Why we need to look closely at spending in the tax code

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.

Great.

– By Kyle Wingfield

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100 comments Add your comment

Hillbilly D

September 26th, 2011
11:28 am

What we need is to reform the tax system. Get rid of all the credits and breaks, tax all forms of income the same and have about 4 or 5 brackets. If two people both make X amount of dollars, they both pay Y percentage of that total, no matter how they make their money. That being said, hogs will fly before it ever happens.

DebbieDoRight

September 26th, 2011
11:28 am

Kyle: 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

Boo Hoo…cry me river. They’ve had tax cuts now for the past 8+ years. They haven’t created all those jobs they were supposed to create, they haven’t reached back and helped out the communities that were devastated by Wall Street’s malfeasance. They only thing they’ve done was to “trickle down” some yellow, stinky fluid on us. They said it was rain………

carlosgvv

September 26th, 2011
11:31 am

Yes, Kyle, this a bipartisan problem that will require co-operation from both sides of the isle. Unfortunately, the Tea Party Congress has made it clear that protecting their wealthy patrons is their one and only concern. Until these Tea Party loons are voted out and responsible Republicans voted in, nothing will change.

JF McNamara

September 26th, 2011
11:40 am

We are approaching the problem completely wrong, and its because of idealogues and dumb propaganda from both parties. The only thing politically palatable right now is to cut taxes, and cutting taxes is revenue negative and only contributes to digging a deeper hole.

Until Republicans drop the “no new taxes” stunt and drop the lie of “ALL tax cuts raise revenues”, we won’t make progress. Until the Democrats get off the tax the rich stuff, and get on the tax everyone a few percentage points more bandwagon, we won’t solve anything.

Both parties need to cut programs dear to them. Until then, its the same old, same old…At least you get a lot of articles out of it.

getalife

September 26th, 2011
11:40 am

“THE GREAT IRAQ GIVEAWAY:

U.S. Handing Over Billions In Bases And Equipment To Avoid Shipping Home ”

Where are the suddenly fiscal cons on military waste?

Dusty

September 26th, 2011
11:59 am

HILLBILLY D,

I hope your sensible solution is considered by those who MIGHT change our tax provisions. It is so fair that one would hope that it might arise on the horizon of government long”before hogs fly”.

But along comes DEBBIEDORIGHT, consumed by wealth envy that never looks beyond those “poor helpless communities”,those magical johnny-jump-up jobs that Wall Street, supposedly a relief agency, should provide.

Maybe Debbie can form her own relief agency. Call it DEPENDS, which Debbie can bravely lead against her perceived flow of “yellow sticky fluid” rained upon poor suffering dependents. Yep, Debbie’s Depends!! Go for it!!

In the meantime, KYLE, keep raising the banner. FAIR TAX CODE FOR ALL. We are in this together. American citizens all equal in opportunity and taxes without exception.

Cosby

September 26th, 2011
12:06 pm

Ahh…another argument for the fair tax. As usual, the 16th amendment was never about funding the federal government but about political postering for the elite in DC

FAIR TAX NOW!!!!

Dusty

September 26th, 2011
12:09 pm

getalife,

When are you going to start supporting the military instead of looking for things to discredit them? Members of the military are risking their lives for you while you sit here using them for political propaganda..

Can you compare costs on your last post? Do you know whether that was a wise decisison or not? Was it outdated equipment? Were shipping costs greater than the value? YOU DON’T KNOW.

Stop your biased complaining.

Dusty

September 26th, 2011
12:15 pm

COSBY,

I am for a fair tax CODE. I believe that is a little differenct from just plain fair tax. I do not support politicians who run on fair tax (for everything). We need the IRS but not for an unspecified coverall fair tax.

DebbieDoRight

September 26th, 2011
12:24 pm

I was over on the sport blogs reading other’s comments when I heard this naying, bleating sound…..sounded sort of like a cat whose tail was caught in the rocking chair. I came back over to this blog and saw this:

Dusty: But along comes DEBBIEDORIGHT, consumed by wealth envy that never looks beyond those “poor helpless communities”,those magical johnny-jump-up jobs that Wall Street, supposedly a relief agency, should provide.

