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February 24, 2012 10:55 AM Taking on Tax Expenditures

By Ed Kilgore

Two very influential writers—WaPo’s Ezra Klein and New York Times columnist David Brooks—chose today to address the murky but essential subject of “tax expenditures”—the ever-growing use of tax incentives to promote a vast array of worthy and unworthy social and economic objectives. Both rightly note that tax expenditures are a large and unescapable part of the federal budget, not just—as many conservative disingenuously claim—some sort of act of forebearance whereby Uncle Sam selectively allows Americans to “keep their own money.” Both also note that any long-term plan to address the country’s fiscal problems must include a close look at tax expenditures. And both seem to think that wary gestures in the direction of limiting tax expenditures recently taken by the Obama administration and GOP candidate Mitt Romney, in the context of rate-lowering “tax reform,” could lead to real progress.

But as Cornell University professor Suzanne Mettler noted in a major article on tax expenditures for the Washington Monthly’s July/August 2011 issue, Barack Obama actually did try to limit major tax write-offs for wealthier Americans back in 2009:

In his first budget to Congress, President Obama proposed to rein in the tax breaks given to the most affluent Americans via deductions for charitable contributions and home mortgage interest by capping their value at a rate lower than the marginal tax rate assigned to those in the upper income brackets. Instead of being able to deduct 39 or 36 percent of the value of their mortgages, in other words, single Americans making more than $174,400 per year would only be able to deduct 28 percent—the same as those who earn $83,600 a year. (This change would actually have reinstated restrictions on tax breaks that existed during the 1990s, signed into law by President George H. W. Bush and ended by his son George W. Bush in 2001. During the decade in which these restrictions were in place, housing prices and charitable contributions soared.) Obama’s proposal was projected to save the federal government $267 billion over ten years—45 percent of the funds needed to finance health care reform.

This modest effort to limit tax expenditures, noted Mettler, immediately generated a vast and powerful lobbying effort, especially by charities.

The proposal never had a chance. Rent-seeking crony capitalism reigned, with interest groups protecting the subsidies that benefited themselves and the affluent, and ordinary Americans had no inkling of what had transpired.

The stakes in this unequal fight, Mettler argued persuasively, were much higher than the proposed budget savings that were subsequently lost. Lost, too, was an opportunity to secure public recognition of what she calls a “submerged state” of subsidies that even beneficiaries often do not acknowledge or understand. Indeed, it’s a big part of the political anomaly whereby many millions of middle-and-upper-income Americans are by any realistic definition on the “public dole” but consider themselves overtaxed and under-supported victims of more visible and direct expenditures for the poor, the disabled and the elderly via public safety net programs.

And while many tax expenditures originated with conservatives, progressives have often become their staunchest supporters, despite the perfidious corrosive impact not only on the budget but on public support for an effective pubic sector:

For too long, progressives have accepted the conservative playbook, creating and expanding tax expenditures on the assumption that they can tilt some of their benefits to low- and middle-income Americans. As long as this cornerstone of the submerged state is left intact, it fosters the delusion that governance is generally ineffective and unhelpful to most Americans, and it prompts people to attribute to markets more credit than they are due.

So yes, it’s encouraging that there is a small renewal of interest in the “submerged state” and its massive costs and sometimes overrated benefits, even if the interest is in part ironically attributable to Mitt Romney’s efforts to look slightly less plutocratic as he seeks to cut tax rates on the wealthy and corporations. Let’s hope this isn’t just another one-day story.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • skeptonomist on February 24, 2012 11:20 AM:

    The biggest beneficiary of the "charitable" donation exemption is churches. This is tax money directly diverted to religion. A fairly small part of this actually gets to materially helping people and a large part to lobbying and trying to convert people (sending Mitt Romney to France for example).

  • Trinity on February 24, 2012 11:31 AM:

    Best democracy money can buy.

    Ugh, how well and truly fucked we are.

  • Rabbler on February 24, 2012 11:51 AM:

    Had the changes been implemented and applied to health care, what percentage would have passed directly to the insurance companies for no additional services rendered?

  • exlibra on February 24, 2012 2:21 PM:

    What I'm waiting for is for the political contributions -- to candidates, parties, and super-PACs -- to become fully tax-deductible. It's, for example, trampling on the First Amendment rights of people like Adelson and The Brothers Koch, not to be able to claim charitable deductions on those.

