The “tax expenditures” solution

Here is another proposal for how to cut the deficit.  This one suffers from a toxic premise:

There is a way to cut budget deficits without raising tax rates. “Tax expenditures” are the special features of U.S. income tax law that subsidize mortgage borrowing, health insurance, local government spending and more. Although these subsidies are a form of government spending, they are counted as reduced tax revenue rather than increased government outlays. Yet tax expenditures increase the deficit by hundreds of billions of dollars a year, more than the total cost of all non-defense programs other than Social Security and Medicare.

A critical feature of the proposal recently unveiled by Erskine Bowles and Alan Simpson, the co-chairmen of the president’s bipartisan fiscal commission, is to reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest.

Their most extreme suggestion is to eliminate all tax expenditures, raising $1 trillion a year in additional tax revenue, and then use all but $80 billion of that to cut tax rates. I think that devotes too little money to deficit reduction at a time when fiscal deficits are dangerously large.

Because Bowles and Simpson recognize that eliminating all tax expenditures is politically impossible, they also proposed to eliminate or scale back some tax expenditures while cutting tax rates less to achieve the same $80 billion annual deficit reduction. This option will undoubtedly be opposed by some who find it unfair to limit measures from which they benefit while leaving unchanged tax rules that benefit other people.

Here is a practical alternative toward the same end: Congress should cap the total benefit taxpayers can receive from the combined effect of different tax expenditures. That cap could be set as a percentage of an individual’s adjusted gross income and perhaps subject to an absolute dollar amount.

To be clear, the cap would not apply to the amount of any deduction but would limit the total tax savings that result from such deductions. Someone with a 25 percent marginal tax rate who pays annual mortgage interest of $4,000 would still deduct that $4,000. The cap would apply to the $1,000 tax saving that individual could expect on mortgage interest, not to his or her deduction.

The idea is not to single out a particular tax expenditure. Because the cap would reduce the revenue cost of all tax expenditures without eliminating or reducing specific ones, it would not unfairly burden taxpayers who benefit from one particular type of tax measure.

The budget gain would be substantial. My colleague Daniel Feenberg of the National Bureau of Economic Research and I have estimated that capping an individual’s benefit from tax expenditures at 2 percent of adjusted gross income would reduce the federal deficit in 2011 by $262 billion, or about 1.7 percent of gross domestic product. An additional cap on these benefits in absolute dollar terms would produce a larger deficit reduction.  . . .

The tax expenditures subject to the cap in our calculations reflect deductions for mortgage interest, state and local income and property taxes, and charitable contributions; credits for dependent care, children and certain education costs; and the exclusion of employer payments for health insurance. Congress could, of course, expand or reduce this list. Dropping the deduction for charitable contributions, for example, would reduce the 2011 revenue gain by some $45 billion.

More than 65 percent of taxpayers do not itemize their deductible expenses but use the standard deduction. Nearly half (46 percent) of taxpayers who use the standard deduction would not be affected by a 2 percent cap. For those who are, the cap would apply to various tax credits and to the exclusion of employer payments for health insurance.

via Martin Feldstein – How to cut the deficit without raising taxes.

Doesn’t this assume that all money belongs to the government?  So not taking a person’s money counts as an “expenditure”?  It also says that taxing something that was not taxed before somehow avoids a tax increase.

If you can get past those problems, what do you think of this idea?  Capping deductions might be better than eliminating them entirely, as some are proposing.  But decreasing the mortgage deduction certainly won’t help the housing market–which is necessary for non-government economic growth–nor will cutting back charitable deductions help churches and other private groups step in with the safety nets that government budget-cutting will be eliminating.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • Joe

    If the cap on the amount of deductions is balanced by a cut to the marginal tax rates then this might not be the worst idea. I favor lower rates and fewer targeted tax deductions. I don’t like using the tax code to reward behaviors that the gov’t decides are good. Lets not pretend that the tax code’s emphasis on mortgagees had nothing to do with the problems in the housing market.

  • Joe

    If the cap on the amount of deductions is balanced by a cut to the marginal tax rates then this might not be the worst idea. I favor lower rates and fewer targeted tax deductions. I don’t like using the tax code to reward behaviors that the gov’t decides are good. Lets not pretend that the tax code’s emphasis on mortgagees had nothing to do with the problems in the housing market.

