Jonathan Gruber Reveals the Emptiness of Fiscal Categories

I have been letting this Jonathan Gruber thing percolate for awhile because I wanted to see what people say. For those unaware, Jonathan Gruber, an MIT economist and architect of Obamacare, was recorded saying:

This bill was written in a tortured way to make sure CBO did not score the mandate as taxes. If CBO scored the mandate as taxes, the bill dies. Okay, so it’s written to do that. In terms of risk rated subsidies, if you had a law which said that healthy people are going to pay in – you made explicit healthy people pay in and sick people get money, it would not have passed… Lack of transparency is a huge political advantage. And basically, call it the stupidity of the American voter or whatever, but basically that was really really critical for the thing to pass… Look, I wish Mark was right that we could make it all transparent, but I’d rather have this law than not.

As Ezra Klein points out at Vox, the fallout from this quote (and some other Gruber statements) is not particularly interesting. People who dislike Obamacare for reasons unrelated to Gruber's statements continue to dislike Obamacare for those reasons and get hysterical about Gruber's statements just like they get hysterical about anything Obamacare. On the flipside, people who like Obamacare continue to like Obamacare and defend Gruber or distance from him or otherwise find themselves unaffected by Gruber's statements. The debate about Gruber is just a shell game in which nobody cares about Gruber or what he said, but are instead seizing an opportunity to hash out their pre-existing Obamacare positions via a fresh newsy proxy.
Nonetheless, if you ruminate over his statements, there is something very insightful to them that most coverage I've read seems to have missed. Those engaging with the substance of Gruber's remarks have generally noted that this kind of CBO "gaming" is common and both sides do it and it's hardly new or unknown.
But the more correct point here is that there is nothing "gaming" about getting the CBO to score something as a mandate rather than a tax. There is no meaningful difference between a mandate and a tax. These fiscal categories are somewhat useful constructs, but deep down they are empty (even though lawyers squinting real hard at these two empty and interchangeable constructs is what determined whether Obamacare is constitutional). Basically anything that you can achieve with a "tax" can be achieved with something that isn't a tax. In fact, almost anything you want to achieve with fiscal/distributive institutions can be achieved in multiple ways that span multiple categories.
To see what I mean about the emptiness of commonly-used fiscal categories consider the following examples.
1. 100% Income Tax
Right now, the federal income tax features a range of tax rates from 10% to 39.6%. We call this a "progressive tax" because the tax rates go up as your income goes up. But we could easily change this to a flat tax and achieve exactly the same outcomes.
What you would do is tax all income at a 100% rate. Then, you would create a welfare program on the side that provided means-tested welfare grants that exactly match the "post-tax" incomes people receive under the current system. Someone who had an effective tax rate of 20% in the status quo would, in this reformed world, have an effective tax rate of 100%, and then receive a welfare payment that is equal to 80% of their market income.
Since the same market behavior generates the same post-tax outcomes, this reformed world would not change incentives at all. Everything would play out exactly as it currently does. But fiscal statistics would dramatically change. The tax level would shoot sky high. The government spending level would also shoot sky high (100% of personal income is now government spending). Even qualitative descriptions of the system would change. Our "progressive tax system" would change into "our flat tax system with regressive welfare benefits."
2. 0% Tax Level, 0% Spending Level
Moving in the other direction, we could also order our fiscal affairs in such a way that government spending and taxing falls to 0% of GDP. All you would have to do is change the way the government finances its operations. Right now, when the governments wants to buy something or transfer money, it uses US dollars. But it could, instead, conduct all of its spending in transferable refundable tax credits.
This would mean that, instead of getting a Social Security check, you'd receive a ticket indicating that you are owed a refundable tax credit equal to the amount of the Social Security check. That credit would be transferable, meaning that you could sell the credit to someone else for dollars, and then they would redeem the tax credit at the end of the year during tax time instead of you. There would be some extra transaction costs for people if the the government funded operations this way, but it would be doable.
Come tax time, positive government tax revenues would be entirely offset by refundable tax credits (assuming a balanced budget). This would mean that, as a fiscal categorical matter, the government has a 0% tax level and spends 0% of GDP. The conservative dream world is within reach!
3. Preventing Taxpayer Money From Going to Things
Often you hear people remark that they are mad about something because taxpayer money is going to it. This is so for abortion and contraception on the right, and for war and armaments on the left. So here's a thought: why don't we just make it so that taxpayer money doesn't go towards anything.
This is easily done. Instead of taxing money in order to finance spending, the government should print money from the Federal Reserve and then spend it directly. Now, your "tax money" isn't going towards anything. It's printed Federal Reserve money that's going towards it.
In times of economic slack, this money-printing approach to financing the government should work without a hitch. Because of the slack, you would not expect any inflation to result.
When the economy is operating at capacity, however, you would expect this money-printing approach to cause some inflation. You could decide to deal with this inflation if you wanted to. Inflation would be higher, but that's alright, so long as its stable and non-accelerating. Alternatively, you could decide to levy a tax in order to absorb the inflation. This tax would not be used to finance any spending, and thus it would still be the case that taxpayer dollars are not going towards any government spending. Instead, the taxed dollars would just be destroyed.
It seems I have just cured all of the complaints about tax money going to specific things!
4. Parent Tax Penalty
Finally, lest you think this is all about abstractions, here is an example of this sort of chicanery from right-wing policy people. Do you recall earlier this year when the so-called Reformicons released their reform "tax plan"? The way the plan works is that tax levels overall would be jacked up in order to finance a massive child tax credit for the middle and upper class.
I described this, I think most accurately, as a massive expansion of the welfare state for the middle and upper class. If you just look at the fiscal impact of it, the plan amounts to shoveling an extra $2500 per kid to families with adequately high market incomes. It's a shrewd policy plan as well: people love welfare money, and only targeting it at the middle and upper class is the most efficient vote-buying strategy for conservatives because the votes of poor people are both few and very unlikely to go to Republicans.
You won't be surprised to find that this is not how Reformicons describe their policy. Though you might be surprised just how far they go to try to obscure this basic welfare state expansion. The most obvious way to obfuscate the welfare state expansion is to just say "tax credits aren't welfare; they are just you being taxed less." As we see from (1) above, and every economist's take on tax credits, this distinction doesn't mean anything. Tax credits are indistinguishable from welfare spending, even though they find themselves in a different fiscal category.
But the Reformicons don't even go for this low-hanging "this is just tax credits" fruit. Instead they dreamed up the almost comical idea of the parent tax penalty. According to their head thinker Robert Stein, the parent tax penalty refers to the amount of payroll taxes a parent's child will pay when that child grows up and starts to work. The suggestion is that people who have children really pay payroll taxes twice: once for themselves, and a second time via their child's contributions.
I decided not to criticize this idea at the time because it undercuts their plan to only give this money to middle and upper class parents: poor parents have kids who grow up to pay payroll taxes too, after all. But the concept of the parent tax penalty is totally ridiculous. A parent doesn't pay payroll taxes twice. They pay payroll taxes once, and then their kid pays payroll taxes once, and then their kid's kid pays payroll taxes once, and so on. There is no "parent tax penalty" as they describe it.
The reason they go down the road of calling it a "parent tax penalty" is because then, instead of their welfare expansion being called a welfare expansion, it gets classified in their rhetorical scheme as tax relief, a break from the double-taxation befalling parents! As with Gruber's mandate, this classification is deceptive in some sense. But, also as with Gruber's mandate, taxes are an empty fiscal category and so you can define them however you want.