If you’re interested in the debate about federal taxes, I highly recommend the Washington Post’s report about tax expenditures, a.k.a. spending in the tax code.
Some people on the right scoff at the idea that tax breaks should be considered government spending, and I agree with them that there’s a fundamental danger in such phrases from the Post story as “the government has reached a rare milestone in tax collection — it has given away nearly as much as it takes in.” The government doesn’t “give away” your income back to you. It was yours to start with. Suggesting otherwise leads to the slippery slope of talking about how much of your money you “deserve” to keep.
At the same time, I think it’s very short-sighted for conservatives to let any and every tax credit and loophole count as good tax policy. Some tax credits very clearly are nothing but a different mechanism for promoting government goals and policies, and those very same conservatives would object to the government doing so with appropriations. They would, rightly, call those appropriations “subsidies.” Well, they’re still subsidies if they come in the form of tax credits awarded for a particular activity.
There may be an argument to be made that tax credits are a more efficient and less politicized way of promoting certain goals: They apply to everyone equally, and they don’t require a bureaucracy to receive applications and make judgment calls about who does or doesn’t receive some of the limited funds appropriated for the purpose (and bow to lobbying pressure, either directly or applied to their bosses). But it’s also a less transparent mechanism, because most credits live forever in the tax code — and require very little in the way of verification that they worked.
Put another way: The loan made to Solyndra and the company’s subsequent bankruptcy are, appropriately, receiving scrutiny as an apparent misuse of federal funds. But how many Solyndras have taxpayers unwittingly funded through tax credits, with equally poor results?
The Post’s article is worth reading in its entirety, but I want to highlight two points.
First, if you think these tax breaks are mostly about “special interests” or “the rich,” think again:
“The big money is in the middle-class subsidies,” said Syracuse University economist Leonard Burman, former director of the nonpartisan Tax Policy Center. “You’re not going to balance the budget by eliminating ethanol credits. You have to go after things that really matter to a lot of people.”
The vast majority of tax breaks, both in the number of loopholes and their value, apply to individuals, not corporations — as you can see in this very interesting and informative graphic.
Second, this is a bipartisan problem that began almost as soon as President Reagan and congressional Democrats overhauled the tax code in 1986 to remove loopholes and lower marginal tax rates:
With no place else to go, lawmakers — particularly Democrats — latched onto the tax code as a vehicle for new initiatives. … [I]t started in 1986 with the low-income housing credit for developers and investors. As Reagan’s budget cutters were slashing direct spending on housing, Rep. Charles B. Rangel (D-N.Y.) won bipartisan support for the credit, which quickly became a primary source of financing for housing construction and rehabilitation.
The trend accelerated under Clinton, who found Republican lawmakers far more willing to finance his priorities in the form of tax cuts than as new spending.
NB: I cut from the above quote a line about Grover Norquist of Americans for Tax Reform and his “taxpayer protection pledge” for lawmakers. It’s not because I wanted to obscure that point, but because I plan to expand on it in another post in the near future. And we should have plenty of other fodder for discussion today.
P.S. — In a related note: As predicted, President Obama’s decision to focus on eliminating loopholes only for higher earners, while raising tax rates on them rather than lowering them, is making life more difficult for the congressional committee charged with proposing solutions for the debt and deficit.
– By Kyle Wingfield