A good explanation of removing spending from the tax code
There is much debate among conservatives about what exactly constitutes a tax increase. Obviously, raising rates qualifies.
But while some people seem to think it’s anything that causes anyone anywhere to pay any more in taxes, there are others of us who recognize that most tax credits and deductions are really government spending by another means. In fact, it’s a more pernicious form of government spending because it favors certain activities and people over others (as opposed to a broader policies that apply to all income and earners) yet is largely hidden and shielded from the annual budgeting process.
I could go on — and have done so in the past — but former Reagan economic adviser Martin Feldstein, in a new piece for the Weekly Standard, does a very good job of making the case:
When the government gives a tax credit to homeowners who buy solar energy panels, it’s just like giving them a cash subsidy to buy those panels. But it’s recorded as a reduction in taxes rather than as an increase in outlays.
Similarly, when the president calls for an increase in the child care credit, that’s also treated as a tax cut rather than the rise in spending that it actually is.
According to calculations of the Treasury Department that are hidden deep in the government’s annual budget, there are hundreds of billions of dollars of spending every year that are recorded as tax reductions. The biggest of these “tax expenditures,” as they are called, is the exclusion of employer health insurance premiums from the taxable income of employees. That exclusion resulted in a tax reduction of $160 billion in 2010 and is projected to be $1.4 trillion between 2010 and 2016. That’s a $1.4 trillion subsidy to health insurance that is disguised as a tax reduction. …
Limiting tax expenditures should have bipartisan appeal. Republicans should welcome limits on tax expenditures as a way to cut hidden government spending. Democrats should accept it as a way to raise the revenue that they insist must be part of any deficit reduction plan. … it is also a natural way to achieve an automatic “failsafe” mechanism to make sure that deficits decline as promised.
Although limiting the use of tax expenditures would produce additional tax revenue, it is very different from other possible revenue increases. It doesn’t raise marginal tax rates, doesn’t discourage work or entrepreneurship, and doesn’t tax saving and risk taking. It is really a reduction in government spending, not a tax increase. And deep enough cuts in tax expenditures would actually allow reductions in personal tax rates as well as in budget deficits.
Of course, such a change would discourage — or stop encouraging — certain activities. But why would those of us who favor limited government be opposed to that? Of course, there are some incentives in the tax code that can be justified, just as the proper level of federal appropriations is not zero. And deductions for things like health insurance and mortgage interest would have to be handled very carefully and gradually so as not to disrupt huge sectors of the economy, even if there is ample reason to think that removing these distortions — again, carefully and gradually — could actually make those sectors stronger in the long run.
In any case, Feldstein supports not eliminating itemized deductions but capping them at 2 percent of a taxpayer’s adjusted gross income. That would allow for a certain amount of incentives without overly distorting individuals’ decision-making.
Feldstein writes that he and two co-researchers studied such a policy and
found that if a 2 percent cap were in effect in 2011 it would result in additional tax revenue of $278 billion. That’s the extra revenue for just a single year. In a decade it could produce more than $3 trillion of additional revenue, enough to achieve a substantial reduction in the national debt while also permitting cuts in personal tax rates.
The tax expenditure cap could also play a key role in a failsafe plan. The tax expenditure cap could initially be set at a larger percentage of adjusted gross income, thus producing less revenue, but could be scheduled to become a tighter cap if additional revenue is needed. An initial cap of 5 percent of adjusted gross income would produce revenue of $110 billion in 2011. If the other outlay cuts and the rise in revenue resulting from economic growth brought the deficit down along an agreed path over the coming decade, the 5 percent cap could remain. But if deficits remained unacceptably high, the cap could be reduced to 3 percent or 2 percent.
Ideally, as I’ve stated before, the removal of deductions should be balanced by lowering marginal tax rates. And in the long term, that’s still true. But if such a policy represented the $1 of new tax revenues for $3 in spending cuts that bipartisan panels have recommended for closing budget deficits and paying down the national debt, I could live with that deal.
