Yesterday, in a column about charitable giving, Michael Gerson seemed horrified that efforts to reduce the tax deduction for charitable giving might be motivated by revenue considerations (rather than "fairness"). The revenue angle seemed self-evident to me, but Gerson's point is helpful in one respect -- it highlights the fact that a tax deduction, often popular with legislators who see it as a cost-free way of pandering to a constituency, does have a cost. The opposite of "tax revenue" is "tax expenditure," and ultimately nearly all the deductions in our tax code are just inefficient and expensive spending to encourage a certain behavior.
My favorite example is the item on the income tax form that asks taxpayers if they want to have $3 donated to election campaign funding. For years, the people who devised this scheme have puzzled over why more people don't accept the checkoff. But I imagine most people think, as I did, that the accompanying disclaimer ("checking yes will not increase your taxes") is inherently false. It may not add three dollars to the amount I pay this year, but in the long run, the money comes from somewhere - it's a hidden government expenditure.
Recently Len Burman, a professor of public administration and economics, wrote an excellent article about these tax expenditures. It's well worth reading in its entirety but as a highlight, take this statement: "A cap on tax expenditures would raise so much money because the expenditures are big and growing fast. The Office of Management and Budget counts 180 of them, totaling more than $1.1 trillion" [per year].
Of course, as Burman points out, although there were some cuts in income tax deductions during the Reagan years, change is immensely difficult because every one of these special tax breaks has an army of special interests defending it now; they become entitlements, just as entrenched as social security or medicare. Think of the uproar that would ensue (has ensued) when anyone mentions doing away with the mortgage interest credit, for example. Yet this one, despite its popularity, also illustrates another fact about tax expenditures: their existence can severely skew people's otherwise rational economic behavior. In favoring breaks that assist people to invest in real estate, we shift funds into that sector, and contribute to such unwelcome phenomena as the recently-burst housing/loan bubble.
Burman speculates on what would happen if Pres. Obama's freeze/cap on [some categories of] discretionary spending were extended to "tax expenditures." Does it sound like it's worth a look? It does to me.
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