Tax expenditures, tax cuts, and IOUs (bonds)

We have seen the argument from some commission participants (Peterson for one) that Social Security is too expensive for those who need it and pay for it because it is an ‘entitlement’. We also have read from some Congress members (Senators Kyl and McConnel) that tax cut extensions of the Bush presidency are not deficit producing and need not be part of pay go.

The Fiscal Times has an article on considerations being undertaken by the Commission for Deficit Reduction. (H/t coberly).

The main theme in this article is that the “tax expenditures” home mortgage deduction and health insurance premium deductions are actually government spending (I assume in relation to the deficit) and thereby letting these taxpayers keep their money is bad. (Because these are “tax expenditures” and not “tax cuts”?)

I see a pattern here unfolding in this series of electioneering statements. Maybe politicians can put it altogether for us before the elections so we know who should pay and who should not in a less confusing way.

Quote is below the fold, bolding is mine:

As the 18-member bipartisan panel met in public for the fifth time, it was becoming clear that the tax system is under its microscope and there are many ideas under review for the long term. The commission’s success has always hinged on whether its leaders could muster support among Republicans for changes to the tax system, and agree to major spending cuts and changes in Social Security, Medicare and other entitlement programs that dominate the budget. So far, the GOP members are still at the table.

The most obvious target is recovering the huge amounts of revenue lost to federal tax loopholes known as “tax expenditures,” which include the home mortgage interest deduction and tax-free health premiums for employees. Proponents of rolling back these breaks say they are essentially government spending via the tax code. But health care premiums and mortgage deductions have long histories and are considered untouchable by some.

Erskine Bowles, one of the commission’s co-chairmen, pointed out that these loopholes cost the Treasury as much as $1.3 trillion per year, which is larger than total tax revenue. Bowles, citing an op-ed by Reagan White House economist Martin Feldstein, suggested that tax expenditures must be part of any serious attempt to limit spending.

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told the commission that the current system of tax expenditures is “one of the most detrimental things to the country.” But she also pointed out that they would be among the more difficult programs to touch.

Senate Budget Committee chairman Kent Conrad, D-N.D., who leads the commission’s working group on taxes, said that he has become convinced that more comprehensive tax reform is necessary to update a system that was built for an era in which the United States did not face global competition. “My own conclusion from this [working group review] is that we really have a tax system that is badly outdated,” he said. “It no longer relates to a world that we are in today.”

In addition to massive lost revenue through tax expenditures, the Treasury loses another $340 billion or so each year in taxes that people owe but simply do not pay, Conrad pointed out. “These are things that require a focus in our work.”

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