Congress Shouldn’t Forget About Tax Entitlements In Its Search for Deficit Reduction

By :: October 22nd, 2013

Yesterday, Washington Post columnist Bob Samuelson urged lawmakers to “just eliminate…the whole notion of entitlements.”  His provocative argument: The very word "entitlement" makes people believe these programs are somehow untouchable. They are, for instance, effectively exempt from the sequester’s cuts even though they represent two-thirds of all government spending.

Bob is on to something but he misses a key piece of the story—tax subsidies, or what we might call tax entitlements.

He focuses only on the familiar spending entitlements—Medicare, Social Security, college loans, farm subsidies, and the like that account for about $2 trillion of the federal budget in fiscal 2014.

But there is another $1 trillion-plus in federal tax entitlements that are treated with the same legislative deference.

Except that they are part of the tax code, these special subsidies are largely indistinguishable from the spending that Bob highlights. Like entitlement spending, they are automatic benefits you receive based on characteristics such as your age, family structure, and income. And, in the case of tax subsidies, on the particular form of income you receive or the economic activity in which you engage.

Like spending entitlements, these tax expenditures are open-ended. Unlike appropriated funds, there is no limit to their total annual cost. You meet the definition of eligibility—you get the dough.

I’m not arguing that all entitlements—tax or spending—are bad. Indeed, while some are boondoggles, others are enormously important. And it would be hard to imagine making major changes every year to transfer programs such as Social Security or tax subsidies such as, say, the mortgage interest deduction. Such uncertainty would create terrible problems.   

But no program is perfect. Yet, unlike agency spending, Congress rarely revisits these tax goodies. They have achieved legislative immortality. And they add a bundle to the deficit.

For instance, in 2014 the government will provide about $250 billion in income tax and payroll tax subsidies for people whose employer buys them health insurance. You get employer-sponsored insurance, you are automatically entitled to the tax break that goes along with it.

It’s the same with people who take out loans to buy a house. You get a mortgage, you get a tax deduction (with limits only for loans over $1 million). That tax break increases the deficit by more than $100 billion a year.

The lost revenue from these mega-subsidies is enormous, rivaling all spending entitlements except for Medicare and Social Security.

And the list goes on and on. If you are poor and have kids, you get tax subsidies. If you are rich and give large gifts to charity, you get a tax subsidy. If you send you kid to college, save for retirement, buy municipal bonds, are a farmer, a veteran, or a retired railroad worker you may get special tax breaks. You are entitled.

Bob notes that about 50 million Americans get Medicare and about 35 million got subsidized meals in 2012. That’s not so different from the 44 million who got a federal tax break to offset their state and local taxes in 2011, the 36 million who got a mortgage interest deduction, or the 38 million who deducted their charitable gifts.

The thing is, these tax entitlements are often hugely inefficient. We give tax breaks for retirement saving to many people who would save anyway. We give subsidies to producers of alternative energy without evidence that these products reduce overall energy use or greenhouse gasses. 

But like their spending cousins, they go on, seemingly beyond congressional control. Lawmakers talk about closing "loopholes" through tax reform just as they vow to modernize Social Security or reform Medicare. But these days nothing ever seems to happen on either front.

Samuelson is right when he says the huge spending transfer programs are absorbing resources that could be used for deficit reduction or even other priorities and that they should not be immune from congressional review. But exactly the same is true about tax entitlements.  



  1. Michael Bindner  ::  3:10 am on October 23rd, 2013:

    For the most part, Social Security and similar entitelements are self-financing – which Samuelson seems to miss. For the last 30 years, they have decreased the deficit, not increased it. The point where the workers who overpaid their FICA taxes start receiving benefits is not the time to discuss rolling them back. If anything, what needs to happen is an increase to the top tax rates to counteract the Reagan cuts which the FICA tax increases of the 1980s helped spare.

    As for tax expenditures, they should be rationalized – not to reduce the deficit but to do more for families with children – for example, eliminating the child exemption, mortgage interest deduction and property tax deduction while increaseing the child tax credit by six fold to $500 a month. Unless the birth rate remains stagnant at these levels, this would make tax expenditures much more efficient.

    As for the health insurance exclusion – preserving it (and essentially replicating it for families who don’t work for larger employers) is the backbone of the Affordable Care Act. Cut this tax expenditure and you may was well repeal the ACA as well and replace it with either an expansion of the Uniformed Public Health Service or a single-payer program.

  2. aed939  ::  10:55 am on October 23rd, 2013:

    The greater picture is that effective marginal rates must be managed. They are important to all income levels. For example, for the lower middle class, they face earned income tax credit and other benefits phaseouts, which create for them a high marginal rate. Would like to see elimination of state income tax decuction. I agree with everything, except careful about gifts. If the gift is to another individual, it has to be taxed once–as income to the recipient, so it is appropriate for the donor not to pay tax or else the same income is double taxed. If it is a tax-exempt charitable organization, it should not be taxed at all. Two ways to go about this: 1) reduce or eliminate specific tax deductions (would simplify the code), or place caps on total deductions either by the amount of the deduction or by income (would make code more complicated).

  3. AMTbuff  ::  12:35 pm on October 23rd, 2013:

    Income tax rates are not exogenous. They were enacted with the understanding that all traditional tax breaks would continue to exist. It’s disingenuous to suggest that the current rates would be appropriate in the absence of traditional tax breaks.

    This was, is, and will always be a package deal. If you take away the tax breaks you need to reduce tax rates accordingly.

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