A former student posted this Huffington Post article on my facebook page. HuffingtonPost article Needless to say that got my attention. The author, Alexander Eichler, leads off the article:
“Take all the tax breaks in the U.S. tax code and put them together.
You’ll find that they add up — and up and up.
That’s the conclusion of a recent report from the Congressional Research Service, an arm of the Library of Congress that provides research and analysis for federal lawmakers. In a report issued last week, the CRS found that all the major tax breaks currently in use in America add up to about $1.1 trillion a year.”
Coincidentally, that is about the size of the FY 2014 projected budget deficit.
Of course, to get into the tax code is very complicated and requires more than a bit of geekiness, which I mean in a good way. So, I have downloaded the CRS report.
The report lays it out fairly quickly: “One legislative proposal, S. 727, introduced by Senators Wyden, Begich, and Coats, would broaden the tax base by eliminating many tax expenditures and reduce tax rates.
One way to broaden the tax base is to eliminate or reduce tax expenditures, which have been in
the tax code since the passage of the progressive income tax in 1913. An understanding of four
complex issues surrounding tax expenditures is necessary for an informed debate over broadening
the tax base. First, tax expenditures affect the economic behavior of taxpayers (efficiency effects).
Second, changing tax expenditures will change the distribution of tax benefits, and the
distribution of after-tax income (equity effects). Third, changes to tax expenditures could change
the administrative burdens on taxpayers and the Internal Revenue Service (IRS).
Lastly, many tax expenditures are popular among taxpayers and voters. Each one of these issues presents
challenges to broadening the tax base, which could be difficult to overcome.
There are over 200 separate tax expenditures, which are projected to total over $1.1 trillion in
FY2014. The revenue loss of all tax expenditures, however, is highly concentrated in a relatively
small number—the largest 20 tax expenditures account for 90% of the total revenue loss of all tax
expenditures. This amount is equivalent to 74% of the total FY2014 revenue from individual
income taxes. If used for rate reduction alone, eliminating these tax expenditures could allow tax
rates to be reduced by around 43%: for example, the top 39.6% tax rate could be reduced to
Congressional Research Service report on taxes:
Challenges of Individual Tax Reform
Clearly, this won’t be easy. Tax expenditures is a strange concept. More commonly called tax breaks or tax loopholes, it is considered a tax “expenditure” because it means that this is tax money that would have been collected and gone into the revenue column of the federal budget but a law was passed that allowed it to go uncollected.
According to CRS, (p. 6), the top five largest individual tax expenditures for FY 2014 are:
Exclusion of Employer Health Insurance ($164.2 billion), Exclusion of Employer Pensions ($162.7 billion), Mortgage Interest Deduction ($99.9 billion), Exclusion of Medicare ($76.2 billion), and Capital Gains Rates ($71.4 billion).
I don’t understand this really, so I will have to do more research. But I like the idea of finally holding up the full budget picture to the light and asking the tough questions about both regular expenditures and tax expenditures: what are the benefits to the economy as a whole? What are the intended purposes and what are the actual results? I have long questioned the benefits of the mortgage interest deduction, much to the howls of students in my classes. Of course, home owners like getting that deduction, but the larger question is whether it really is needed in terms of national goals. Would people still buy homes if it was not there? Would mortgage interest rates be lower if that deduction was not in place? Given the recent housing bubble, what role did the mortgage interest deduction play in hyper-inflating housing prices? Did it play a role in encouraging people to buy houses that were truly beyond their means? Lastly, who gained the most from this deduction and were they the intended beneficiaries? It is not unlike the questions we would ask of a housing program that helps low-income people access safe and affordable housing.
The health tax expenditure deduction comes in for some criticism from the CRS report. “For those eligible, it encourages the excessive purchase of health insurance and thus leads to more over-consumption and rising costs of health care. Moreover, while socially optimal insurance would feature limited coverage for ordinary expenses and more complete coverage for catastrophic expenses, employer plans typically do not have a high deductible, a situation often thought to be due to the tax subsidy.” (p. 15) However, it is a complicated issue and the CRS urges careful analysis and caution before jumping to any quick-fix reform that might harm features of this subsidy that really do correct some market failures in health care insurance.
I will continue to study this. But it is clear why the CRS included Challenges in the title.