Wednesday, August 11, 2010

Sacred Tax Cows: It's Them or Us


The National Commission on Fiscal Responsibility and Reform is in a pickle. We can expect Republican members of the Commission to push for cuts in government spending but no new taxes, and Democratic members to argue that tax increases are necessary. With a supermajority required to approve any recommendation, what hope is there of success?

The best hope for bipartisan consensus lies in targeting the $1.2 trillion a year in hidden government spending embedded in the Tax Code in the form of "tax expenditures." These programs are styled as tax savings, but really function as replacements for explicit government spending. Some make sense, but a great many are poorly targeted and would never pass Congress if presented as an outright spending proposal.

Unfortunately, some of the most popular of these tax breaks - in particular, political "sacred cows" like the home mortgage interest deduction, the charitable contribution deduction and the deduction for state and local taxes - are incredibly expensive and give the country very poor returns relative to their cost. Everyone likes these tax breaks, but in light of the long-term fiscal crisis facing the country, we must choose: we can maintain our herd of hideously expensive tax sacred cows, or we can sacrifice them and set the country on the path to fiscal health.

Today the government spends more through tax expenditures than it collects from the personal income tax, and spends twice as much through the Tax Code as it does through explicit discretionary spending programs. Unlike explicit spending, tax expenditures show up in the budget process simply as reduced tax revenues. In reality the tax revenues are there, borne by taxpayers not eligible for the subsidy, and spent on those who do qualify. It's as if the government actually collected roughly twice as much in personal income taxes as it actually does, but then spent all those extra revenues on programs that today are invisible as a matter of budget presentation or debate.

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