Want to cut the deficit? Clean up the tax code.
The Office of Management and Budget has found 170 tax code credits and other loopholes – including special rules for NASCAR venues – that cut federal revenue dramatically.
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:Skip to next paragraph
Donald B. Marron is director of the Urban-Brookings Tax Policy Center. He previously served as a member of the President's Council of Economic Advisers and as acting director of the Congressional Budget Office.
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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.
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