July 25, 2014

Old Views on Tax Expenditures Complicate Budget Talks

  • The national debt has grown significantly in recent years due to rising annual deficits. A deficit occurs in any year the government spends more...

The pace of budget negotiations between President Obama and House Speaker John Boehner has picked up in recent days, with the two meeting again on Monday at the White House.

With the latest exchange of offers, Obama and Boehner seem to have moved closer to a deal that would reduce the deficit by about $2 trillion over the next decade. But the political maneuvering continues.

Concord Coalition Executive Director Robert L. Bixby says that bridging the gap between the two parties might be easier if they would move beyond old habits by acknowledging that some policies traditionally defined as “tax increases” are really “spending cuts.”

“The current tax code is riddled with ‘tax expenditures’ -- exemptions, deductions, credits, exclusions and preferential rates that function much like entitlement spending,” Bixby points out in a blog post today.

A strong case can be made for cutting back or eliminating many of these tax expenditures because they  “complicate the tax code, distort economic choices and drain needed revenues,” Bixby writes. “Moreover, because tax expenditures tend to benefit upper-income households more than middle- or lower-income households, reforms can result in a more progressive system, or at least one that is as progressive as the current system.”

The largest tax expenditures include the exclusion from income of employer-provided health insurance ($164 billion a year), the home mortgage interest deduction ($100 billion), the Earned Income Tax Credit ($58 billion), charitable contribution deductions ($52 billion) and the Child Credit ($52 billion).

“To be clear, changing the definition of what constitutes a spending cut versus a tax increase would not bridge all the policy differences or produce all of the deficit reduction needed to put the budget on a sustainable path,” Bixby said. Changing that definition, however, would be “a more useful way of assessing the true impact of various policies.”

In recent days there have been more warnings from Federal Reserve Chairman Ben Bernanke, business executives and others that the economy could suffer substantial damage if elected officials fail to avoid the fiscal cliff in a responsible way.