Oh 'holey' tax system
The federal income tax base is full of holes, like special exemptions, deductions, and credits. Filling them in would broaden the tax base and help the deficit.
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In some preliminary research, my Tax Policy Center colleague Eric Toder and I (2011) have tried to estimate how large the government is when we recognize that many (but not all) tax preferences are effectively spending programs. For fiscal 2007, we estimate that spending-like tax preferences amounted to 4.1 percent of GDP. Adding that to official outlays yields a broader definition of spending, 23.7 percent of GDP in 2007, about a fifth larger than the official 19.6 percent. Similarly, our broader definition of revenues—official revenues plus revenues foregone through spending-like tax preferences—is 22.6 percent of GDP rather than the official 18.5 percent.Skip to next paragraph
'EconomistMom' (Diane Lim Rogers) is Chief Economist of the Concord Coalition, a non-partisan, non-profit organization which advocates for fiscal responsibility, and the mom of four (amazing) kids to whom she dedicates her work. She’s been blogging since Mother’s Day 2008.
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These figures illustrate that conventional budget measures understate the extent to which federal fiscal policy affects economic activity. They also suggest that some policy proposals that increase revenues, as conventionally measured, may nonetheless reduce the size of government. If policymakers reduce the tax preference for employer-provided health insurance, for example, that would increase federal revenue but reduce the government’s role in private insurance markets.
Advocates of smaller government are often skeptical of proposals that would increase federal revenues. When it comes to paring back spending-like tax preferences, however, an increase in revenues may actually mean that government’s role is narrowing.
The trouble is that once people start realizing that reducing government “spending” may include things like reducing the subsidy to employer-provided health insurance received via their (very own) tax exclusion, instead of clamoring for government to get smaller they might start screaming that “the government needs to get its hands off of”…”my tax preferences.”
The “holey” tax system enlarges the deficit and enlarges the government, but most of us don’t want to give up our (very own) precious holes. See, tax cuts can be just like spending dressed up in a different costume.
(**NOTE: here’s the link to Donald’s own blog post on his testimony, and here’s a link to the Senate Budget Committee page where you can read/watch testimony by the other witnesses, Gene Steuerle, Rosanne Altshuler, and Larry Lindsey.)
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