It doesn’t matter what we CALL it!

Posted by Don Fullerton on May 8, 2011

Filed Under (Other Topics, U.S. Fiscal Policy)

In a recent Op-Ed in the NY Times, Martin Feldstein points out that the huge current federal deficit can be reduced without raising tax rates, but instead by reducing “tax expenditures” – provisions in the tax code to provide tax breaks (and thus extra money) for many special functions.  Martin Feldstein is a Harvard professor, and he is a former President of the National Bureau of Economic Research. His piece is well worth reading, so I hope you click on the link and read the whole article. 

For the moment, I’ll just use his thoughts to make an additional point – about the fact that a “tax expenditure” is equivalent to a particular kind of government spending.  If Congress wants to provide $1 billion for charities, for example, it can either (1) provide a special tax deduction for individuals who give to certain charities, in a way that costs the government $1 billion of lost revenue, or it can (2) add $1 billion to the spending side of the budget to provide the exact same funds to the exact same charities, in a program that would subsidize the same individual donations to the same extent.

Those two methods are equivalent in every respect.  Every existing “tax expenditure” is really the same as a particular government spending plan. 

Yet many politicians say they want to cut spending, not raise taxes.  Fine.  I would just point out that cutting a tax-expenditure could easily be characterized either way.  If any eventual deficit reduction plan were to eliminate certain tax deductions for special purposes, it would appear to raise additional tax revenue, but it is not from raising any tax rate.  And that effect on the budget is exactly the same as cutting some federal spending. 

So don’t make arbitrary distinctions between what we call a tax hike and what we call a spending reduction, as nice as those sound bite distinctions might sound to a politician.  Any Member of Congress who wants to cut federal spending should be equally happy about a plan to cut a “tax expenditure”.  It has the same effect!