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Wednesday, August 10, 2011

Spending in the Tax Code - Needs to be addressed in deficit reduction

I've blogged on this several times, but it is back in the news, so I'll mention it again. There is and has been a need to reduce spending and adjust revenues to improve the tax system. An editorial on Fox News (8/8/11) with quotes from two knowledgeable and objective sources - Len Burman and Maya MacGuineas, reminds us that there are benefits and a need to reduce "tax expenditures." These are the numerous number of special deductions, exclusions and credits in our federal (and state) income tax system that are not needed in defining the income tax base.

Burman notes that a tax credit can (and has) been used to avoid a label of spending and to reduce scrutiny on the particular item.

For example, if an elected official wants to help parents, they could create a program for lower-cost child care or increase funding for an existing child care program. That gets a lot of scrutiny and on a regular basis - every year when that federal agency with the funds seeks budget approval. However, create a child care credit or expand the existing one and it may just slip into a tax bill and never get looked at again. Either way - there is a regular "cost" in the budget.

There are many tax deductions and credits and exclusions that can be removed or cut back, such as the mortgage interest deduction (7/3/11 post) and taxing some percentage of the employer-provided health insurance exclusion, and others.

As noted in the article, the savings from cutting back on tax expenditures can be used for deficit reduction and paying for lower tax rates. They could also be used to make the income tax system more equitable by increasing the standard deduction. Removal and reduction of tax expenditures would also make the tax system simpler and more transparent - two important principles of good tax policy.

For more on tax expenditures - see my short article from the AICPA Tax Insider - here.

What do you think?

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