  • http://www.newreformationpress.com Patrick Kyle

    Another accounting “trick” used to ease or avoid cuts from the budget. Why not a 10 or 15% cut across the board in the federal budget? I have never heard an adequate explanation as to why this is unacceptable.

  • http://www.newreformationpress.com Patrick Kyle

    Another accounting “trick” used to ease or avoid cuts from the budget. Why not a 10 or 15% cut across the board in the federal budget? I have never heard an adequate explanation as to why this is unacceptable.

  • WebMonk

    In general I would go with Joe on this. But when that “general” starts to be put into specific effect things start to happen that aren’t quite as nice as I would like.

    I would tend to leave the tax rates and deductions where they are at the moment and start primarily by cutting expenditures. The top six categories (one of which is debt interest which we can’t affect much) in the US budget make up over 80% of the total. Social Security, Military, Unemployment, Medicare, Medicaid, and Debt Interest.

    There are whole classifications of pork spending that generate roughly a job per $1+ million/year spent. The problem is that a lot of bureaucrats tend to take up the extra in administration costs, and those jobs would be cut way back. I’m all for that, with the recognition that that will cause job loss of some amount (though not a one-for-one basis since some of the cut jobs would not be lost but rather squeezed into other places). However, that would cut only $5-50 billion per year (or thereabouts). The low-hanging pork is “easy” (not actually easy politically) to cut out, but does not really make up a major portion of the budget. Not more than a percent or two (depending on definitions).

    To make serious cuts into the debt and deficit, the major areas need to get scaled back.

    Social security is the biggest single item. Adjust the retirement age upward, eventually winding up with retirement age being 72 (phased in over a longish time period – a couple decades, but beginning soon). Cut SS payments to people with higher retirement income/savings – even if you make over $150K per year, you only get SS retirement based on $150K maximum. (fine details could be tweaked) Based on some GAO numbers and a bit of my own guesstimation, this could start making a $50 billion per year difference and would climb up to $500 billion/year difference in a couple decades. This is a necessity in my mind, because otherwise SS will start making a 10-15% annual growth soon.

    Military costs need to get scaled down, and there are several ways to at least start without affecting troop levels/preparedness or technological advances. The cuts wouldn’t be huge, but they would knock off a couple percentage points. After that, there is always a smaller military size involving less activity around the world. Acceptable amounts of shrinkage vary, but there does need to be some shrinkage of some sort. That knocks off a few more percentage points. Basically it would be around a 3%-10% cut in military spending. (3% would have very little effect on military abilities, while 10% would require some pretty notable personelle/activity shrinkages)

    Then we get to Unemployment. This gets ugly quickly. I wouldn’t touch it until the economy is going stronger again, however. There are a variety of plans to make cuts with various effects. The better ones (IMO) are more oriented toward providing assistance toward getting a job instead of providing money until a job is regained.

    Medicare and Medicaid aren’t much of a concern to me in some ways. They’re big and costly, but there are so many ways to fix them that it’s not a technical problem, just a political one. And I think they are going to get hammered hard, marginalized to some extent, and folded into other places just from the way things are heading. Of much greater concern to me is the health insurance cost. That’s a technical problem with I think will be growing significantly. Solutions start at getting rid of the massive government involvements made this year.

  • WebMonk

    In general I would go with Joe on this. But when that “general” starts to be put into specific effect things start to happen that aren’t quite as nice as I would like.

    I would tend to leave the tax rates and deductions where they are at the moment and start primarily by cutting expenditures. The top six categories (one of which is debt interest which we can’t affect much) in the US budget make up over 80% of the total. Social Security, Military, Unemployment, Medicare, Medicaid, and Debt Interest.

    There are whole classifications of pork spending that generate roughly a job per $1+ million/year spent. The problem is that a lot of bureaucrats tend to take up the extra in administration costs, and those jobs would be cut way back. I’m all for that, with the recognition that that will cause job loss of some amount (though not a one-for-one basis since some of the cut jobs would not be lost but rather squeezed into other places). However, that would cut only $5-50 billion per year (or thereabouts). The low-hanging pork is “easy” (not actually easy politically) to cut out, but does not really make up a major portion of the budget. Not more than a percent or two (depending on definitions).

    To make serious cuts into the debt and deficit, the major areas need to get scaled back.