Saw that and I thought, “What the heck? Has Dusty gone off her meds AGAIN?” I mean, what is “wealth envy” anyway? I have zero kids, own property, have a great career, and support and love my country — so I was kind of perturbed when I read her “wealth envy” comment. Is she somehow confusing wealth with “p3nis” and getting all Fraudian on us or something? Oh well, Like I said, I’m always a little confused about what Dusty is posting when she goes off her meds.

Dusty: Maybe Debbie can form her own relief agency. Call it DEPENDS, which Debbie can bravely lead against her perceived flow of “yellow sticky fluid” rained upon poor suffering dependents. Yep, Debbie’s Depends!! Go for it!!

Sigh. Dusty, it is always better to “JUST SAY NO” to drugs, don’t drink and drive and take all medications prescribed to you by your psychaitrist. Going through life fat, drunk, high and stupid is not a pretty sight. Life is so much better when you’re lucid — try it Dusty you just might like it.

Jefferson

September 26th, 2011
12:34 pm

You can hollar Fair, but it will never happen.

Dusty

September 26th, 2011
12:39 pm

Well, hi, Debbie, I see you are all fired up as usual. All I can say is: Is that the best you can do? Repetition gets stale.

Sorry but I don’t “do” drugs, alcohol or meds. Don’t even have a psychiatrist! I do have a few “degrees”. I just disagree with you which you think is “crazy”!

You better get busy with Debbie’s Depends. Those poor mistreated folks need your protection from the “evil rich”.

JDW

September 26th, 2011
12:47 pm

Kyle, I agree with you that it is incredibly short sighted to view this type of spending as “untouchable” and it is SPENDING pure and simple. It is a simple fact of accounting that if you create a receivable (tax bill) and then issue a credit against that bill you have created an expenditure in the amount of the credit. I also agree that most of the dollars benefit individuals but at the same time think that the dollars that benefit corporations should be the first to be cut.

I look forward to hearing what you have to say about “Grover Norquist of Americans for Tax Reform and his “taxpayer protection pledge” for lawmakers”. Grover et al… may not be the gravest danger facing the security of our country but they are damn sure in the top 5.

JDW

September 26th, 2011
12:49 pm

O’ and Kyle one last bit, you said “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”.

Must disagree, the bureaucracy is the IRS and the judgement calls are made every day in audits and tax court.

common sense

September 26th, 2011
12:52 pm

what the Dimwits do not understand is this, if we raise taxes on the Rich, then prices of everything we buy will go up along with those taxes. Our wages will remain flat, and hiring will cease. The rich will also begin to layoff more people, in order to lower their cost to pay for these increases. It is a vicious cycle, as they raise prices to cover these tax increases, their income rises, which means taxes rise. They will raise prices again, to cover taxes, it is called hyper inflation of prices.

I say we reform our tax code, everyone pays the same amount every year, regaurdless of income.

Bart Abel

September 26th, 2011
1:09 pm

RE: “The government doesn’t ‘give away’ your income back to you. It was yours to start with.”

I actually take issue with this comment, which seems to be the foundation of Tea Party activism.

In fact, we all benefit from government services and investments–from infrastructure to defense to education to clean air and water to safe food and products to a transparent financial system to a strong justice system to disaster relief to medical research–without wanting to pay for it or even taking notice of such benefits until they’re not there. Nevertheless, we all benefit we and we all have to contribute. Try living in a country without such services and see how well you succeed with government out of the way.

It was “yours to start with?” So what. So was the money I used to buy groceries and pay my mortgage. But taxes paid isn’t money that goes into a black hole or goes exclusively for the benefit of others. They’re an exchange for the goods and services that had grown the middle class and made our country great. Chipping away at these good and services could ultimately lead to lower taxes…and a smaller middle class…and higher poverty. We’ve seen it happen over the last few decades. It’s time to reverse the trend.

Ayn Rant

September 26th, 2011
1:22 pm

Thanks, Kyle, for deviating from right-wing dogma by calling out tax deductions, loopholes, and special rates for what they are: hidden subsidies, arithmetically equivalent to federal expenditures. Some subsidies may be justified, but they should be enacted as outright expenditures, not buried in the 70,000+ page federal tax code.

Everybody agrees that the Federal Tax Code need to be replaced, not revised and patched. Why can’t we do that? Why is that not more urgent than the debt ceiling increases and stop-gap funding measures that Congress quarrels over?

Eliminating outrageous tax deductions and loopholes, such as “carried interest”, and foolish outright subsidies, such as corn/ethanol, would be a good start to reducing the federal deficit.

