Martin Lobel is a partner at the firm of Lobel Novins & Lamont LLP and the chair of Tax Analysts' board of directors. The author writes that if the federal government is serious about deficit reduction, it needs to cut tax expenditures.
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Tax expenditures are government spending programs that deliver subsidies through tax exemptions, deductions, credits, exclusions, deferrals, preferential rates, and so on for selected beneficiaries, for example, the oil industry.1 Tax expenditures cost the government more than $1 trillion in fiscal 2011,2 which is almost as much as our projected deficit. If Congress eliminated all tax expenditures, it would cut corporate and individual income tax rates by greater than 20 percent and still generate 20 percent more revenue.3
Despite the importance of tax expenditures, they are hidden, so there is little or no discussion of them in the mainstream media. Lobbyists and Congress use tax expenditures as an easy way to subsidize a favored few at the expense of the ordinary taxpayer. Once tax expenditures are enacted, they are not subject to annual appropriations analysis of whether they are justified, and there is no limit on the amount of the expenditure.4 Best of all from a public relations standpoint, when commentators question those tax expenditures, proponents of the expenditures scream that eliminating them amounts to a "bad" tax increase. The best examples of that are the sophisticated ads being run on almost every newscast by the American Petroleum Institute, claiming that eliminating tax subsidies for the oil industry is a tax increase that will hurt consumers.
Although not all tax expenditures are bad, Congress needs to reexamine the existing tax expenditures and set standards that new ones must meet before being enacted. There is too much money at stake to continue to ignore the issue. As with appropriated expenditures, Congress needs to set standards to see whether taxpayer money should be spent on a program. That requires transparency to determine on a regular basis whether each of the tax expenditures really works and whether it is worth the cost. Unfortunately, many of the expenditures are not really effective in achieving their supposed purpose, and interfere with the natural flow of capital toward its most productive use.5 Finally, most tax expenditures are skewed to benefit the wealthy more than middle- or lower-income taxpayers.
Those tax expenditures exacerbate the growing gap in income between the middle class and the very rich. Between 1960 and 2004, the top 0.1 percent of U.S. taxpayers saw the share of their income paid in federal taxes drop from 60 percent to 33.6 percent, while the middle 20 percent of taxpayers saw an increasing amount of their income go to pay taxes even though tax rates had declined substantially.6 Also, between 2002 and 2007, the top 1 percent of U.S. taxpayers had almost two-thirds of the entire income growth in the United States.7
It will not be easy to cut tax expenditures because those who benefit from them will fight to keep them by calling the cuts tax increases, evoking a Pavlovian response from the public, who often don't understand what the real implications are. However, it is not impossible to make the cuts if the media expose the issue and explain that we are not talking about raising taxes on everyone but, instead, trying to cut the deficit by eliminating expenditures that cannot be justified. Oklahoma, for example, a very conservative state, has enacted laws to make tax expenditures far more transparent and accountable than the federal government does.8 We should follow its lead.
1 Richard W. Caperton and Sim J. Gandhi, "America's Hidden Power Bill: Examining Federal Energy Tax Expenditures," Center for American Progress, Apr. 2010, Doc 2010-8179, 2010 TNT 71-51.
4 Patrick E. Tolan Jr., "Questioning Tax Expenditures for Economic Recovery," Tax Notes, Apr. 5, 2010, p. 67, Doc 2010-4912, 2010 TNT 65-3; Carl Davis, "Judging Tax Expenditures," Tax Notes, Nov. 9, 2009, p. 677.
6 Chuck Collins, Alison Goldberg, and Sam Pizzigati, "Shifting Responsibility: How 50 Years of Tax Cuts Benefited the Wealthiest Americans," Wealth for the Common Good, Apr. 12, 2010, p. 1.
8 David Blatt, "Making Oklahoma's Tax Expenditures More Transparent and Accountable," State Tax Notes, Mar. 22, 2010, p. 847.
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