Why can’t Congress balance the budget? It’s the tax loopholes, stupid.
Three economists with the Urban-Brookings Tax Policy Institute testified last week before the U.S. Senate Committee on the Budget on the topic of “tax expenditures.” The cumulative effect was a powerful indictment of a tax code that grants some $1 trillion in exemptions, credits, deductions, exclusions and preferential rates.
In testimony entitled, “Reforming Federal Taxes: Some Lessons from History,” C. Eugene Steuerling addressed the question of how the U.S. tax code came to be so littered with more holes than than a kitchen strainer.
- In recent decades, the tax code broke away from its revenue-raising functions, became an instrument of public policy and began to evolve like the spending side of the budget. A quarter of all “spending” is embedded in the tax code, yet is given little attention.
- Congress hates voting for legislation that creates losers. As a consequence, there is a bias in the system toward spending more and taxing less. “Both deficit reduction and systemic reform, you see, require identifying ‘losers’—those who must give up something to balance the sheets.”
- Budgetary accounting is misleading. ”Tax subsidies and spending items put in the tax code mislead the public as to extent of governmental influence over the economy. A tax subsidy effectively raises tax rates that must finance the subsidy in the same way as an equivalent spending item. … [It] looks like smaller government when it really is bigger government in disguise.”
In “Cutting Tax Preferences Is Key to Tax Reform and Deficit Reduction,” Donald B. Marron noted that the tax 
loopholes amounted to almost as much money as the country raises through personal and corporate income taxes combined. Eliminating the tax preferences would be equitable, by leveling the tax playing field, and it would lead to greater economic efficiency: “It is hard to believe a tax preference that encourages people to go deeper into debt and directs capital into larger homes is socially beneficial.”
(The biggest tax preferences are shown in the chart at right.) While many tax breaks go to “special interests,” Marron noted, the big money is consumed by deductions for broad swaths of the population. Congress may want to retain some preferences because they represent the best way to achieve socially desirable goals, such as the earned-income tax credit or the deduction for interest paid on mortgages. Even then, Marron said, Congress could consider restructuring the preferences to make them accomplish their aims more effectively.
Finally, Roseanne Altshuler hammered home the economic inefficiency of the tax code in “Tax Reform: A Necessary Component for Restoring Fiscal Responsibility.” Wrote she:
The current system is riddled with tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers. These provisions create complexity, generate large compliance costs, breed perceptions of unfairness, create opportunities for manipulation of rules to avoid tax, and encourage the inefficient use of our economic resources. The many changes we have made to the tax code — more than 4,400 over the past ten years — have made the income tax system even more difficult for taxpayers to understand, less stable, and increasingly unpredictable. The state of our current system reflects that we have forgotten that the fundamental purpose of our tax system is to raise revenues to fund government.
She made three main points in her testimony:
-
Balancing the budget will require either fixing the tax code or finding a new source of revenue. “Raising
significantly more revenue from the current tax system is politically infeasible and would be damaging to economic growth.” -
Reform should broaden the tax base. ”A reform that broadens the base would not only raise revenue but would simplify the system, increase transparency, make the system less distortive by both allowing for a lower rate and reducing tax-induced biases towards certain activities, and improve the fairness of the system.”
-
International corporate taxation must be updated to reflect the reality of increased global competition faced by U.S. multinational corporations.
Bacon’s bottom line: There is no escaping the necessity of tackling tax reform as part of any effort to restore the long-term financial integrity of the United States.
Your Golden Years and your 401K are at Risk
|
| Buy the Book! |
Jim Bacon :A life-long journalist and writer, James A. Bacon is former Publisher & Editor-in-Chief of Virginia Business magazine, former editor of the Generational Advisor newsletter, and founder of the Bacon's Rebellion public policy newsletter and blog. Visit his blog and ·buy his book, or you could lose your golden years and your 401K.
Read his book, Boomergeddon: Boomergeddon is the day investors stop buying U.S. Treasuries — the day the U.S. government goes into default, the global economy is thrown into turmoil, the American empire begins to crumble, and the social safety net starts to unravel.
Following the main themes in “Boomergeddon” the book, this blog chronicles the melt-down of federal finances and the demise of the democratic welfare state. (Read a free sample here.)
If you’re looking for a laugh or a warm, fuzzy feeling, go somewhere else. In “Boomergeddon,” we explain why there’s a good chance you’ll spend your golden years eating dog food and recycling beer bottles.
Visit the blog to stay current with news about the looming retirement crisis caused by runaway spending on government programs and entitlements; mounting federal budget deficits; the coming global capital shortage; the debt burden that will cannibalize the entire federal government; and the inevitable disintegration of America’s retirement safety net.
