Every lawmaker in Washington knows how to close budget deficits, though many people outside Washington may not have heard about this possible solution.
While federal spending and budget deficits are widely covered in the news, it’s rarely mentioned that federal tax revenues as a share of the economy are at their lowest point in more than half a century. Simply put, tax revenues are down, even after accounting for the effects of the recession. There are several reasons, and one of them is the credits and deductions that benefit nearly everyone – from profitable corporations to regular taxpayers to the 1 percent.
There’s a solution to budget deficits that doesn’t involve raising tax rates. Close those credits and deductions, and the federal government will run a surplus in the near term.
That’s because steep budget deficits are partly the result of an increasingly complex tax code that spans thousands of pages and offers credits and deductions for a colorful array of activities. Those credits and deductions are the reason paying your taxes requires long hours and a degree in accounting. They’re also one of the reasons corporations like Apple and billionaires like Warren Buffett pay a smaller share of their income in taxes than many middle-class Americans.
Credits and deductions on average saved folks in the bottom 20 percent of income less than $700 in 2011, but the average 1 percenter – with an income exceeding $1.5 million – saved around $200,000 from reduced tax payments, according to the Tax Policy Center.
If we wiped out all those deductions and credits – which are called “tax expenditures” in Washington parlance – Congress would be talking about what to do with the budget surplus. Tax expenditures are projected to cost the US Treasury around $1.3 trillion this fiscal year. Meanwhile, the budget deficit is projected at $1.2 trillion. Without all those tax code complications, the deficit would turn into a near-term surplus.
Of course, some of these deductions are aimed at helping people – especially the 99 percent. And some incentivize activities that benefit society and spur economic growth. But lawmakers wouldn’t even have to eliminate every tax expenditure in the tax code to substantially reduce deficits. They might choose to keep some credits, such as the Earned Income Tax Credit, which functions as a lifeline for low-income Americans. And they might also find ways to phase out these credits over time, giving Americans and companies time to plan for the changes.
But some tax expenditures are downright absurd. Currently wealthy taxpayers enjoy a tax break for buying second and third homes; last year the home-mortgage interest deduction handed a $4.4 billion housing subsidy to the wealthiest 1 percent of Americans. While some lawmakers oppose raising tax rates even for these wealthy taxpayers, members of both parties support simplifying the tax code – and removing subsidies for lavish vacation homes is a good place to start.
If lawmakers were serious about eliminating tax breaks they could simultaneously reduce deficits, simplify the tax code, and save thousands of Americans hours preparing their taxes. Yes, many people would end up paying more in taxes – because they’d lose some lucrative deductions – but Americans rank the federal budget deficit as one of their top concerns for the nation.
And polls suggest that Americans may be willing to see some of these tax breaks reduced or phased out completely, if accompanied by lower rates. Spending a lot less time filing tax returns every April would be a nice bonus.
So why aren’t lawmakers jumping at this opportunity? In large part because there’s an army of lobbyists to protect every tax expenditure in the tax code – and there are over 200 different tax expenditures. That’s a lot of lobbyists.
And for that reason some people will read this column and dismiss it as nonsense, arguing that ending credits and deductions is politically treacherous. But difficult politics is not the same as a budget crisis. The solutions are there – just not in the places we’re looking.