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CBO: A Sustained Loss in Revenue That’s Largely Spending In Disguise

January 26th, 2011 . by economistmom

Today the Congressional Budget Office released their budget and economic outlook report.  Since last August, the outlook for the ten-year budget deficit has deteriorated by $1.4 trillion (see Table A-1 on pages 106-7).  Note that more than 100% of the deterioration is due to revenue losses; projected federal revenues over the (fiscal years) 2011-20 period declined by $1.9 trillion–a net $713 billion due to recent legislation (the lame-duck deficit-financed tax cuts), but a larger $958 billion due to negative revisions to the economic forecast and the interaction of those economic changes with our less-than-adequately-robust-or-resilient income tax base.

And as the CBO highlights in their revenue chapter (see the box on pages 96-97 of the report), reductions in revenue don’t usually correspond to declines in the size of government, because most “tax cuts” are of the “tax expenditure” variety that are more appropriately characterized as spending programs in disguise.  As CBO explains it:

["Tax expenditures"] are similar in some ways to government spending. Like spending programs, tax expenditures provide financial assistance to particular activities, entities, or groups of people. They are more similar to entitlement programs than to discretionary spending because they are not subject to annual appropriations and any person or entity that meets the requirements can receive the benefits.

One Response to “CBO: A Sustained Loss in Revenue That’s Largely Spending In Disguise”

  1. comment number 1 by: AMTbuff

    I have been listening to the January 14 conference on Tax Expenditures (webcast available at The first panel was all about raising taxes using “low salience”. I call it deception, guaranteed to reduce taxpayer cooperation. I’ll comment more on that subject another day, but I advise you to skip that section.

    The second panel gave the best summary of tax expenditures I have ever seen. It wasn’t the usual “tax break = spending, so there’s no harm to removing the tax break and spending the extra revenue on something different”. That simple syllogism is how I interpret Diane’s position on tax expenditures. Not that I want to single out Diane, since until this conference I thought that almost all experts believed that tax expenditures were equivalent to spending, full stop.

    The panel presentations made it crystal clear that the term Tax Expenditure encompasses a broad range of provisions. If you are short of time, focus on Linda Sugin’s presentation. All presenters agreed that the term Tax Expenditure requires an idealized baseline, and that experts disagree about its design.

    Different speakers had different ideas of how to categorize tax expenditures, but they agreed that most of these provisions are not simple giveaways to special interests. Most are defensible on principle, well targeted to their objectives, and arguably more efficient than any spending program could be.

    Some provisions move the income tax in the direction of a consumption tax. Some provisions represent attempts to measure disposable income. Some provisions are effectively rate reductions. All of these are defensible in terms of fairness, making it a real stretch to categorize them as spending.

    As Linda Sugin concludes, simply sweeping away everything that you label a Tax Expenditure could decrease fairness. That’s a point I have been making here for months.