Kyle, your continued use of the meaningless catch phrases “your money” or “my money” is obnoxious. Money is just pieces of paper and computer records; it’s meant to circulate. What is my money today was my employer’s or my government’s money yesterday, and will be Kroger’s or Amazon’s money tomorrow.

Jefferson

September 26th, 2011
1:33 pm

If it was “your” money, you would still have it, get over it, it is gone to run the house of reps.

Tiberius - Your lightning rod of hate!

September 26th, 2011
1:46 pm

The logic (or lack thereof) of Jefferson is simply stunning.

ragnar danneskjold

September 26th, 2011
1:47 pm

While tax preferences for favored contributors constitute a solid 10% of the individual income tax code and regulations, fully 40% is nothing but rules to cobble together the “progressivity” element of the “progressive” income tax. From separate percentages for married vs single, to the various deductions for rugrats, to the limitations on various expenditures, it is all there to keep the tax “progressive.” While the maddening twists and turns in the code keep people like me fully employed, any rational economist would embrace a flat tax or a Fair Tax alternative in a heartbeat.

Jefferson

September 26th, 2011
1:57 pm

Too bad, its not going to change.

KyleKyleGoAway

September 26th, 2011
1:59 pm

@ bart abel @ 109pm – you make way too much sense. Your comment, sadly, is over the heads of the confederacy of dunces that includes Kyle and his ideologically blinded acolytes.

Tiberius - Your lightning rod of hate!

September 26th, 2011
2:04 pm

“@ bart abel @ 109pm – you make way too much sense.”

If you like deflection and posting nothing to do with the original post, yeah.

Otherwise, no.

UGA 1999

September 26th, 2011
2:10 pm

KyleKyle…..you do know you do not have to join this blog? Right?

DebbieDoRight

September 26th, 2011
2:36 pm

Sigh – Heard the screeching again…….

Sorry but I don’t “do” drugs, alcohol or meds. Don’t even have a psychiatrist! I do have a few “degrees”. I just disagree with you which you think is “crazy”!

Well there’s only 6 degrees of separation between sane, insane, and plain dang crazy. Guess which side you’re on! :)

brad

September 26th, 2011
2:37 pm

Common Sense: “what the Dimwits do not understand is this, if we raise taxes on the Rich, then prices of everything we buy will go up along with those taxes. Our wages will remain flat, and hiring will cease. ”

If your argument is correct, why did prices not drop after the Bush tax cuts?

UGA 1999

September 26th, 2011
2:38 pm

Brad…..9/11, Iraq, Afganistan….take your pick.

KyleKyleGoAway

September 26th, 2011
2:42 pm

@ Tiberius @ 204pm – an eye for an eye, right? Surely someone as filled with hate as you can appreciate that!

@ uga 1999 @ 210pm – I need my daily dose of crazy. For sh1ts and giggles, you know.

brad

September 26th, 2011
2:43 pm

99. How did those events impact pricing on a micro level, other than for products being purchased by the DOD?

UGA 1999

September 26th, 2011
2:49 pm

KyleKyle….then may I suggest you watch the latest Obama campaign videos regarding this “jobs” plan.

HDB

September 26th, 2011
2:50 pm

UGA 1999
September 26th, 2011
2:38 pm

Question: Why didn’t the Bush Administration PAY for the war effort with a tax INCREASE (as his predecessors have done) rather than BORROWING the money from the Chinese…forcing more borrowing and government SPENDING to arrest the reccession he got the nation into??? Wouldn’t that have been the prudent thing to have done?? That’s why we’re in the boat we’re in NOW!!

UGA 1999

September 26th, 2011
2:53 pm

HDB…..because Bush knew that taxing the American people when the jobless rates were increasing and a recession was looming was NOT the answer.

brad

September 26th, 2011
2:57 pm

99, still waiting for your explanation of tax cuts and micro-economics. You don’t have anything, do you?

KyleKyleGoAway

September 26th, 2011
2:59 pm

@uga 1999 @ 249pm – har har har. Seriously, though – and I’m puttin’ this in language you and your mates will understand – the fakts r nawt on yer syd.

UGA 1999

September 26th, 2011
2:59 pm

UGA 1999

September 26th, 2011
3:02 pm

FYI – I am not all against a tax increase. I dont think it is a great idea. However if you are going to raise taxes then they should be raised for EVERYONE!

brad

September 26th, 2011
3:05 pm

Really? Where?

brad

September 26th, 2011
3:10 pm

Never mind, 99, I can see that you’re in over your head.

