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Saturday, January 15, 2011

Good NPR story on tax breaks (expenditures)

NPR has a great story and audio posted for 1/13/11 -"Can Washington Break Its Tax-Break Habit?" by Scott Horsley. It includes a statement from Dr. Laura Tyson who previously served as an economic advisor to President Clinton. She notes that while special tax rules make the tax system more complex and reduce government revenues, they can come about because someone wants a special subsidy or financial award (such as for college students) and finds that it is easier to create a tax credit than to try to increase the federal budget allocation for Pell grants.

This is a reminder that tax expenditures - special tax rules that are not necessary for measuring the tax base, are really a form of spending. To further explain, for an income tax for individuals, you just need to measure income. There is no need for any deductions. BUT, what about the reality of "ability to pay" and ensuring that some portion of one's income is available to live on? The standard deduction and personal exemptions help address this matter and so should be elements of any income tax. But do we also need tax breaks for higher education and mortgage interest as well as exclusions for employer-provided health insurance? Such deductions also raise equity issues. For example, why those deductions and not ones for credit card interest and costs of your child playing sports? Also, deductions and exclusions are worth more (are greater subsidies) for those in the higher income tax brackets.

The Joint Committee on Taxation publishes an annual report of tax expenditures (here) and most states do as well.

I have written about this before in my reports and blog and even in 2008 in the SF Chronicle - 'Spending problem?' - some of it's hidden in our tax laws.

What do you think - how should tax expenditures fit into federal and California tax and budget reforms?

1 comment:

Sylvia Han said...

Indeed, so much tax expenditures are the source of complexity. IRC code section 151 through 248 addressing various deductions. each starts with general rule, definition, special rule and exception etc.Then followed with code for limitations of deductions. Congress worked very hard to favor one type of transaction over theothers, one group of people over the other, one type of industry over other....

It is undeniablly true that tax system can be a very effective tool to modify economic behavors, or human behavors and achive social objectives. However,tax law can not be used to solve every problem. over using tax law to address social issues has became addictive and abusive almorst for every administration office.Now it is time to clean the system up and looking for other alternatives.

The current tax code is over stuffed. many deductions should be get rid of. for example, Morgage interest deduction and interest deduction have done enough damages to current economy. those deductions induce more people buying hourses beyond their ability. it induce companies operating on high debt -equity ratio. the consequence is that almost every family has debt, housing market collapse. people making money to pay debt interest... a vacious cycle is hard to break.

the current reform is focussing on breaden base and lower tax rate which is on a right track. the more deductions disallowed, the simpler the system. Simple and easy understanding rule promote high compliance and reduce tax gap thus increas tax revenue.