Tax System Equity and Tax Expenditures .. and Stanley Surrey Explanation

On October 11, 2010, the Washington Post ran an editorial entitled "The Current U.S. Tax System Is Tilted Toward the Haves." It addresses the issue of the growing number and amount of "tax expenditures" in our federal tax system and the inequities often inherent in them.

"Tax expenditures" refers to deductions, exclusions and tax credits that result in lowered tax bills for those using them. Generally, the term focuses on special rules that are designed for some purpose other than measuring income. Typically, the special rules are designed to encourage some type of behavior, such as charitable giving. For more on this - see the statement at the end of this blog post from Stanley Surrey who invented the phrase while serving as Assistant Secretary for Tax Policy at Treasury in 1967.

The editorial raises the question as to why about 50% of the $400 billion cost of the breaks benefit the "wealthiest 5 percent of Americans?" They note two problems with "tax expenditures" -

1. The lack of transparency and accountability.
2. Equity issues because "accomplishing social policy through tax expenditures tends to award the most help to those who need it least."

The editorial refers to a recently issued report by the Corporation for Enterprise Development and the Annie E. Casey Foundation entitled Upside Down. I encourage you to read the report and I applaud these entities and the Washington Post for highlighting this issue because more people need to understand that not only do these numerous special rules complicate the tax law, but they make the system inequitable.

We'd be better off with an income tax with a broader base and lower rate. Hopefully reports and articles like this will help spread the word to more people. (I had an op ed in the SF Chronicle on this topic in April 2008.)

And, here is a history lesson on "tax expenditures" - an excerpt from Pathways to Tax Reform by Stanley S. Surrey, 1973, page 6:

"The federal income tax system consists really of two parts: one part comprises the structural provisions necessary to implement the income tax on individual and corporate net income; the second part comprises a system of tax expenditure under which Governmental financial assistance programs are carried out through special tax provisions rather than through direct Government expenditures. This second system is grafted on to the structure of the income tax proper; it has no basic relation to that structure and is not necessary to its operation. Instead, the system of tax expenditures provides a vast subsidy apparatus and uses the mechanics of the income tax as the method of paying the subsidies. The special provisions under which this subsidy apparatus functions take a variety of forms, covering exclusions from income, exemptions, deductions, credits against tax, preferential rates of tax, and deferrals of tax."