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Tuesday, March 12, 2013

Budget and tax system spending

In looking for budget cuts, lawmakers have to look at all of the deductions, exclusions and tax credits in the tax system. As Mr. Simpson and Mr. Bowles, co-chairs of President Obama's Deficit Commission that issued a report in 2010, say - these represent about $1.1 trillion of annual spending. That amount is about the same as the amount of discretionary spending in the federal budget - it's a lot of money. I'm talking about, for example, the roughly $95 billion cost for allowing less than 1/3 of mostly high income individuals to have a reduced tax bill because of their mortgage interest deduction on their main home or perhaps also a vacation home and perhaps even a home equity debt.  It includes over $110 billion for the approximately 60% of employees whose employer covers all or part of their health insurance cost which is not considered compensation to them.

Well, on March 5, the Senate Budget Committee held a hearing on this spending - Reducing the Deficit by Eliminating Wasteful Spending in the Tax Code. Chairwoman Patty Murray noted in her opening remarks:

"Over the next few weeks, both chambers of Congress will be debating fundamental choices about our country’s direction, and what kind of nation we will leave to our next generation. We will lay out proposals that reflect very different approaches to the many challenges we face. One central question we’ll be looking at is how can we bring down our debt and deficits, while putting the middle class and broad-based economic growth first? Today’s hearing will focus on how cutting wasteful spending from our tax code can help us meet this challenge."

Not all tax expenditures are wasteful spending, but most can likely be improved to better aim at their intended purpose. Some, such as a mortgage interest deduction on a vacation home, should be phased out.  Doing so can help the income tax system be more equitable and transparent.  If enough tax expenditures are eliminated or reduced, lower rates and deficit reduction are possible.

For a list of the tax expenditures and their cost, see the annual Joint Committee on Taxation report.

What do you think?


Lisa Pan said...

The FY 2014 Senate Budget Resolution is right on track with the message from the March 5th hearing.

As the resolution points out, Tax expenditure continues to exceed total discretionary spending. Treasury estimated $1.3 trillion of tax expenditure in 2013.

The budget resolution outlines several ways to reduce "tax expenditures disproportionately benefiting the wealthiest Americans". Even though the budget committee does not write tax laws, tax is an integral part of budgeting process and the budget committee probably has some influence over the tax writing committee members. I'm highlighting a few points from the "Reducing the deficit while increasing the fairness and efficiency of the tax code" section.

As proposed by Simpson-Bowles, the resolution calls for converting certain itemized deductions into limited tax credits. This could address some level of disproportionate benefits because a deduction would benefit those in a higher tax bracket more than those in a lower bracket, whereas a credit brings the same benefit to everyone. Since this proposal addresses itemized deductions, it's even more likely to reduce tax benefits for high income individuals.

The resolution also puts a huge emphasis on aggressive off-shore tax planning. However, corporate income tax as a whole only makes up about 9% of total tax revenue, and only a small portion of it comes from international compliance. That said, examining a large taxpayer will likely be more cost-efficient than going after many difference individuals separately. The large corporations are also more likely to be made news. For exampe, when WSJ reports Google avoiding billions of income tax using off-shore planning, it pressures the government to investigate these areas even if the revenue gap is tiny under the big picture.

In contrast to the AICPA's Ten Principles of Good Tax Policy, the Senate resolution primarily rests on the principles of fairness and economic growth. It emphasizes on the maintenance of a progressive tax system (vertical fairness) that increases U.S. international competitiveness.

Lisa Pan said...

Link to the Fiscal Year 2014 Senate Budget Resolution:$File/senatedembudget.pdf