Is the “tax expenditures” concept a helpful approach?

The other day, I griped in the comments section of The Atlantic about Obama treating the removal of the tax exemption for investment income in 529 plans and a bump in the “refundable tax credits” as effectively equivalent, and I got replies to the nature of “they’re all tax expenditures, and all equally worthy or unworthy.”  So I thought it would be useful, in the context of a tax reform that hopes to simplify taxes by swapping special benefits in favor of lower marginal rates, to think about the types of so-called “tax expenditures.”

Here’s my list:

1) Out-and-out tax credits, especially when a matter of “refundable tax credits,” are functionally no different than government benefits being doled out.  Example:  child tax credits or tax credits for purchasing a hybrid or electric car.

2) Tax-deductions that are wholly unconnected to the nature of the income being taxed are suspect, too.   Example: deductions for mortgage interest or local property taxes.

3) Tax-deductions that are directly related to the cost of earning income.  Really, these shouldn’t even be up for debate, but some are:  most significantly, the cost of child daycare should be a direct deduction from the secondary (lower) earner’s income.

4) But differing tax treatment for different types of income are no more “tax expenditures” than are different tax brackets for different levels of income, are they?  The biggest issue here is, of course, different treatment for investment income, and, as a subcategory, investment income dedicated to a specific long-term savings cause (retirement or education).

Now, I’d be willing to chuck the lower rates for capital gains if it was balanced with inflation-indexing:  given that surely virtually anyone with capital gains is doing their taxes on a computer, it wouldn’t be that hard to add into the cost-basis calculation an indexation that ups the cost basis to current dollars.  We also could restructure interest income reporting to split interest up into “up to CPI” and “in excess of CPI.”  And dividends?  Well, if it’s double-taxation to tax dividends in personal income tax and corporate tax both, then we could permit companies to pay dividends out of pre-tax earnings, then make them taxable at the individual level.

Anyway . . . just a few thoughts.  What do you think?