– By Kyle Wingfield
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92 comments Add your comment
the red herring
May 24th, 2011
4:32 pm
put in a fair and flat tax—i’ll bet those that argue against it have never bothered to read the info at http://www.fairtax.org —do a thorough search of that web site and you will see it can work. right now the middle class gets screwed the worst—the truly rich (over 500k/yr income) have so many loopholes they don’t pay their fair share—-the EITC class either pay no federal income tax or actually get rewarded in excess of what federal tax they should have paid by means such as the EITC. The folks in the middle 50k to 500k get screwed because they don’t have any loopholes, no EITC, no high dollar tax attorneys (like GE) to keep us from paying a dime…. if the “true” middle class would band together (call it tea party or whatever) and force our government to tax everyone the same—eliminate loopholes, tax credits, etc. then our tax rate would be low enough for everyone to live with it and we would be able to take care of our seniors and disabled. folks like herman cain, bachman, perhaps even pawlenty and gingrich could fit that mold. the establishment from either democrat or republican parties (e.g. obama, huntsman, and the highly recruited mitch daniels) will not benefit the country nor the middle class. The middle class is dwindling and simply can’t afford to foot the bill for illegals, lazies, and folks having children to increase their government checks any longer. The middle class can’t escape taxes like the rich and the folks deemed as democratic voters that never pay taxes (EITC folks, illegals, etc). a friend of mine educated his wife and took his family of 4 on vacation every year with his tax refund of over 2k plus his earned income tax credit of over 3k each year—they did apply their refund to her education so they no longer get all their tax $$ back—but for 6 years or so they milked the system for all it was worth. still it’s not the middle class’s job to foot that bill— the people that actually paid that tax money probably didn’t get a vacation to disney world so basically that’s income redistribution at it’s worst….. Nobama in 2012… no old style republican either……
MarkV
May 24th, 2011
4:32 pm
Kyle,
A progressive tax code is not social engineering by any imagination. It is merely the result of a realization that in a free market society the moneys people make are not fair rewards for the contributions they make.
Screwy Louie
May 24th, 2011
4:33 pm
A momentary diversion:
If you haven’t heard or read about the president dating something today as 24 May 2008 take a look at the story. But more interesting is his signature, which looks like one developed for use by a pompous a$$. Who in the world, other than a narcissist or a person of arrogance signs this way?
http://nymag.com/daily/intel/2011/05/president_obama_has_no_idea_wh.html
Gramps
May 24th, 2011
4:35 pm
According to the IRS website, you pay estate tax on amounts over $3,500,000 that do not go to your spouse or charity.
You do not pay income tax on gifts under $13,000 and you do NOT pay income tax or inheritance tax on money inherited. However, you have to calculate the basis in the inheritance property on the day you receive it. Then if you make money on the sale of that property you will pay capital gains tax on any money ABOVE your basis.
MarkV
May 24th, 2011
4:39 pm
A sure sign of idocy: To point up simple mistakes as something worth talking about, and making judgments based on the form of a signiture.
Linda
May 24th, 2011
4:40 pm
I did not know until today that some socialists/progressives do not know they are socialists/progressives. No wonder they are socialists/progressives.
Kyle Wingfield
May 24th, 2011
4:43 pm
MarkV @ 4:32: I believe this “realization” is not as universal as you make it out to be.
Kyle Wingfield
May 24th, 2011
4:45 pm
Obviously, I’m not a CPA. I was looking at point 15 of the section of the Internal Revenue Code that defines gross income…if I was mistaken, my apologies.
http://www.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000061—-000-.html
What??
May 24th, 2011
4:49 pm
LOL @ Linda’s what did your children do to you line….
hilarious
Kyle Wingfield
May 24th, 2011
4:49 pm
MarkV @ 4:50: Exception to what?
What I mean is that your belief that “in a free market society the moneys people make are not fair rewards for the contributions they make” is not universal.
MarkV
May 24th, 2011
4:50 pm
Kyle Wingfield @4:43 pm: You mean a progressive income tax system is some kind of exception?
What??
May 24th, 2011
4:52 pm
Kyle
Last post about the topic.
You misread it. It was referring to interest in an estate or trust….sort of like interest in a partnership. For instance if your parent’s form a trust and they die, any beneficiary has an interest in that trust. If the trust sells investments, the gain in that investment is taxed. You as the beneficiary receive that gain which is taxable. If you receive cash from the estate purely, you receive the same basis in that cash as your parents, so 1,000,000 to them, is the same 1,000,000 to you. If it earned interest and is now 1,100,000. You are taxed on the 100,000.
Linda
May 24th, 2011
4:54 pm
Screwy@4:33, Obama went on a bumpy ride yesterday, seesawed & lost traction trying to sell Obamacare in Ireland.
http://ajc.newsinc.com/video.html?wid=1529&cid=5051&vid=23417220&freewheel=12699&sitesection=ajc&plg=1527
Bart Abel
May 24th, 2011
4:57 pm
Funny Linda. Adam Smith argued in favor of progressive taxes in “Wealth of Nations”. Isn’t it amazing how he became a socialist decades before Karl Mark was conceived?
Support for a progressive tax structure doesn’t make one a socialist any more than homophobia or opposition to premarital sex makes one a Nazi.
