The Entitlements No One is Talking About

Here is an article I just published in The Fiscal Times, prompted in part by Leonard Burman’s work, on the staggering size and automatic growth of “tax expenditures” — tax breaks, for us non-budget mavens.

Everybody knows that tax breaks — on everything from mortgage interest to green-energy projects — permeate American life and often amount to backdoor government spending. Republicans love to promote tax cuts, because they seem to strike a blow against Big Government. Democrats love them because many tax breaks are a way to fund favored social programs.

What you may not know — I confess that I didn’t — is that the cost of existing tax breaks rivals the costs of Medicare and Social Security and is growing every bit as fast as the two giant entitlement programs. In fact, the automatic escalation of tax breaks is very similar to that of entitlement programs.

Some factoids:

• Aggregate revenue drain from tax breaks topped $1 trillion in 2009 and actually exceeded the total money collected from personal and corporate income taxes. By contrast, Social Security outlays are expected to hit $730 billion this year and Medicare to hit $451 billion.

• The cost of existing tax breaks is soaring three or four times as fast as inflation. Even if Congress doesn’t add a single new one, the automated escalation — above and beyond inflation — will cost the government $2.85 trillion between now and 2020.

• The biggest single tax break, for company-paid health insurance, will drain about $160 billion in 2010 and about $248 billion in 2015. Those estimates are straight from Treasury, by the way.

Those are huge amounts of money, but they are almost completely off the public radar. Public debates about long-term fiscal problems always focus on the growth of Medicare and Social Security. That’s fine, but it ignores a huge part of the issue.

Burman, somewhat facetiously, proposes that we simply freeze tax expenditures for three year and cap their growth after that at the rate of inflation. For practical and political reasons, that isn’t going to happen.

What could be possible, though, is a top-to-bottom tax reform, ala 1986, that wipes out most tax breaks and lowers overall rates. At the end of the day, the total tax burden would have to go up. But that’s a discussion worth having.