Thursday, March 14, 2013

The Senate Budget and Tax Expenditures

    On March 13, the Senate Democrats introduced their first budget resolution in almost four years.  On page 64 under the heading "Spending in Disguise," the Democrats speak admiringly of a quote from Donald Marron, a member of George W. Bush's Council of Economic Advisors:
“A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences – preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise.”
    The Democrats then go on to explain this disguised spending and why the Orwellian term "tax expenditures" (of which the logical counterpoint would be "spending income") is justified:
Much of the complexity of the tax code can be traced to the proliferation of so‐called “tax expenditures,” which the Budget Act of 1974 defines as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or deferral of tax liability.”
Tax expenditures, in other words, are special tax preferences that, under current fiscal conditions, have the effect of increasing the deficit by reducing the tax liabilities of the individuals and businesses who qualify for them. From an economic and budgetary perspective, the difference between tax expenditures and direct spending programs is substantively meaningless.
    The last sentence is fascinating for two reasons.  First, the Democrats are arguing that the government spending tax dollars for whatever reason (defense, education, welfare, infrastructure is equivalent to dollars that taxpayers, following federal tax law, never owed in the first place.  Those deductions for charitable contributions, medical expenses and mortgage interest, not to mention the child tax credit?  That is money the government is spending on you, the taxpayer.

    Second, the Democrats have long argued that government spending is a great economic stimulus.  This was the basis of the 2009 Recovery Act.  And Nancy Pelosi has famously (or infamously) asserted that unemployment benefits (money taken from some taxpayers and given to others) stimulates the economy, and similar claims have been made about food stamps.  And yet, if "[f]rom an economic... perspective, the difference between tax expenditures and direct spending programs is substantively meaningless," then why isn't allowing taxpayers to keep their own money instead of filtering it through government coffers equally beneficial?  It's like arguing friction aids locomotion.

    This issue defines the difference in the liberal versus conservative view of government's role in the economy, and to a lesser extent, Democrat versus Republican view.  For the former, the government is a necessary and integral part at virtually every level of economic activity.  For the latter, perhaps with less conviction, the government serves a limited role that acts as sand in the gears as that role increases. Unfortunately, the former idea seems to be gaining momentum even as evidence builds that the economy is not.  The American people will have to decide if it's time to head in the other direction come 2014, if it's not already too late.

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