Spending in Disguise
Republicans are demanding a deficit-reduction package that’s entirely spending cuts. Democrats insist that revenues must also be included.
Are these positions completely irreconcilable? Not if both sides are willing to attack the spending hidden in our tax code.
I explore this idea for finding common ground in a new essay in National Affairs, “Spending in Disguise”:
A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences that seem like they let taxpayers keep their own money but are actually spending in disguise. Those preferences complicate the code and often needlessly distort family and business decisions. Their magnitude raises the possibility of a dramatic reform of the tax code—making it simpler, fairer, and more pro-growth—that would amount to both cutting spending and increasing government revenue at once, and without raising tax rates.
Such a reform would not eliminate the need for serious spending cuts, of course, nor would it take tax increases off the table. But it could dramatically improve the government’s fiscal outlook and make the task of budget negotiators far easier. It will only be possible, however, if we clearly understand how spending is hidden in the tax code and what reformers might do about it—if we see that tax policy and spending policy are not always as distinct as we might think.
In short, there is a deal to be done in which revenues go up solely because spending in the tax code goes down.
The trillion-dollar question is whether President Obama, Speaker Boehner, and Leader Reid can cut that deal by August 2nd. If not, one side will have to cave on a core principle (no prize for guessing which party that’s likely to be), or we will find out just how painful it really is to run out of fresh borrowing room.
[...] That includes three pieces: $1.0 trillion from reducing tax preferences (some of which may be the moral equivalent of cutting spending), $133 billion in new revenues for the highway trust fund (but not from higher gas taxes), and [...]
I suspect that Republicans would rather decrease direct spending and increase tax preferences, given their druthers, as long as those benefits go to their donors. If you want tax reform, find a form of public finance that even the GOP will accept.
This is a great commentary by Mr. Marron. Readers should go directly to the full text at the National Review.
Now, if he and his colleagues at the TPC could point me to where the JCT is costing a dividend repatriation proposal at $79 billion, it would make my day.
Sorry, that was “National Affairs”.
I guess the TPC is not willing to share the source of that JCT $79 billion cost estimate. I’m beginning to wonder if it exists.
Thanks for the clear explanation. I don’t know if you saw my earlier comment from another blog entry. Anyway I quote myself here:
“I agree that tax expenditures should be made transparent and fair. I think the accounting should be turned around into a refundable credit rather than an income deduction.
Here is how I would set it up: The “individual income tax return” would list all income from all sources, NO exceptions. The tax due would be looked up in a table.
A second form, “Claim for individual federal subsidy”, would list all the subsidized activities. These might include half of any long-term capital gains, tax exempt dividends, mortgage interest and so forth. The subsidy claimed would be found by using exactly the same table used to calculate the taxes due.
This scheme is simple and fair.”
I think this arrangement corrects many of the problems you address.
This is well reasoned and makes a lot of sense. The thing that you are ignoring is that any attempt to remove the hidden spending through subsidies and tax breaks will be seen as raising taxes by the Republicans. Remember raising taxes is out of the question.