Tiberius - Your lightning rod of hate!

September 26th, 2011
3:10 pm

“Surely someone as filled with hate as you can appreciate that!”

KyleKyle, you should read (or understand) English more often.

I am not filled with hate – I am merely a conduit for the hate of others who cannot cope with the reality of the real world.

KyleKyleGoAway

September 26th, 2011
3:20 pm

@ Tiberius @ 310pm – good on ya; you are a republican through and through, a true patriot, to borrow from Herr o’reilly.

HDB

September 26th, 2011
3:40 pm

UGA 1999
September 26th, 2011
2:53 pm

Question: So the solution to BORROW from the Chinese…which further strained the economy….and placed the nation in economic peril was the PRUDENT thing to do?? I don’t get it….especially, in order to ensure national unity, a tax increase to finance wars was necessary!! The only areas of the populace who were NOT called to sacrifice were the WEALTHY…and a tax increase WAS necessary at that point!!

Wrong policies…..wrong implementation……

AngryRedMarsWoman

September 26th, 2011
4:19 pm

It comes down to something this simple – the tax code should not be used to manipulate social or business policy. For individuals, the only deductions should be for other income-based taxes paid…period. For businesses, no special tax breaks or “incentives” for doing (or not doing) something/anything. If it makes sense for a person or business to do (or not do) something they will do it…neither should need a tax/break incentive. If you want a home and it makes sense to you to buy one you should do so – if you need a deduction of the interest payments to tip the scales in favor of home ownership then maybe you should not buy.

November 6, 2012

September 26th, 2011
4:29 pm

DebbieDo, I love you…….. :)

Get Real

September 26th, 2011
4:32 pm

DebbieDoesObama….get a life and get a clue…end of story

Tiberius - Your lightning rod of hate!

September 26th, 2011
4:32 pm

“you are a republican through and through, a true patriot,”

No, and yes.

I Report (-: You Whine )-: Thee Magnificent!!! mmm, mmmm, mmmmm! Just sayin...

September 26th, 2011
4:34 pm

In a normal world, I would probably agree.

But in this era of government waste fueled by the catastrophe that is obozonomics, where no tax dollar is safe from being squandered, methinks that those who are responsible enough to even be qualified for tax breaks, homeowners and businessmen for instance, are far less likely to give it all to some drug dealer.

Just a thought…

Laurie

September 26th, 2011
4:39 pm

Dear Dusty, GET A LIFE! The guy has it right. It’s not about supporting the military. Where you went from point A to 123 on that one, I do not know. getalife is pointing out a story that came out today where the DOD has decided to “give” Iraq billions of dollars worth of installations and equipment from investments made during and after the war. I would like to see the US CHARGE Iraq for what we had to spend over there rather than give it a way. It’s a decision that speaks to the stupidity of those in charge of the DOD… like we couldn’t use the money…

a dad

September 26th, 2011
5:04 pm

Ok y’all, here are some topics for discussion, and I would appreciate hearing each sides suggestions. First, to stimulate employment, how would your particular candidate/political party/ideology/etc. go about encouraging business to expand and hire new workers? Second, compare a flat consumption tax with, say, a slightly progressive flat tax such as everyone pays a certain amount of their income, no deductions, all income taxed the same, etc., then at the end of the year, say those who earn less than 50k apply for and receive a full refund, 50-100k get 75%, etc (all amounts and figures purely arbitrary). OR should we just go with a strictly flat tax (and by the way, has anyone seen any sort of figures about what kind of revenue this was generate? I never have.)
So c’mon y’all, lets hear some real IDEAS and not just regurgitating what some talking head said. How would YOU address these problems? And in commenting, let’s try to do so intelligently for a change, shall we?
I’m waiting …..

I Report (-: You Whine )-: Thee Magnificent!!! mmm, mmmm, mmmmm! Just sayin...

September 26th, 2011
5:07 pm

Like I was just sayin…

PRINCETON, NJ — Americans estimate that the federal government wastes 51 cents of every dollar it spends, a new high in a Gallup trend question first asked in 1979.

a dad

September 26th, 2011
5:09 pm

I Report: good start. What’s the estimation based on, opinion or fact?