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.
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