    Social security is the biggest single item. Adjust the retirement age upward, eventually winding up with retirement age being 72 (phased in over a longish time period – a couple decades, but beginning soon). Cut SS payments to people with higher retirement income/savings – even if you make over $150K per year, you only get SS retirement based on $150K maximum. (fine details could be tweaked) Based on some GAO numbers and a bit of my own guesstimation, this could start making a $50 billion per year difference and would climb up to $500 billion/year difference in a couple decades. This is a necessity in my mind, because otherwise SS will start making a 10-15% annual growth soon.

    Military costs need to get scaled down, and there are several ways to at least start without affecting troop levels/preparedness or technological advances. The cuts wouldn’t be huge, but they would knock off a couple percentage points. After that, there is always a smaller military size involving less activity around the world. Acceptable amounts of shrinkage vary, but there does need to be some shrinkage of some sort. That knocks off a few more percentage points. Basically it would be around a 3%-10% cut in military spending. (3% would have very little effect on military abilities, while 10% would require some pretty notable personelle/activity shrinkages)

    Then we get to Unemployment. This gets ugly quickly. I wouldn’t touch it until the economy is going stronger again, however. There are a variety of plans to make cuts with various effects. The better ones (IMO) are more oriented toward providing assistance toward getting a job instead of providing money until a job is regained.

    Medicare and Medicaid aren’t much of a concern to me in some ways. They’re big and costly, but there are so many ways to fix them that it’s not a technical problem, just a political one. And I think they are going to get hammered hard, marginalized to some extent, and folded into other places just from the way things are heading. Of much greater concern to me is the health insurance cost. That’s a technical problem with I think will be growing significantly. Solutions start at getting rid of the massive government involvements made this year.

  • WebMonk

    Patrick – National Debt payments can’t get cut, so that means a more than 10% cut for everyone else.

    A 10% cut to military would require immediate (not in six months or a year, but next week) withdrawal from both Iraq and Afghanistan and major firing of personelle and suddenly dropping contracts with thousands of companies which supply the military causing a massive spike in unemployment (1-3 million unemployed over the course of the year).

    Ditto for a lot of other things – unemployment would suddenly stop for 4 millino to 10 million people. An extra 50-100K people suddenly losing government jobs. Every retired person would suddenly take a 10% drop in income from SS. Doctors suddenly get 10% less from Medicare and Medicaid, meaning they would essentially stop accepting them. Dept of Justice would grind to a halt until the snarls could be undone. Dept of Vet Affairs would close 10% of their facilities which are already drastically short of being able to care for our veterans.

    Basically, that would be a BAD thing. Phase that in over a decade or two and it might work a bit better.

  • WebMonk

    Patrick – National Debt payments can’t get cut, so that means a more than 10% cut for everyone else.

    A 10% cut to military would require immediate (not in six months or a year, but next week) withdrawal from both Iraq and Afghanistan and major firing of personelle and suddenly dropping contracts with thousands of companies which supply the military causing a massive spike in unemployment (1-3 million unemployed over the course of the year).

    Ditto for a lot of other things – unemployment would suddenly stop for 4 millino to 10 million people. An extra 50-100K people suddenly losing government jobs. Every retired person would suddenly take a 10% drop in income from SS. Doctors suddenly get 10% less from Medicare and Medicaid, meaning they would essentially stop accepting them. Dept of Justice would grind to a halt until the snarls could be undone. Dept of Vet Affairs would close 10% of their facilities which are already drastically short of being able to care for our veterans.

    Basically, that would be a BAD thing. Phase that in over a decade or two and it might work a bit better.

  • S Bauer

    Doesn’t this assume that all money belongs to the government? So not taking a person’s money counts as an “expenditure”?

    I don’t see an assumption that all money belongs to the government here. If the government can tax income at all, we already have a situation that asserts that some of what I earn belongs to the government. The government decides to take a certain percentage of my income as its own. If the government then wants to influence my behavior by giving me some of its money in exchange for me using that money for a certain purpose (such as buying a house or charitable gifts), it’s an “expense” from the government’s perspective. It matters little what you call it, expenditure or exemption.

    What I find to be preeminantly inane is this statement:

    reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest.

    Leaving aside the notion of whether it is the government’s job to provide incentives to “work, save or invest” at all, saying that you are “reducing tax expenditures” rather than “raising tax rates” is all smoke and mirrors. If the government says, “I’m not going to claim more of what you earn as my own. I’m just not going to give you back as much money as I used to,” the bottom line is that I don’t have as much money as reward for my work, or to save and invest, as I did before. To say that doing it one way over the other will not reduce incentives is ludicrous.

