but when packaged with a whole host of other government programs, it loses its value.

2) and 3) must pay taxes.

You must pay taxes. Maybe in its original intent the EITC was structured that way, but all you have to do now is file a tax return. For the 32-some percent I mentioned before, there are no taxes paid at all. The credit was never originally structured to exceed the amount of taxes paid, but that is now how it works (i.e. income redistribution).

But to reiterate, my problem is not with the EITC, even in its current bastard form. The problem is the amount of government services that are being provided at essentially no cost to a huge portion of the population. One ironclad rule of economics is that when you begin providing a service for free, demand skyrockets. We now have developed a structure where a significant minority of the population gains access to all kinds of services without having to contribute any skin in the game. The natural result of this dynamic is ever louder clamoring from this group for additional services. Why not, it's free. Democratic policy seems to be founded on a) expanding the number of services available and b) expanding the group eligible for such services at little or no cost. This leaves a shrinking set of people the responsiblity to fund the cost, which with both expanding services and an expanding set of beneficiaries, grows at a nearly geometric rate.

This has been a recipe for disaster. The costs of all these government programs long ago outpaced incoming revenue, leading to almost perpetual deficits. So we now have a shrinking portion of the population that is responsible for both the growing service cost as well as a growing interest cost to fund the debt of all the previous years of too many services. That has accelerated the geometric growth rate.

Check out this chart...

Notice how the green line has a vaguely exponential shape. It would actually be much worse if the full present value of all future obligations (Medicare, prescription drug benefit, etc.) were included. Notice the blue line keeps pretty good pace. This is partly due to the exceptional productivity increases our country has enjoyed and partly due to the accounting fiction shown in the graph below.

Notice that "Social Insurance and Retirement" (i.e. Social Security) is included as tax receipt and makes up a significant portion of federal income. In essence, we are spending Social Security contributions to cover current expenses. If those were properly set aside, the deficit would be much larger (i.e the slope of the blue line would be much less than that of the green line).
The point is that government costs are growing exponentially, revenues are not nearly keeping up, and every attempt to accelerate the increase in costs through expanded services, while shifting that burden onto a smaller portion of the population just makes the problem (exponentially) worse.

To make the picture even bleaker, this dynamic existed even before the current economic crisis this year. Tax receipts are going to fall off a cliff this year - the purple and blue areas above are going to shrink dramatically.

With his current budget, Obama may be solidifying his voting base by expanding its number of members and the value of the services they receive, but his policy goals are completely disconnected with the realities above. Unless something changes dramatically, either a drastic cut in spending levels or (hope hope) some dramatic and exceedingly unlikely leap in worker productivity, it is a mathematical certainty that the above dynamic is going to end in disaster.

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