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.