  • S Bauer

    Doesn’t this assume that all money belongs to the government? So not taking a person’s money counts as an “expenditure”?

    I don’t see an assumption that all money belongs to the government here. If the government can tax income at all, we already have a situation that asserts that some of what I earn belongs to the government. The government decides to take a certain percentage of my income as its own. If the government then wants to influence my behavior by giving me some of its money in exchange for me using that money for a certain purpose (such as buying a house or charitable gifts), it’s an “expense” from the government’s perspective. It matters little what you call it, expenditure or exemption.

    What I find to be preeminantly inane is this statement:

    reduce tax expenditures rather than raise tax rates. That would increase revenue without reducing incentives to work, save or invest.

    Leaving aside the notion of whether it is the government’s job to provide incentives to “work, save or invest” at all, saying that you are “reducing tax expenditures” rather than “raising tax rates” is all smoke and mirrors. If the government says, “I’m not going to claim more of what you earn as my own. I’m just not going to give you back as much money as I used to,” the bottom line is that I don’t have as much money as reward for my work, or to save and invest, as I did before. To say that doing it one way over the other will not reduce incentives is ludicrous.

  • DonS

    Webmonk — well said.

    There are a host of reasons why this is a terrible idea. Here’s a partial list:

    1. We are better at raising taxes than cutting spending. Right now, our tax revenues are at historical norms (approx. 19% of GDP) and our expenditures are some 3-5% above historical norms (26% of GDP last year). It’s obvious that our primary effort has to come on the spending side. Typically, we talk about a “mix” of tax increases and spending cuts. The tax increases occur, and the spending cuts turn out to be a mirage, just cuts in the increase in future spending. We need hard, real cuts, and serious reform of our entitlements before we even begin to think about closing the gap with taxes.

    2) When we talk about changing spending programs, we phase the changes in over decades. In 1982 we began phasing in a two year increase in the Social Security retirement age which won’t be fully in effect until 2027!! But on the taxing side, we make these changes instantaneously or nearly so. People bought houses based on the promise of a tax deduction. Now we’re just going to take that away from them? One of the reasons why we sometimes have economic problems is that the people don’t trust that Congress isn’t going to continually change the tax code. They can’t rely on it, so they sit back and wait.

    3) The phase-out idea is the worst one ever. At one time we aspired to filing our taxes on a postcard. But now we are enamored with this phase-out idea, and so every tax deduction or credit you want to take comes with an extra worksheet or schedule for you to calculate whether you are entitled to a full or partial credit or deduction. Well under half of Americans file their own tax returns. That’s stupid, and a complete waste of resources. And now we want to make it even more complex?

    4) “Tax expenditures” is an infernal phrase, for the reasons Dr. Veith indicated. It’s our money! Don’t let the government establish this mindset that it isn’t. If you don’t have economic liberty, you don’t have liberty. Fight for limited government.

    What we need to do, quite simply, is begin to phase toward an alternative tax system which is simpler and which doesn’t involve the government having the right, at any time of its choosing, to snoop through your personal affairs, in the name of tax enforcement. It will take decades, because we have to do it in a way that’s fair to those who have ordered their affairs in reliance on the current system. I support replacing the income tax with a consumption tax. That would be freedom.

  • DonS

    Webmonk — well said.

    There are a host of reasons why this is a terrible idea. Here’s a partial list:

    1. We are better at raising taxes than cutting spending. Right now, our tax revenues are at historical norms (approx. 19% of GDP) and our expenditures are some 3-5% above historical norms (26% of GDP last year). It’s obvious that our primary effort has to come on the spending side. Typically, we talk about a “mix” of tax increases and spending cuts. The tax increases occur, and the spending cuts turn out to be a mirage, just cuts in the increase in future spending. We need hard, real cuts, and serious reform of our entitlements before we even begin to think about closing the gap with taxes.

    2) When we talk about changing spending programs, we phase the changes in over decades. In 1982 we began phasing in a two year increase in the Social Security retirement age which won’t be fully in effect until 2027!! But on the taxing side, we make these changes instantaneously or nearly so. People bought houses based on the promise of a tax deduction. Now we’re just going to take that away from them? One of the reasons why we sometimes have economic problems is that the people don’t trust that Congress isn’t going to continually change the tax code. They can’t rely on it, so they sit back and wait.

