July 21, 2010

SCRAP THE CODE:

The 'Tax Expenditure' Solution for Our National Debt: The credits and subsidies that make the tax code so complicated cost big bucks. Reduce them by third and the debt will be 72% of GDP in 2020 instead of 90%. (MARTIN FELDSTEIN, 7/20/10, WSJ)

When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

These tax rules—because they result in the loss of revenue that would otherwise be collected by the government—are equivalent to direct government expenditures. That's why tax and budget experts refer to them as "tax expenditures." [...]

Neither party has focused on controlling this kind of spending. Democrats are reluctant to cut such programs, because once built into the tax law they don't have to be reauthorized each year, but remain on the books unless they are repealed. Income limits on the taxpayers who can take these deductions or tax credits allow Congress to target the benefits to lower-income groups. Moreover, many tax expenditures are refundable, so the government sends the individual a check for the benefit even if he owes no tax. Democrats can thus cleverly avoid the traditional accusation of being the party of "tax and spend."

Republicans also are reluctant to cut these tax perks, because they regard the additional revenue collected by the federal government as a "tax increase"—even though the increased revenue is really the effect of a de facto spending cut. A Republican who would vote to cut or eliminate an ordinary spending program therefore won't do so if it is packaged as a tax benefit.

But eliminating tax expenditures does not increase marginal tax rates or reduce the reward for saving, investment or risk-taking. It would also increase overall economic efficiency by removing incentives that distort private spending decisions. And eliminating or consolidating the large number of overlapping tax-based subsidies would also greatly simplify tax filing. In short, cutting tax expenditures is not at all like other ways of raising revenue.

Posted by Orrin Judd at July 21, 2010 5:30 AM
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