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An idea all deficit hawks should support

Len Burman has a very good, but slightly opaque, op-ed on tax expenditures in today's Post. His point is important, though, so let me try and tease it out a bit.

When the government spends $10,000 building a community health clinic, that's an expenditure. When it loses the same amount of money by deciding not to tax health care, that's a tax expenditure. The effect on the deficit is the same, but the two policies function very differently.

There are two things that set a tax expenditure apart from a normal expenditure. First, it's regressive. Because a rich person pays a high tax rate and a middle-class person pays a lower tax rate, protecting Bill Gates's health-care benefits from taxes is worth 39 cents for every dollar, while protecting a line cook's health care may be worth only 12 cents.

Second, they grow automatically. The mortgage interest deduction is worth more every year even though Congress isn't voting to put more money towards it. It grows with the amount of money spent on mortgages, not with congressional action. The government's program to help homeowners, however, is worth more only if Congress decides to increase the amount of money going towards it. That makes it easier for tax expenditures to grow and harder for direct expenditures to grow.

Which brings me back to Burman's piece, which argues that the best way to reduce the deficit would be to freeze tax expenditures:

Suppose Obama's "freeze" were also applied to tax expenditures. Say we postponed its effect until fiscal 2013 so that the effects do not threaten a nascent economic recovery. Capping tax expenditures at 2012 levels for three years and indexing the cap for inflation after that, as proposed for non-security discretionary spending, would reduce the deficit by about $3.5 trillion. That's right -- 14 times as much as what the president's spending freeze would save.

A cap on tax expenditures would raise so much money because the expenditures are big and growing fast. The Office of Management and Budget counts 180 of them, totaling more than $1.1 trillion.

No, capping tax expenditures would not be easy. Almost all are on autopilot: Like Social Security and Medicare, they will grow forever if Congress does nothing. Congress would have to subject the hidden welfare state to annual review. To meet the constraints and reduce costs, some tax expenditures would have to be eliminated or redesigned. This would be a good thing. Like direct spending, some tax expenditures are inefficient and poorly targeted and thus not worth paying for.

But unlike direct expenditures, tax expenditures are not reviewed on an annual basis. It would be worth a lot more to look at them than to look at the budget.

By Ezra Klein  |  February 2, 2010; 3:34 PM ET
Categories:  Taxes  
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Comments

Ah, but tax expenditures (aka, "selective tax cuts," "tax loopholes," and my favorite, "tax incentives") are the ultimate pork every politician wants to bring home to voters. It would be great to reduce them precipitously, but they're gravy, particularly for Republicans.

Good luck.

Posted by: jp1954 | February 2, 2010 3:52 PM | Report abuse

"Capping tax expenditures at 2012 levels for three years and indexing the cap for inflation after that, as proposed for non-security discretionary spending, would reduce the deficit by about $3.5 trillion. That's right -- 14 times as much as what the president's spending freeze would save."

So this would essentially be a combination of eliminating or lowering deductions and raising taxes--and nobody things that would have any negative impact on economic activity? Is it not at least plausible that any freezing of tax expenditures that would net an additional $3.5 trillion--and that's $3.5 trillion that would be out of the private sector, at least for a time, correct?--would have a deleterious effect on the economy? What about home sales? At least for a while?

And if it would have a near-term negative impact, wouldn't that negatively impact the political aspirations of the politicians who went along with such a "freeze"?

And wouldn't they be bad language, to call it a freeze? Given that the end result would be people seeing themselves paying more in taxes?

Posted by: Kevin_Willis | February 2, 2010 4:20 PM | Report abuse

The Obama commission should be REQUIRED to spend half of it's time looking into reducing "Tax Expenditures"!!!

Posted by: cautious | February 2, 2010 4:41 PM | Report abuse

"When it loses the same amount of money by deciding not to tax health care, that's a tax expenditure."

Somewhere in all this is the premise that any dollar not taxed can be viewed as an expenditure; as some sort of largesse. At any moment, Liberals in Washington could decide they're letting you keep too much of the tax expenditure that is your take-home pay.

Suck down that kool-aid, Ezra.

Posted by: whoisjohngaltcom | February 2, 2010 5:23 PM | Report abuse

BTW, isn't this the definition of the AMT problem???