    3) The phase-out idea is the worst one ever. At one time we aspired to filing our taxes on a postcard. But now we are enamored with this phase-out idea, and so every tax deduction or credit you want to take comes with an extra worksheet or schedule for you to calculate whether you are entitled to a full or partial credit or deduction. Well under half of Americans file their own tax returns. That’s stupid, and a complete waste of resources. And now we want to make it even more complex?

    4) “Tax expenditures” is an infernal phrase, for the reasons Dr. Veith indicated. It’s our money! Don’t let the government establish this mindset that it isn’t. If you don’t have economic liberty, you don’t have liberty. Fight for limited government.

    What we need to do, quite simply, is begin to phase toward an alternative tax system which is simpler and which doesn’t involve the government having the right, at any time of its choosing, to snoop through your personal affairs, in the name of tax enforcement. It will take decades, because we have to do it in a way that’s fair to those who have ordered their affairs in reliance on the current system. I support replacing the income tax with a consumption tax. That would be freedom.

  • http://www.toddstadler.com/ tODD

    “It’s our money! Don’t let the government establish this mindset that it isn’t” (@6). I suppose there’s that point of view on the one hand, though I believe the passage “Give back to Caesar what is Caesar’s, and to God what is God’s” offers a rather different point of view on the other: (1) It actually isn’t our money, it’s God’s, and (2) he said that some of it actually belongs to “Caesar”. So …. huh.

  • http://www.toddstadler.com/ tODD

    “It’s our money! Don’t let the government establish this mindset that it isn’t” (@6). I suppose there’s that point of view on the one hand, though I believe the passage “Give back to Caesar what is Caesar’s, and to God what is God’s” offers a rather different point of view on the other: (1) It actually isn’t our money, it’s God’s, and (2) he said that some of it actually belongs to “Caesar”. So …. huh.

  • DonS

    tODD @ 7: Uh huh. OK, fine. For those of us who are Christians, we are merely stewards of what God grants us. But He grants it to us, not to the government. We are to render unto Caesar that which is Caesar’s, not the converse. And we cannot allow the government to reverse that in our minds. That’s why I hate tax refunds — “oh, goodie, look what the government gave me!”. NOT!! They merely returned, months later and without interest, that which they shouldn’t have had in the first place.

    The government exists to serve the citizens. We do not exist to serve the government. We need to remember that.

  • DonS

    tODD @ 7: Uh huh. OK, fine. For those of us who are Christians, we are merely stewards of what God grants us. But He grants it to us, not to the government. We are to render unto Caesar that which is Caesar’s, not the converse. And we cannot allow the government to reverse that in our minds. That’s why I hate tax refunds — “oh, goodie, look what the government gave me!”. NOT!! They merely returned, months later and without interest, that which they shouldn’t have had in the first place.

    The government exists to serve the citizens. We do not exist to serve the government. We need to remember that.

  • http://jdueck.net Joel

    From the original:

    Doesn’t this assume that all money belongs to the government? So not taking a person’s money counts as an “expenditure”?

    Not exactly. It only assumes that, if you fall in a 25% bracket (e.g.), that 25% of your money belongs to the government. So yes, if the government elects not to take all the whole 25% (by creating deductions or credits), that does reasonably count as an expenditure on their end.

  • http://jdueck.net Joel

    From the original:

    Doesn’t this assume that all money belongs to the government? So not taking a person’s money counts as an “expenditure”?

    Not exactly. It only assumes that, if you fall in a 25% bracket (e.g.), that 25% of your money belongs to the government. So yes, if the government elects not to take all the whole 25% (by creating deductions or credits), that does reasonably count as an expenditure on their end.

  • http://www.toddstadler.com/ tODD

    DonS (@8), again, in response to your statement, “But He grants it to us, not to the government” — it is unscriptural to say God doesn’t grant some of “our” money to the government! Why else would Jesus say it was actually “Caesar’s”, as in “belonging to Caesar”?

    “The government exists to serve the citizens. We do not exist to serve the government.” Again, that really isn’t scriptural. The government exists because God established it, and “the one in authority is God’s servant for your good” (as well as “God’s servants, agents of wrath to bring punishment on the wrongdoer.”). So you got it half-right. But we exist to submit to the government, which would appear to contradict the other half of what you said.

  • http://www.toddstadler.com/ tODD

    DonS (@8), again, in response to your statement, “But He grants it to us, not to the government” — it is unscriptural to say God doesn’t grant some of “our” money to the government! Why else would Jesus say it was actually “Caesar’s”, as in “belonging to Caesar”?

