I’m on a mini vacation this weekend, looking out at the Pacific Ocean and appreciating the here and now but also contemplating my goals for the future, both personal and professional. Sometimes these goals overlap, and most people would find it strange that I’m moved to blog on fiscal policy even while on vacation. But you see, I’ve made myself a personal commitment to work harder on the issue of tax expenditures, tax reform, and bipartisan solutions to the deficit problem over the next few months (to few years, I anticipate). I want to better explain the ways in which (most) tax expenditures are economically equivalent to spending-side subsidy programs. I also want to look at the reform of the tax system and reductions in these tax expenditures from a fiscal policy, and not just tax policy, perspective. This entails demonstrating the ways in which these tax-side spending programs are an even better target when it comes to deficit reduction than most spending-side programs–for reasons of economic efficiency, income distribution (fairness), and/or fiscal sustainability (the projected growth in their cost and hence their contribution toward the deterioration in the fiscal outlook over the next several decades).
To do this effectively, we have to start talking about tax expenditures more like we talk about direct spending, regardless of the asymmetry that still exists in the official federal budget process because tax cuts are not annually appropriated–even when they are enacted to expire after only a year or two. (For this reason, most tax cuts are more akin to entitlement programs rather than annually-scrutinized discretionary spending.) So I’m going to spend some time trying to change our vocabulary on tax expenditures in highlighting particular types of tax expenditures as examples of spending our society might rather cut than the direct spending programs the small-government types tend to limit their attention to.
While President Obama and his Administration have been good at making the general point that there’s a lot of federal spending that’s run through the federal tax code (around $1 trillion/year, as much as all of discretionary spending combined), they have not been very good at following up with an internally-consistent set of budget proposals. The President still tends to emphasize “tax reform” (such as in his corporate tax reform suggestions) as a revenue-neutral proposition, seeming to buy into the Republican view that raising revenue as a share of GDP would grow government even if higher revenues come from broadening the tax base and reducing tax preferences (”tax expenditures“). And whenever the President talks about the need for revenue-side solutions to the deficit problem, it’s not so much in the context of a more efficient and fair tax system via “tax reform” (that would reduce those tax expenditures fairly broadly), but rather in the framework of “it’s only fair” that we raise “taxes on the rich”–no matter how that’s done, via broadening the tax base or increasing tax rates.
So even when the President actually embraces the idea of reducing tax expenditures (such as limiting itemized deductions) to raise revenue and reduce the deficit, his limiting that policy to only households with incomes over $250,000 makes it sound less like a smart way to cut spending and much more like just another proposal to raise taxes on the rich. And even though Administration officials like to point out that they don’t engage explicitly in “class warfare” in their rhetoric about those taxes on the rich (because they don’t blame the rich for being rich nor suggest they deserve to be punished for being rich), the fact that they want to limit revenue increases of any sort to those that would raise burdens only on those over $250,000 makes it sound a lot like class warfare to a lot of people, especially to those Republicans whom the Administration supposedly wants to bring on board for bipartisan solutions to the deficit problem.
So while the Republican pledge to not raise taxes in any way, shape, or form at any time is obviously the much bigger road block in achieving meaningful, smart, and bipartisan deficit reduction (which will require a mix of spending cuts and revenue increases), I actually think the secret “open sesame” code is more in the hands of the President and the Democratic leadership in Congress–and all of us who are not entrenched in the “no new taxes” view. We need to do a better job framing our preferred approach of including revenue-side ways to reduce the deficit, to make it clearer that reducing tax expenditures means reducing spending and reducing the deficit in a fair and economically-efficient and even widely preferable way.
I’ll be working on this for awhile. Hope you’ll stay tuned.