Cleaning Up the Tax Code and 15 Other Ways to Cut the Deficit

In conjunction with its new deficit option game, the New York Times asked 16 budgeteers to write-up ideas for reducing the deficit. My assignment was to explain the rationale for reducing tax expenditures–the exclusions, exemptions, deductions, and credits that complicate the code and dramatically reduce the revenue that it raises:

The Office of Management and Budget has identified more than 170 such tax expenditures (these provisions are called “expenditures” because they essentially run spending programs through the tax code). The deductibility of state and local taxes, for example, runs almost $70 billion each year. Favorable tax treatment for life insurance savings is about $23 billion. Credits for alcohol-based fuels total almost $9 billion. And dozens of rifle-shot provisions benefit narrow interests, such as special tax rules for NASCAR venues.

In total, individual and corporate tax expenditures reduce revenues by more than $1 trillion each year. Congress should revisit each tax break to see if it produces sufficient economic and social benefits to justify its budgetary cost. Some provisions should make the grade (the earned income tax credit, for example). But many others should be restructured or cast into the dustbin of history.

Such housecleaning would help close the deficit, reduce wasteful spending disguised as tax cuts, simplify tax preparation for millions of households, and potentially make the tax code more progressive (since many tax expenditures are worth most to households in high tax brackets) – all without raising rates.

You may have noticed that the co-chairs of the President’s fiscal commission recently made tax expenditures a centerpiece of their proposal for both deficit reduction and tax reform. Tax expenditures are so expansive that the co-chairs decided an aggressive roll-back could both raise more revenue and finance substantial reductions in tax rates on wages, salaries, and other ordinary income (tax rates on capital gains and dividends would increase since their lower rates are counted as tax expenditures, a topic I will return to at a later date).

For the other 15 ideas for deficit reduction, see here.

3 thoughts on “Cleaning Up the Tax Code and 15 Other Ways to Cut the Deficit”

  1. Your suggestions make sense. Our tax system would be simpler and more effective if we were to eliminate many of the deductions, credits and exemptions currently allowed under the tax code and use some of the additional savings or revenues to reduce marginal tax rates. Essentially, this is what the Bowles-Simpson plan does even if one could argue about some of the specifics of that plan .

    I’m intentionally avoiding, for now, the issue of what, precisely, a “tax expenditure is” (and whether that definition has any real significance). If you shed light on this in a future post, that would be quite welcome. Not to steal any of your thunder, but I would argue that the lower tax rates on capital gains and dividends are not a “tax expenditure” unless and to the extent the combined corporation tax and individual tax on the underlying income is less than the ordinary individual tax rate. That income is, after all, taxed twice under our current system.

  2. I disagree you are talking about collecting more money Not cutting spending. Tell me which department you want to cut then we can talk.

  3. see ireland votes.
    New Wis. gov. mulls canceling ‘collective bargaining.’
    NJ gov. wants to reduce everywhere,
    inc. current payments to current retirees (and
    future).

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