    “The government exists to serve the citizens. We do not exist to serve the government.” Again, that really isn’t scriptural. The government exists because God established it, and “the one in authority is God’s servant for your good” (as well as “God’s servants, agents of wrath to bring punishment on the wrongdoer.”). So you got it half-right. But we exist to submit to the government, which would appear to contradict the other half of what you said.

  • DonS

    tODD @ 10: I disagree with your premise. As stewards, he gives it all to us, and it is our responsibility to apportion it. His comment “render under Caesar” was responsive to an inquiry about whether we should pay our taxes. He could just as easily have said “render unto the utility company …”, etc.

    When we earn our money, it is our’s. Our tax liability arises in the course of living, just as do all of our other expenses. Taxes aren’t more special than the mortgage — they are an expense. If we move during the year, our tax liability, and to whom it is owed, will change. If we buy a taxable item, for those of us with sales tax, we will pay a tax. If we don’t we won’t. When the tax liability is incurred, whatever that liability is belongs to Caesar, just as when we use electricity the cost of that belongs to the electric company.

    What I really object to is the notion that the government incurs an expenditure by lowering our tax liability through a deduction or credit. Those deductions and credits are part of the tax code and establish our tax liability. Because of that, the amount of the deduction or credit never was Caesar’s and shouldn’t be thought of in that way by referring to it as an “expenditure”.

    I strongly object to your notion that I exist to “submit to the government”, and I also don’t exist to serve it, unless I have been called to do so in the civil service or military. Yes, I am required to submit, such as by not leaking classified information (just to cite an offhand example ;-)) but that is surely not why I exist. I exist to serve God and my neighbor. As you quoted, government is our servant, just as the husband is the servant of the wife, and our submission is solely for the purpose of allowing government to do its job of serving.

  • DonS

    tODD @ 10: I disagree with your premise. As stewards, he gives it all to us, and it is our responsibility to apportion it. His comment “render under Caesar” was responsive to an inquiry about whether we should pay our taxes. He could just as easily have said “render unto the utility company …”, etc.

    When we earn our money, it is our’s. Our tax liability arises in the course of living, just as do all of our other expenses. Taxes aren’t more special than the mortgage — they are an expense. If we move during the year, our tax liability, and to whom it is owed, will change. If we buy a taxable item, for those of us with sales tax, we will pay a tax. If we don’t we won’t. When the tax liability is incurred, whatever that liability is belongs to Caesar, just as when we use electricity the cost of that belongs to the electric company.

    What I really object to is the notion that the government incurs an expenditure by lowering our tax liability through a deduction or credit. Those deductions and credits are part of the tax code and establish our tax liability. Because of that, the amount of the deduction or credit never was Caesar’s and shouldn’t be thought of in that way by referring to it as an “expenditure”.

    I strongly object to your notion that I exist to “submit to the government”, and I also don’t exist to serve it, unless I have been called to do so in the civil service or military. Yes, I am required to submit, such as by not leaking classified information (just to cite an offhand example ;-)) but that is surely not why I exist. I exist to serve God and my neighbor. As you quoted, government is our servant, just as the husband is the servant of the wife, and our submission is solely for the purpose of allowing government to do its job of serving.

  • S Bauer

    But ours is a government “of the people, by the people, and for the people”. Those who govern do so “by consent of the governed.” This is one of the ideals that make us exceptional :-). So part of my calling as a citizen of this country is to serve my neighbor by participating in, and supporting, the government that we the people elect. It is part of my service to my neighbor to use government to “help and befriend him in every bodily need” just as much as to act individually to do so.

  • S Bauer

    But ours is a government “of the people, by the people, and for the people”. Those who govern do so “by consent of the governed.” This is one of the ideals that make us exceptional :-). So part of my calling as a citizen of this country is to serve my neighbor by participating in, and supporting, the government that we the people elect. It is part of my service to my neighbor to use government to “help and befriend him in every bodily need” just as much as to act individually to do so.

  • http://jdueck.net Joel

    Geeze. You guys. The term “tax expenditure” is a well-accepted and well-understood economics term. It’s just used to identify a particular practice. It’s silly to read all these moral assumptions into the term, just as it would be to speculate about moral premises hidden in terms like “inflation” or “entitlement” or “currency devaluation”.

