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Tuesday, March 29, 2011

Interesting tax expenditure example

The analysis to California proposal SB 508 includes an interesting observation about tax expenditures that I had not heard before. Here is it: "the late economist David Bradford stated that instead of purchasing weapons systems from defense contractors, Congress could instead provide a Weapons Supply Tax Credit for defense contractors equal to the cost of goods sold. Defense spending would then vanish from the spending side of the federal government's accounting ledger, and revenues would concomitantly decline by an equal amount." That's a good example of how spending, such as for higher education, K-12 education, health care, welfare and a lot more, gets hidden because made via tax deductions, exemptions and credits rather than direct spending.

1 comment:

Anonymous said...

Mathematically speaking, revenue foregone(cash that could have been, but was not collected, by the government)totals up to the same amount as revenue collected and then revenue spent (assuming they are equal, example $1,000 revenue collected and $1,000 spent equals $0; whereas $0 collected and $0 spent also equals $0).

There is a difference however.

When the government collects revenues from many people(taxpayers)and then directs the expenditure to a particular vendor (e.g., a weapons provider), it is the government which picks the winner and the losers (e.g., other weapon providers who were not chosen). In other words, the choice of where to direct expenditures is made by the government.

On the other hand, when a tax expenditure program is used, it is individual taxpayers who make the choice. They choose whether to spend on a deductible activity or not. They choose whom to spend the money on (which vendor wins and which vendor loses). So the control over whether to spend or not and whom to spend it on is no longer in the hands of the goverment, but rather in the hands of the individual taxpayers.

Interestingly enough, the U.S. Supreme Court decided on the basis of this analysis just two days ago in the case of Arizona Christian School Tuition Organization v. Winn et al. The court decided that a decision to expend amounts subject to credit for suporting a religious school was the taxpayer's decision and not a government decision. Thus, the government was not picking winners and losers amoung competing religions.

For the analogous case of picking winners and losers amoung weapon venders, a tax expenditure program would put control into the hands of individual taxpayers rather than consolidating it with the government. This may not be a wise move. For example, foreign governments could channel funds through taxpayers to pick wrong weapon systems.

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