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Monday, March 26, 2012

Increased focus on tax expenditures

The Wall Street Journal ran an article on March 24, 2012 - "Tax Breaks Exceed $1 Trillion: Report" by McKinnon. I think it is great that there is growing attention on tax expenditures because if they are not a focal point in addressing both tax reform and deficit reduction, and if the public doesn't know the cost of the tax expenditures they claim (which is far more than what corporations claim), we won't have tax reform or deficit reduction. For example, when people call for spending reductions, they really need to look at the roughly $1.1 trillion spending buried in the federal tax system rather than only discretionary (direct) spending.

The article notes that the largest tax expenditure is the exclusion employees get for the health insurance their employers provide to them. The estimated cost for 2014 is $164.2 billion.  That is a lot of money and an inequitable and inefficient of government (taxpayer) resources. That $164 billion only benefits employees with employer-provided health insurance. Why not both reduce the cost and spread the benefit to more taxpayers?

Reducing or eliminating the 200+ tax expenditures in the federal system will allow for lower rates, a simpler system, a reduced tax gap, and greater economic efficiency. President Obama and Congressman Paul Ryan, and others, have proposed cutting back on tax expenditures, but with varying levels of specificity. I believe the lack of details is due primarily to the fact that this is an election year and if you make it clear you plan to eliminate or reduce the mortgage interest deduction, child credit, fringe benefit exclusion, and more, the public won't vote for you. The public needs to be informed on how inefficient, unfair and costly these items are. They also need to be convinced that the savings will be used to lower tax rates and lower the debt.

There is also a problem though in that elected officials for the most part, continue to consider and propose new or expended tax expenditures!

For more, see:
What do you think?


Lindsay W. said...

I agree with you Professor. I think in general, the tax law should be used for non-revenue purposes sparingly and that lawmakers need to ask themselves if a goal can be reached some other way than through another tax expenditure. I also think it's important to remember that the easiest way is not always the best. It may be more expensive upfront to create a new program rather than use the tax law, but it may be more effective and efficient in the long run.

As you referenced in your lecture for the tax policy class, the Century Foundation lays out four important questions that need to be answered before a new tax break is enacted (as reported in the CRS report on tax expenditures from 2008). These questions are:
1) Why is a government program necessary at all?
2) what objectives is the tax break meant to accomplish, and how will success or failure be measured?
3)What evidence can be cited that suggests the tax break will accomplish these objectives at an acceptable cost?
4) Why is a tax break better than a direct spending program for accomplishing this purpose?

Personally, I feel one of the best reasons for direct spending rather than a tax expenditure is that line items on the budget get reviewed yearly whereas tax expenditures do not. Many tax provisions enact "sunset" timelines to address this problem but often this just adds more complexity to the tax law. Without this yearly review, many outdated provisions still exist that no longer are valid or are used outside of their intended consequences yet are difficult to get rid of.

Overall, I completely agree with you that "if the public doesn't know the cost of the tax expenditures they claim, we won't have tax reform or deficit reduction." The tax system needs to be reworked to unearth spending that is buried in the tax law so voters can make a more informed choice about which government programs are worthwhile and which ones need to be cut or reduced.

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