    Whether government reduces everyone’s taxes by $100 or writes everyone a check for $100, the effect on the government’s bottom line is the same; only the means is different. The term “tax expenditure” just allows economists to convey when the former approach is being used versus the latter. They picked this term because it accurately describes the means and the effect on the government’s books from its organizational perspective.

    To understand this concept better, read this editorial by Greg Mankiw. And before you balk at the NYT masthead, note that Mankiw is a conservative economist who served as an advisor to George W. Bush.

  • http://jdueck.net Joel

    Geeze. You guys. The term “tax expenditure” is a well-accepted and well-understood economics term. It’s just used to identify a particular practice. It’s silly to read all these moral assumptions into the term, just as it would be to speculate about moral premises hidden in terms like “inflation” or “entitlement” or “currency devaluation”.

    Whether government reduces everyone’s taxes by $100 or writes everyone a check for $100, the effect on the government’s bottom line is the same; only the means is different. The term “tax expenditure” just allows economists to convey when the former approach is being used versus the latter. They picked this term because it accurately describes the means and the effect on the government’s books from its organizational perspective.

    To understand this concept better, read this editorial by Greg Mankiw. And before you balk at the NYT masthead, note that Mankiw is a conservative economist who served as an advisor to George W. Bush.

  • DonS

    Joel @ 13: I’m not a fan of “targeted” tax cuts or credits. I think the tax rate schedule should be clear at whatever levels and income bands the legislature decides. Any tax deduction or credit should be broad-based and applicable to a vast segment of the population — at least theoretically available to everyone or serving a compelling public purpose, such as home mortgage deductions, charitable deductions, and child and marriage deductions. I prefer moving toward lower rates and fewer deductions, though I think the move needs to be very gradual in order to not harm people who have taken particular actions in reliance on the tax code. Ultimately, I favor phasing out the income tax, because it is in unreasonable conflict with our 4th amendment rights to privacy and protection from unreasonable search. The 16th Amendment should never have been passed, but, as usual, it was passed based on the notion that it would only affect a few “rich” people. Ha! Class envy is an old, evil institution.

    That being said, I don’t care who Mankiw is, I adamantly disagree with him. There has been a conscious effort on the part of big government proponents to equate tax increases with spending reductions, in order to distract the public from the truth, which is that the government NEVER CUTS REAL SPENDING! I won’t play that game and others who care about our country’s well being and the financial well being of our children shouldn’t play it either.

  • DonS

    Joel @ 13: I’m not a fan of “targeted” tax cuts or credits. I think the tax rate schedule should be clear at whatever levels and income bands the legislature decides. Any tax deduction or credit should be broad-based and applicable to a vast segment of the population — at least theoretically available to everyone or serving a compelling public purpose, such as home mortgage deductions, charitable deductions, and child and marriage deductions. I prefer moving toward lower rates and fewer deductions, though I think the move needs to be very gradual in order to not harm people who have taken particular actions in reliance on the tax code. Ultimately, I favor phasing out the income tax, because it is in unreasonable conflict with our 4th amendment rights to privacy and protection from unreasonable search. The 16th Amendment should never have been passed, but, as usual, it was passed based on the notion that it would only affect a few “rich” people. Ha! Class envy is an old, evil institution.

    That being said, I don’t care who Mankiw is, I adamantly disagree with him. There has been a conscious effort on the part of big government proponents to equate tax increases with spending reductions, in order to distract the public from the truth, which is that the government NEVER CUTS REAL SPENDING! I won’t play that game and others who care about our country’s well being and the financial well being of our children shouldn’t play it either.

  • http://jdueck.net Joel

    DonS, I’m not a fan of targeted tax cuts or credits either, and I’m glad the Simpson-Bowles plan has got people started talking seriously about eliminating them. The broad approach they favour is to remove these narrowly-targeted credits (“tax expenditures”) at the same time as they cut tax rates dramatically across the board (lowering the top rate from 35% to 23% for example) . Their plan also includes major spending cuts, by the way. You should read the draft proposal (PDF), it really is quite good, and covers far more than reforming the tax code.

    Although you vehemently disagree with the semantics of the term “tax expenditure”, you clearly have a sense of their impact on the economy and favour phasing them out, which is what matters. If removing tax expenditures was the only type of “spending cut” being proposed by Simpson-Bowles, and if the term had been invented only recently for use in this debate, I would agree with you about the term being misused deceptively. But the fact is that of $2,948 trillion in spending cuts identified in the plan, only 25% comes from removing tax expenditures and other tax code reforms. The other 75% comes from “normal” cuts in discretionary and mandatory spending, the kind you most seem to favour. Simpson and Bowles are clearly the reverse of “big-government advocates,” and so is Mankiw, by the way. Again, I suggest you read the draft proposal.

