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Conservative economist Marty Feldstein goes after tax expenditures

On Tuesday's Wall Street Journal op-ed page, former Reagan economic adviser Marty Feldstein comes out against targeted tax breaks, also known among budgeteers as "tax expenditures." It's estimated the U.S. government will effectively spend $1 trillion handing out various tax perks, ranging from green energy subsidies to the politically bulletproof mortgage-interest deduction. And with lawmakers casting around for ideas on how to close the deficit, some have been taking a closer look at tax expenditures.

Case in point: the energy bill, which Democrats are hoping to pick up again soon. Senate Finance Committee Chairman Max Baucus (D-Mont.) has said Democrats may get rid of some tax breaks for the oil industry in order to pay for the bill. Industry is already fighting back.

Tax expenditures are inherently hard to revoke for obvious reasons. People don't like giving them up. And as Feldstein points out, Republicans especially aren't eager to tamper with them. But it's been done before -- by Reagan in 1986:

Tax expenditures have been cut before on a large scale. President Ronald Reagan's 1986 tax reform reduced tax expenditures to 6% of GDP (from 9%), the level at which they remain today. Cutting them another 2% of GDP would reduce the national debt in 2020 by some $4 trillion, bringing the projected debt down to 72% of GDP from 90%.
In 1986, the cuts in tax expenditures were made politically attractive by combining them with tax rate reductions. Although such rate cuts cannot be afforded now, there is currently widespread public agreement that the deficit must be reduced, and a growing acceptance that cuts in government spending are the way to do it.

By Jia Lynn Yang  |  July 20, 2010; 7:08 PM ET
Categories:  Tax expenditures  
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