Friday, April 26, 2013

Tax Expenditures

In trying to figure out how government finances work, we can’t forget tax expenditures.

That sounds like an oxymoron: a tax can’t be an expenditure … can it?

Welcome to D.C., where it can be. It turns out there is spending and taxes. But a tax expenditure is rebate of one form or another: it’s a tax that should be collected but is somehow exempted. The deductibility of mortgage interest is a good example.

A new or bigger tax break is a "tax cut." (Cheers.) If Congress tells the U.S. Treasury to issue a check for the same sum for the same purpose, it's a spending increase. (Jeers.) So Congress has done a lot of the tax-break approach, which has been dubbed "backdoor spending through the tax code."

This may sound like semantics or, worse, obfuscatory accounting. It's actually a whole lot more than that.

All these are variants on the same idea. All have similar economic effects. All involve the government using taxpayers' resources to pick up some of the … tab. One type goes through the spending side of the budget, booting the oft-cited statistic measuring government spending as a share of the economy. The other goes through the tax code, reducing government revenue as a share of the economy.

… Donald Marron of the Urban Institute think tank … and colleague Eric Toder estimate that about two-thirds of the $1.2 trillion a year in tax breaks is "spending in disguise."

Read the whole thing, entitled “Tax Breaks as Spending” in the April 25 issue of The Wall Street Journal.

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