MarkV
May 24th, 2011
4:59 pm
Kyle Wingfield @4:49 pm: Whether tthe US progressive tax is an exception in the world of capitalist countries – it is not. I am not saying that the realization of the unfairness I mentioned is being specifically pointed out, but that in my view it is the basis of the progressive tax concept as well as being a reality.
Linda
May 24th, 2011
5:09 pm
Bart@4:57, That’s not what I said & I was not referring to you. You need to get off this blog & get right with your children.
Jefferson
May 24th, 2011
5:15 pm
Taxes should be paid based on one’s abibilty to pay. Only a greedy person would disagree.
Dan
May 24th, 2011
6:10 pm
There are some here debating the “fairness” of a progressive tax. Which is broad debate and there are many definitions of progressive. Even a flat tax is progressive based on spending levels. But our current system, which is undeniably progessive, is approaching a precipice, some opine that we are already there, where more than half the people pay no taxes. Regardless of your views on progressive taxes, surely there is no cogent argument that suggests this could be beneficial to a productive society. Unfortunately it is human nature to take what you can get, and when that tipping point occurs, the majority will take what the minority has made and that well will quickly run dry
Dan
May 24th, 2011
6:13 pm
Jefferson, would you agree the necessary corollary to that would be that people take from that pool only what they need? If so simple observation would lead you to conclude that there are many taking what they do not need. Both due to sloth and a constant barrage from pols telling them how much they deserve.
MarkV
May 24th, 2011
6:25 pm
Our current system may be approaching a precipice, but not because more than half the people pay no taxes – they do, even if they do not pay income taxes. The potential precipice is due to the fact that the wealth of a small part of the population far exceeds the wealth of the rest of the population and the difference is growing faster and faster. That is the true class warfare we are experiencing.
Linda
May 24th, 2011
6:26 pm
Greedy people don’t pay taxes. Since the top earners pay the most taxes, that eliminates them from being greedy.
Linda
May 24th, 2011
6:29 pm
There are no classes of people in the US. Some people have class & some people don’t.
Moderate Line
May 24th, 2011
6:59 pm
A good explanation of removing spending from the tax code
++++
Very Orwellian.
Moderate Line
May 24th, 2011
7:06 pm
Kyle Wingfield
May 24th, 2011
4:49 pm
MarkV @ 4:50: Exception to what?
What I mean is that your belief that “in a free market society the moneys people make are not fair rewards for the contributions they make” is not universal.
+++
Ok Kyle. Look at the pay for the average shortstop MLB and the average pay for a policeman.
The free market is not a fair market in determining the value of labor but it is better than the alternative. Derek Jeter makes $14 million a year. It is almost impossible to say that is “fair reward.”
Linda
May 24th, 2011
7:27 pm
What will be decided in the 2012 election is WHO determines what is “fair?’
Will it be the American consumers who decide to keep, spend &/or invest their money & where?
OR
Will it be the fed. govt. who decides who the winners & losers are?
Will we keep our free market, free enterprise, capitalist system of govt. that we have died for OR will we revert to more of a socialist system that is bringing Europe down?
Michael H. Smith
May 24th, 2011
8:00 pm
As we agreed before on this very issue we’ll continue to agree, Kyle. You don’t have raise the tax rates to raise revenues and the less Marxist/Progressive the code the better. Secondly, some regulations are hidden subsides given to a select few while it is a hidden tax on the consumers – all and all these type regulations are another form of government spending. Regulations need prudent cost/benefit reviews.
Pleasant evening to all.
Mongo
May 24th, 2011
8:10 pm
Kyle: Sorry but you’re looking at it backwards. Not taxing inheritance is really Social Engineering since you are treating one source of income differently that other sources. ALL income should be taxed equally. No playing favorites. Why should wages be the most penalized and highest taxed form of income? Why should waiting for grandpa to die not even be taxed at all? Is being a trust-fund baby somehow more noble than working for your money?
And the canard that inherited money “is already taxed” is a ridiculous red herring. All money is taxed every time it changes hands, so why should inheritance be any different? If I pay a plumber to fix my sink, he gets taxed on money I already paid tax on. When the plumber pays his doctor for a checkup, the doctor gets taxed on money the plumber and I both already paid tax on. And so on and so on.
Saying that inheritance shouldn’t be taxed is just letting the fat cats get out of paying taxes on money they did absolutely nothing to earn when the rest of us have to pay taxes on everything we make. That’s nothing more than right-wing social engineering whether you can admit it or not.
Mongo
May 24th, 2011
8:16 pm
I see the parasites are whining and snarling that they shouldn’t have to pay any tax on the ill gotten inheritances. Bad dogs! Taxes aren’t just for little people!