  • Mr Dave on February 24, 2012 4:01 PM:

    Is it impolite to ask whose money is it, the government's or the individual's?
    Wish I were rich enough to be a liberal.
    Maybe one day my biggest worry will be choosing between Sidwell, St Alban's or GDS. ( For those of you outside the beltway those are expensive private schools where much of the DC liberal establishment sends their kids while saying how much they support public education))

  • HMDK on February 25, 2012 7:42 AM:

    Hey, Mr. Dave.
    Have you been blind and deaf for decades?
    If not, you'd realize a great many things.
    First of which, is that the screwing over of the middle and lower class has been done most agressively by conservatives.
    "rich enough to be a liberal"?
    Who are you trying to kid, here?
    The republican party has been going full throttle for tax cuts to millionaires and those even richer for decades, while kicking those below.
    Sad to say, yes, democrats have been following their lead, but they're nowhere near as pathological in their pursuit. Your remark is so off base as to be nonsense.

  • Jim Keating on February 25, 2012 12:39 PM:

    The third rail of government giveaways called tax expenditures , a benefit hidden in the tax code, regressively benefiting the more affluent of our society.

    I say third rail because these tax expenditures add over One Trillion a year to our budget deficit, more than Medicare ,Medicaid, Social Security and Defense combined and nobody equates them to government giveaways. Tax expenditures, earmark tax reductions to promote special interests. Even though they are tied to taxes they are designated earmarks.

    Expenditures are the same as entitlements in over all effect. A dollar lost through tax expenditures equals a dollar spent. The only difference , it’s spent before received, and the bureaucracy that oversees it is the IRS. This is why conservatives want to de-fund the IRS. A dollar not received is the same as a dollar spent. Tax expenditures are legitimately owed but forgiven; therefore, they are not tax increases when discontinued .

    Tax earmarks should be received by the government as tax revenue, then, if it is an effective earmark be distributed as an entitlement.

    This much needed oversight would guarantee effectiveness creating intended consequence of eliminating the deficit. These expenditures are fiercely protected by the conservative republicans. They like to cast removal as a tax increase rather than eliminating an entitlement. Smoke and Mirrors are used to create irrational fears to gain the desired result, regressive distribution of the tax burden.

    Tax expenditures tend to benefit higher-income individuals compared to many other spending programs. Not only are higher-income individuals likely to be subject to higher tax rates, but they are also more likely to itemize deductions, to have significant capital investments, and to own their homes-all characteristics associated with tax expenditures. Then,
    we have expenditures designed as corporate welfare; a story for another day. Remember, Tax Expenditure Reduction = Deficit Elimination “Problem Solved“.

  • Patango on February 25, 2012 3:16 PM:

    Well put Jim Keating and agreed

    I thought it was great Obama came out with this when he got in office , then I was appalled to see the wealthy dems turn on him about it , my impression is everyone SAYS we need tax reform , then big money does all it can do to stop it and succeed every time , it is a huge part of the paradigm to keep the status quo in DC , and it will take the 99% to get really involved to overwhelm DC on this issue , much like electing the 1st black president ...

  • dsimon on February 26, 2012 3:49 PM:

    Mr.Dave: "Is it impolite to ask whose money is it, the government's or the individual's?"

    It's not impolite to ask. But regardless of the answer, we have to devise an equitable way of paying for programs we say we want. I'm happy to "let you keep more of your money" if you're willing to tell me which of your programs or services you're willing to give up in return.

    "Wish I were rich enough to be a liberal."

    Isn't it liberals who are advocating measures such as capping tax deduction rates at 28% and conservatives who are generally fighting it, even though these changes would primarily affect the wealthy?

  • INTJ on February 27, 2012 12:57 PM:

    dsimon: "We have to devise an equitable way of paying for programs we say we want."

    There is no definition of "equitable" with which I am familiar that would have one group of people paying a different proportion of their income in taxes simply because they can. Equitable would be a flat tax rate, where everyone pays the same proportion. As to "what we say we want," that is immaterial, compared to for that which the U.S. government should be paying.

    The problem is that not everyone "wants" the same things, so our government tries to give people everything. The simple truth is that there is no way to pay for it all, and there never has been.

  • David Brown on February 27, 2012 2:32 PM:

    Firstly the top ten "tax expenditures" account for 80% plus of the "lost" revenue. Secondly 85% or more of the "tax expenditures" are for individuals, not businesses. Thirdly the top ten were essentially all in place when the Reagan tax reforms were made in 1986 etc. Fourthly the "tax expenditures" have follow-ons and cahnging one changes other tax revenue streams (i.e. eliminate mortgage deuctability and you reduce AMT as well). In other words the major items (i.e. mortgage deductions, local and state tax deductions, employer provided healthcare etc.) have been in place for decades and benefit hundreds of millions of people, most of them voters!