  • http://jdueck.net Joel

    DonS, I’m not a fan of targeted tax cuts or credits either, and I’m glad the Simpson-Bowles plan has got people started talking seriously about eliminating them. The broad approach they favour is to remove these narrowly-targeted credits (“tax expenditures”) at the same time as they cut tax rates dramatically across the board (lowering the top rate from 35% to 23% for example) . Their plan also includes major spending cuts, by the way. You should read the draft proposal (PDF), it really is quite good, and covers far more than reforming the tax code.

    Although you vehemently disagree with the semantics of the term “tax expenditure”, you clearly have a sense of their impact on the economy and favour phasing them out, which is what matters. If removing tax expenditures was the only type of “spending cut” being proposed by Simpson-Bowles, and if the term had been invented only recently for use in this debate, I would agree with you about the term being misused deceptively. But the fact is that of $2,948 trillion in spending cuts identified in the plan, only 25% comes from removing tax expenditures and other tax code reforms. The other 75% comes from “normal” cuts in discretionary and mandatory spending, the kind you most seem to favour. Simpson and Bowles are clearly the reverse of “big-government advocates,” and so is Mankiw, by the way. Again, I suggest you read the draft proposal.

  • DonS

    Joel @ 15: There was a post on this plan on November 19 — go back to the archives and you will see that I and others already commented. I have read the draft proposal. As I said then, it’s a good start, but it’s not nearly enough. The plan uses FY 2010 as a base year. That’s crazy, since we spent WAY too much money this year. It should have used FY 2008. It doesn’t suggest anything about unwinding the impending disaster of Obamacare, which seriously damages its credibility. It suggests that we take until 2075 (!!!) to raise the Social Security retirement age another two years. We have a crisis in the area of unfunded mandates. I’m 51. Tell me I have to wait another two years to retire on full benefits so that my kids aren’t burdened with as much federal debt to pay for in cleaning up our mess — I’m OK with that! Why do we need 65 years to raise the age another two years?

    There is very little in proposed real spending cuts — almost all of the “cuts” are actually merely cuts in projected increases, and most of these occur four or more years from now. We should know by now that outyear proposed cuts never happen, because the Congress at that time will kill them. In the meantime, as usual, the proposed tax increases ARE real and take effect much more quickly under the proposal.

    The plan calls for settling federal taxation and spending at about 21% of GDP. Since the historic levels for taxation are about 19%, that’s way too high. We need to find a way to keep taxation at 19% and reduce spending to 18% or lower over time, so we can begin to address the debt and outyear obligations.

    Just color me unimpressed.

  • DonS

    Joel @ 15: There was a post on this plan on November 19 — go back to the archives and you will see that I and others already commented. I have read the draft proposal. As I said then, it’s a good start, but it’s not nearly enough. The plan uses FY 2010 as a base year. That’s crazy, since we spent WAY too much money this year. It should have used FY 2008. It doesn’t suggest anything about unwinding the impending disaster of Obamacare, which seriously damages its credibility. It suggests that we take until 2075 (!!!) to raise the Social Security retirement age another two years. We have a crisis in the area of unfunded mandates. I’m 51. Tell me I have to wait another two years to retire on full benefits so that my kids aren’t burdened with as much federal debt to pay for in cleaning up our mess — I’m OK with that! Why do we need 65 years to raise the age another two years?

    There is very little in proposed real spending cuts — almost all of the “cuts” are actually merely cuts in projected increases, and most of these occur four or more years from now. We should know by now that outyear proposed cuts never happen, because the Congress at that time will kill them. In the meantime, as usual, the proposed tax increases ARE real and take effect much more quickly under the proposal.

    The plan calls for settling federal taxation and spending at about 21% of GDP. Since the historic levels for taxation are about 19%, that’s way too high. We need to find a way to keep taxation at 19% and reduce spending to 18% or lower over time, so we can begin to address the debt and outyear obligations.

    Just color me unimpressed.

  • http://www.google.com/ Bobbe

    Mighty useful. Make no mistake, I appricaete it.

  • http://www.google.com/ Bobbe

    Mighty useful. Make no mistake, I appricaete it.


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