Dan
May 24th, 2011
8:24 pm
Sorry MrkV, but in this country the “poor” or “disadvantaged” or Needy, have far more now than at any time in history. People designated as below the welfare line, have many of lifes luxuries, cars, AC, electronics, jewelry, and on and on. just a generation or two ago, middle class had work clothes and sunday clothes, hung there laundry out on a rope on a tree, there were no vacations. Rented apartments had a bedroom for the kids and one for the parents and the baby, and the kids probably shared a bed. Now DFACS would cause a ruckus if you had more than two kids in a room much less a bed. No you are very wrong about the precipice, the precipice is all about, the growing dependency of the population, the wholly unsustainable dependency. This is clear by simple observation, and hidden by ignorance of those who choose to misread sloth for bad circumstance and encouraged by those who wish for others to do the work for them
Lil' Barry Bailout
May 24th, 2011
9:32 pm
Obama signs Westminster Abbey guestbook, dates it May 24, 2008
——————
Idiot.
Lil' Barry Bailout
May 24th, 2011
9:35 pm
Mongoloid, just a quick clue for ya: parasites are folks who demand that the government confiscate the property of others and convert it to their own use.
Barry
May 24th, 2011
9:43 pm
Consumption tax is the only fair tax. Since when is it the government’s businees how much money I earn?
Linda
May 24th, 2011
9:46 pm
There is no use to argue with the socialists/progressives.
Herman Cain said, “The objective of the liberals is to destroy this country. The objective of the liberals is to make American mediocre…”
Either I or they have missed something. I don’t think there is anything to gain from the socialists/progressive agenda except for the powerful in DC. If the average socialist/progressive Joe thinks he will be better off with a new socialist govt., in which he or she thinks everything will be free, paid for by the “rich,” he or she will be greatly surprised when Sugar Daddy or Sugar Mother refuses to play &/or runs out of money.
There is nothing different between socialists/progressives & terrorists, who are both trying to bring down the US.
Jane
May 24th, 2011
10:20 pm
We need to end subsidizing people having kids. If you can’t afford to support your kid, DON”T GET PREGNANT !!! It is not my job to pay to support your breeding habits.
Ted
May 24th, 2011
10:31 pm
My heirs won’t have to pay an inheritance tax because I’m going to pay my estate out in cash before I die. Screw you all.
Screwy Louie
May 24th, 2011
11:11 pm
MarkV
May 24th, 2011
4:39 pm
A sure sign of idocy:
Did someone suggest idocy?
http://blogs.abcnews.com/politicalpunch/2011/05/awkward-moment-during-obama-toast-to-queen-.html
Lil' Barry Bailout
May 25th, 2011
8:08 am
The top five or ten percent of earners who pay almost all the income taxes are the host organism. The rest are the parasites, not paying their fair share.
Parasites: Greedy.
LA VERGA
May 25th, 2011
8:31 am
LIL GOP LOSER……..Hows that ryan plan woking for ya…lol
Obozonomics
May 25th, 2011
8:55 am
FairTax.org fixes all of this…
Barb
May 25th, 2011
9:02 am
Ending deductions would put an end to start up small business. America has been built on this sector of humanity and they could have not survived without tax deductions early on. However, what we do have to get rid of is the massive tax deductions and eliminations for large business who are sending their business abroad. Penalize them with higher taxes (or any taxes) if they use cheap labor abroad instead of American workers.
74 Dawg
May 25th, 2011
9:13 am
Kyle , are you going to tax independent contractors LLCs and sub s corps on their GROSS income, or are you simply re-defining the meaning of legitimate business expenses, i.e. no 2 martini lunches, but the money you actually pay others to provide your business with material, labor and transport and other services would be deductible expenses? It would be rather destructive to tax Ford or Kroger obn the full price of a car or a box of cereal when their actual profit might be 2-5% of that figure. So if employee benefits are out, what about salaries, corporate meetings in Las Vegas and other expenses ad nauseum? Who decides? The IRS ? Congress? Give me a break. The ONLY system that makes actual sense is a flat tax on individuals only, and no tax on corporations – they are all owned by individuals of some kind who pay taxes also, aren’t they? OR a fair tax with a monthly prebate on your first $30,000 in purchases to cover necessities. Your half way measures only re-define the chaos and start the lobbyist polka up from scratch again, just like the Reagan reforms. It is better than what we have, but will eventually end up in the same place. Until the vast majority of citizen voters realize that every new dollar their representatives spend is coming out of their pocket now, in real time the insanity that representative democracy has devolved into will continue…
Lil' Barry Bailout
May 25th, 2011
9:40 am
The Ryan plan is much too modest. I’d prefer deeper spending cuts and balancing the budget more quickly. The Ryan plan will likely not be implemented though, as the parasites have the productive waaaay outnumbered.