Posted by: whoisjohngaltcom | February 2, 2010 5:24 PM | Report abuse

"Somewhere in all this is the premise that any dollar not taxed can be viewed as an expenditure; as some sort of largesse."

Yawn.

If you're going to espouse Galtianism, please have the decency to go off and found your own island kingdom instead of wasting the time of the rest of us who are actually trying to solve problems.

Posted by: adamiani | February 2, 2010 6:01 PM | Report abuse

Please frame this post and hang it on your wall. The next time somebody proposes a tax credit that makes you feel all warm and fuzzy, look over at the framed post and remind yourself that as good as the credit makes you feel, it's bad policy.

Eliminate credits and lower rates.

Posted by: ostap666 | February 2, 2010 6:06 PM | Report abuse

Ezra,
By what logical, economic, or accounting basis can not taxing something be considered an expenditure. Anything can be taxed. I am not being obtuse (okay maybe a little). I really don't understand the point. Until 1851, England had a tax on windows. Scotland and France both had similar taxes. Taxes have been levied on tatoos, waste water, vomit, ties and a host of other things. Is not taxing these things an expenditure?
Steve

Posted by: FatTriplet3 | February 2, 2010 6:43 PM | Report abuse

Ezra,

A worker with a $1 increase in wages would also have to pay -- in addition to federal individual income taxes -- employer/employee payroll taxes and state individual income taxes. So you have to these items in the person's marginal tax rate. This means someone in the 25 percent federal individual income tax (IIT) bracket will have a 25 percent + 15.3 percent + state individual income marginal tax rate, or 40.3 percent + state individual income marginal tax rate. Someone in the 39.6 percent tax bracket has a 42.5 percent + state individual income marginal tax rate subsidy. So the employer tax exclusion isn't as -- but still very much so -- regressive as you make it out to be. Those with lower wage jobs (i.e., the waitress with the diabetic child) generally don't get health insurance through their employer, and therefore don't get the tax subsidy, and are in effect subsidizing everyone else's tax subsidy for employer provided health insurance. Is this fair?

Posted by: moronjim | February 2, 2010 6:48 PM | Report abuse

So if I spend $100 on booze, that's an expenditure. But if I decide not to hold up the liquor store with a gun and take the $400 that's in the register, that's also an expenditure.

Or, to use less loaded terms, if I decide not to take a second job working at the liquor store, the income I forgo is also an expenditure.

Heck, the fact that I'm sitting here typing rather than going out and pawning my wedding ring is an expenditure.

Posted by: tomtildrum | February 3, 2010 12:55 PM | Report abuse

Many seem confused (or are just trolling) about the idea of a 'tax expenditure', as opposed to the choice of government to tax, or not to tax something.

Say two people earn the same amount, one pays $2000/month on his mortgage and the other $2000/month on rent. At the end of the year the government chooses to give the mortgage-payer some money (in the form of the mortgage interest deduction) and not to give the same amount to the rent-payer.

That is just as much an expenditure as if I went out and gave every mortgage-payer $5, and just as voluntary. When the government effectively pays people/companies to spend their money in certain ways (by allowing favorable tax treatment) that is a 'tax expenditure'.

In a similar fashion the government pays people to have children, donate to charity and a host of other things -- this should not be confused with some (imagined) mindset that all money is the government's and deciding not to take it in the form of taxes is a 'tax expenditure'.

As for the person who was rather dramatically calling into question the idea that forgoing income is an expenditure, and restricting ourselves to the analogies involving legal behavior, if you went and did that second job for no pay, that would certainly be an expenditure.

Posted by: Sheinor | February 3, 2010 1:48 PM | Report abuse

Sheinor,

I appreciate your attempt to clarify. Your kinda, sorta saying that if government taxes a category of some sort, lets say income, and then chooses to provide either deductions or credits for a subcategory (homeowners, people who give to charity, employers who provide health benefits in lieu of income) that the failure to tax that sub-category is an expenditure. So is the failure to tax people with low income at the same rate as those with high income a tax expenditure?
Steve

Posted by: FatTriplet3 | February 3, 2010 9:26 PM | Report abuse

The comments to this entry are closed.

 
 
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