CQ WEEKLY
June 25, 2011 – 2:22 p.m.
Political Economy: Code Words
By John Cranford, CQ Columnist
No one should have been surprised when
The stage for a public breakup of the Biden group had been set long ago — even though we heard lots of nice talk from members of the group about mutual respect and hard work, and even after House Speaker
But much remains murky. By now it’s quite possible that Obama has informed Boehner that if big tax increases are off the table as a way to limit the growth in the federal debt, then so are big changes in entitlement spending.
That doesn’t mean the budget impasse cannot be resolved. It will be, eventually. And, importantly, leaving tax changes out of the mix now may hold the door open for Congress to embark on a comprehensive overhaul of the tax code once the debt ceiling has been raised.
It all comes down to whether or not lawmakers will abandon their natural impulses to bestow tax favors on narrow interest groups or to pursue some economic purpose by handing a tax break to those who engage in a particular behavior.
Increasingly, there is broad agreement on both sides of the aisle that these sorts of giveaways have gone way too far. Tax “expenditures” is the policy term of art long applied to tax breaks. The term, codified in the 1974 Budget Act, is intended to represent that decisions to forgo revenue amount to spending by the government that is no different from any other entitlement — except that it’s less transparent to budget overseers and to the public at large.
The term has taken on a decidedly disparaging connotation in the past year or so, as lawmakers have realized that the sum of all tax breaks is about as large as the sum of all federal discretionary spending — and nowadays exceeds the amount of individual income taxes that is collected.
Economists have been turning a gimlet eye to tax expenditures in general for some time, and concern about the growing federal debt has given critics of them added incentive to question both their policy effects and their economic effectiveness. A May paper by two Brookings Institution economists, William G. Gale and Benjamin H. Harris, gives little quarter to those who favor using the tax code to achieve social or economic policy aims.
Gale and Harris describe a host of objections that apply to many of the most popular and well-known tax expenditures, suggesting that they often fail to achieve their economic purpose, that they distort behavior and that, even when they accomplish their aims, they are less efficient than direct spending would be.
Moreover, the two economists note, because of the way most tax breaks are structured, they tend to provide greater benefits to people with higher incomes even if they apply to everyone — running counter to the tax code’s generally progressive nature.
The Key to an Overhaul
For lawmakers who want to overhaul tax policy to reduce rates, to make the code simpler, to lower compliance costs, to limit errors and to preserve the code’s progressive character, eliminating or significantly changing tax expenditures is the only way to go.
Not a few experts — and lawmakers — have observed that Republicans and Democrats alike can find reasons to favor an all-out review of tax breaks. The fact that Republicans have objected to using repeal of a few high-profile expenditures as part of the debt limit talks doesn’t mean that those concerns would stand if the changes were part of a broad tax overhaul.
Political Economy: Code Words
A hint that Congress may be changing its mind came two weeks ago, when sizable majorities of both parties in the Senate disregarded anti-tax advocate Grover Norquist and voted to repeal a credit for ethanol producers that many economists say is as distorting and ineffective as any other tax expenditure.
Norquist wanted the revenue that would be raised by repealing the ethanol credit to be returned to taxpayers through some other benefit. Otherwise it would amount to a tax increase, he said, and would violate the pledge against tax increases that he routinely solicits from Republicans. His arguments were ignored.
The vote itself was inconsequential because the underlying bill isn’t destined to become law, but it reflected the struggle over whether an overhaul of the tax code ought to be used to generate additional revenue to improve the government’s fiscal posture, or handled as a revenue-neutral exercise.
Those who favor starting over can take heart in the fact that there is an orchard full of low-hanging questionable breaks just waiting to be plucked in the process.