Marty Feldstein is (Mostly) Right About Tax Expenditures
Kudos to Marty Feldstein, who this morning called for scaling back tax expenditures. These are highly-targeted tax breaks that are often little more than spending programs in mufti. Lawmakers of both parties love them, which is why they will reduce federal revenues this year by nearly $1 trillion, equal to almost the entire federal deficit.
I’ve got some quibbles with Feldstein, who was a top economic adviser to President Reagan. But overall, he got it right when he wrote in today’s Wall Street Journal;
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… If Congress is serious about cutting government spending, it has to go after many of them.
Neither party has focused on controlling this kind of spending…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.
Unfortunately, in his column, Marty barks up a few wrong trees. He targets many of those refundable credits which allow government to deliver cash assistance to people in need. No doubt many are too complex. And we certainly can argue about whether some families who currently are eligible ought to be. But if you stipulate that some people in this country do need assistance, one can make a strong case that it is more efficient to provide that help through programs such as the Earned Income Tax Credit rather than through old-style welfare.
Similarly, Marty mostly aims at such relatively minor tax breaks as those for employer-provided life insurance and travel costs. While he suggests limiting the deduction for state and local taxes, he says nothing about the three biggest tax expenditures: the mortgage interest deduction, the tax exclusion for employer-sponsored health insurance, and the maze of tax-advantaged retirement savings accounts. Together, the Big Three account for more than one-third of that $1 trillion in foregone tax revenue.
Maybe Marty is wise to avoid these political land mines for now. After all, Feldstein being Feldstein, the real targets of his message are GOP lawmakers who insist that scaling back these subsidies is akin to voting for a dreaded tax increase. Maybe its best that he establishes the principle that it is not before asking them to tackle such issues as the mortgage deduction. And if Marty can convince Republicans that cutting hundreds of billions of dollars in spending dressed up as tax breaks is not apostasy, he will have accomplished a major public service.
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Yes, I think the glaring omissions were a sort of “foot in the door” strategy, not a cop-out on the most egregious tax expenditures. Remember, it is not only Congress, but lots of voters read the WSJ as well. I fear that mentioning “mortgage-interest deduction,” “employer-provided health insurance,” and “get rid of” in the same sentence to your average Joe would be the end of the “reign in tax expenditures” idea.
Feldstein says: “Not every type of tax expenditure should be cut. Some provide good incentives while others increase the fairness of the tax system.”
That point makes it completely clear that the debate over cutting tax expenditures is fundamentally a debate about what is a fair baseline for the income tax. Which so-called tax expenditures make sense, for example in the service of horizontal equity and accurate measurement of income, and which are just handouts? Then, is the tax code an inefficient way to administer the handouts?
Agreement on the baseline must come before any agreement to eliminate undefined tax expenditures. The term “tax expenditures” has no meaning absent an agreed baseline. For example, if the baseline is 100% confiscation of gross income, every dollar the taxpayer keeps is a tax expenditure! If the baseline is a tax system that allows deduction of all costs of producing income, then non-allowance of commuting expenses and education costs are negative tax expenditures!
By all means we should scrutinize tax rules of all sorts and identify one by one provisions that are clearly handouts. But let's resist calls to jump aboard the “cut tax expenditures” bandwagon without knowing what destination the people driving it have in mind. That would be like agreeing to health care reform regardless of what shape “reform” will take.
>Feldstein being Feldstein, the real targets of his message are GOP lawmakers who insist that scaling back these subsidies is akin to voting for a dreaded tax increase. Maybe its best that he establishes the principle that it is not before asking them to tackle such issues as the mortgage deduction.
As you indicate, the “tax expenditure” terminology has a political agenda attached to it. That agenda poisons any generic discussion of “tax expenditures”. The subterfuge is obvious. Specific tax changes can and should be discussed instead.
Use of the term “tax expenditure” implies a judgment that the tax break is an unjustified handout. Different people will make that judgment differently. Creating a presumption of unfairness is the whole point of using the term “tax expenditure”. Feldstein and other advocates of this term are not fooling anyone.
I think most Republicans regard ending any tax break as a tax increase, especially if a favored donor is the beneficiary (like big oil and the mortgage and buidling industry).
I agree with you on the advisability of maintaing tax subsidies for the poor, however I would find a way to fold them into salary or payments for taking part in adult literacy programs – and would expand them to living wage levels – paying for it by ending the deductions for property taxes and mortgage interest.
This would not hurt the mortgage industry at all, since growing families spend their extra money on housing. It would effect the mix of housing – which is not a bad thing – especially if rich people buy or build their McMansions anyway (as studies seem to indicate).
My tax plan is posted on the web page. I address these issues in detail. Oh, I would appreciate it if TPC scored it.