Getting Tax Expenditures Right Can Help Ease Our Fiscal Woes
The current impasse over the debt ceiling has been resolved, at least in the short run, by a set of compromises that leaves no one satisfied. At the same time, the long-term imbalance of government expenditures outpacing its revenues remains largely unsolved. It is to that issue that I devote my weekly column, which builds on the work of my last two essays for Defining Ideas (you can find those here and here).
What political and economic forces have led the United States on its downward path to fiscal irresponsibility? To be sure, the uneasy combination of high government expenditures and modest government revenues is the surface cause of the current situation. But the techniques deployed to fuel the expansion of government power are truly driving the current malaise.
Two ways to make government bigger involve borrowing money and imposing progressive taxes. A third notable technique is tax expenditures. Tax expenditures allow the scope of government activities to increase without going through the nasty process of an explicit government appropriation and transfer payment.
Under conventional wisdom, tax expenditures can take many different forms. A useful catalogue has been provided by economist Donald B. Marron in his recent article, Spending by Disguise, which lists credits, deductions, deferrals, exclusions, and preferential rates as the means whereby the government can funnel real resources to its favored participants without having to go through the hassle of cutting a check on their behalf.
The basic claim of Marron and others is that there are trillions of dollars in tax expenditures that are waiting to be canceled out—enough in fact to ease the deficit woes. Unfortunately, the matter is more complex than this for the simple reason that not all tax expenditures are cut from the same cloth, which I explain further over at Defining Ideas.
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Feb '11
Re: Getting Tax Expenditures Right Can Help Ease Our Fiscal Woes
"For example, an ordinary business deduction for inventory reduces the amount of taxable income, but no one thinks of that deduction as a tax expenditure."
Yet many people *do* thing of depreciation as a tax expenditure...I don't think the average politician or journalist understands the concept of accrual accounting, and depreciation is often spoken of as if it were some kind of special favor.
When you buy a piece of capital equipment, then (absent any special "expensing" provisions in the tax code at the particular moment), you are in effect paying taxes on profits that you have not yet made. This arguably creates a bias against asset-intensive businesses, such as manufacturers and railroads, and in favor of businesses that deal in more intangible things.
Sep '10
Re: Getting Tax Expenditures Right Can Help Ease Our Fiscal Woes
Okay I have read the professor's article twice now and Mr. Marrons's once and my mind is officially blown. I thought I was doing pretty well when I could grasp baseline budget growth and why that means that cuts are not generally reductions in spending. And now this.
I think this sentence from Mr. Marron's article expresses it best.
"Advocates of smaller government are often skeptical of proposals that would increase federal revenues. But when it comes to paring back spending-like tax preferences, an increase in revenues would mean that government’s role would get smaller."
I think if you can get that, and you can get base line budgeting you may have some of the necessary tools to understand about half of what is being debated in Washington right now.