That’s a lot of spending through the Tax Code as described by Urban-Brookings Tax Policy Center Director Donald Marron at lunch today before the National Economists Club — between $600 billion and $700 billion annually, and that’s counting both individual income and corporate tax preferences, but corporate preferences are small in comparison. In the last normal year, in 2007 before the recession and the stimulus bill, federal spending was 19.6% of GDP according to Treasury, but “spending-like tax preferences” raised that to 23.7% of GDP.
- Spending in the Tax Code should get the same scrutiny as regular spending;
- Some revenue increases make government smaller:
- Reducing “spending-like tax preferences” would generate new revenue for deficit reduction, rate cuts, or both, and are likely key to deficit reduction efforts.
He noted the $6 billion a year ethanol tax credit might not have been adopted if it had to be a regular spending program.
To the extent that a spending program would more efficiently deliver an incentive, say as a replacement for the home mortgage interest deduction, raising revenue would shrink government.
Lowering tax rates and the deficit may depend upon reducing “spending-like tax preferences.”
The largest “spending-like tax preference” by far is the exclusion of employer-provided health insurance, which provides the most benefit for those with the highest incomes and the best plans. In 2011, Treasury listed it as reducing federal income tax by $174 billion and payroll taxes by $108 billion. That $282 billion total dwarfs the next largest preference the $89 billion home mortgage interest deduction, which only goes to homeowners with enough deductible mortgage interest to exceed the standard deduction and which increases in benefit the higher their tax bracket. 401(k) retirement plans reduced revenue by $63 billion; the Earned Income Tax Credit by $62 billion; the itemized deductions for charitable giving, $40 billion, and state and local taxes, $38 billion; capital gains, $38 billion; and accelerated depreciation of businesses filing on Form 1040, $18 billion. The complete Treasury list is on pages 246 to 251 here.
Marron is looking for a more concise politically neutral term in place of “spending-like tax preferences” if you sound-bite savvy readers can help him out. He has discarded “tax expenditures” as too politically loaded. Harvard Law Professor Stanley Surrey originated that term in 1967 when he was Assistant Treasury Secretary for Tax Policy. The Tax Policy Center has a large collection of data, analysis, and articles on the subject here.
Previously, Donald Marron served as a member of the President’s Council of Economic Advisers, as acting director of the Congressional Budget Office, and as executive director of Congress’s Joint Economic Committee. Before his government service, he taught economics and finance at the University of Chicago Graduate School of Business and served as chief financial officer of a health care software start-up. Marron is also a visiting professor at the Georgetown Public Policy Institute.