13 July 2011

Tax Spending

Greg Mankiw's Blog | Spending Hidden in the Tax Code

The blue line is total discretionary outlays of the federal government, and the brown line is the sum of tax expenditures. Both are in constant dollars. Note that these two categories of spending are about equal in magnitude. It is just as important to focus on stealth spending implemented through the tax code as on explicit spending.
This is a good chart.

I would like to see a "compromise" solution to this mess which raises revenue by eliminating these sorts of tax provisions. I don't think I'll ever get one, but sometimes it's nice to dream.*  Team Blue gets higher taxes (sort of) without Team Red having to raise tax rates (essentially). Team Red made a mistake in drawing their line in the sand at "no tax increases." The line should have been "no increases in tax rates," thereby leaving the door open to increased revenue.

(* Also from the files of Sensible Solutions to the Debt Ceiling Debate That Will Never Happen, see Tim Carney's proposal.)

Politics aside, eliminating these sorts of provisions is a good move, for reasons I don't feel like elaborating on.

I do worry about the rhetoric surrounding these issues though. "Tax expenditure" is a slippery phrase. Often appropriate and accurate, but slippery nonetheless. I see it used too often from a perspective that assumes all income belongs to the State, and any dollar not paid in taxes is therefore an expense for the fisc.

(For instance, the source of this chart lists lower capital gains rates as a tax expenditure.  Here is a good example of why I think this is incorrect, with a more complete example here, both from Steven Landsburg.  Here is Megan McArdle on the difficulty of measuring how much tax expenditures cost.)

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