Tax cuts are expenditures. Got that, reporters?

Tax cuts are expenditures which increase the deficit. That simple fact, which is taught in every econ 101 course, seems to have eluded many Republicans, Tea Party members and the news media.

 

Tax expenditures, aka tax subsidies, special interest provisions, exemptions, deductions, credits, deferral of tax liability and preferential tax rates, mean the government collects less money that could be used to lower tax rates or provide for more accountable government spending. Although some tax expenditures can be justified on a cost benefit analysis, most cannot. Tax expenditures are not subject to the annual scrutiny appropriated funds receive and, even if they were, it would be very difficult to do a cost benefit analysis because of the lack of transparency and open ended nature of most tax expenditures. It’s like signing a blank check for services, but without the ability to determine whether you are getting any services or what they’re worth.

 

Tax expenditures cost the federal government over $1 trillion last year and the figure keeps growing faster than both mandatory and discretionary spending. That’s real money, even by government standards. Yet, we see almost all Republican and some Democratic legislators calling for more tax cuts (tax expenditures) while railing against appropriated expenditures. Why? Could it be that tax expenditures are worth more for the wealthy, who fund campaigns, than for middle or lower income taxpayers who are in the lower brackets and who have seen their income decline while the rich’s have increased?

 

This ability of the rich and powerful to get tax expenditures, which last long after any rational justification, is largely responsible for the common belief that “We have the best Congress money can buy.” With oil at over $80 a barrel, does the oil industry really need about $14 billion of tax expenditures? But where are the media?

 

Aside from Tax Analysts, which publishes Tax Notes, and of which I am chairman (in the interests of disclosure), none of the media are covering these issues with any degree of regularity or even a modicum of sophistication. When was the last time you saw an article pointing out the hypocrisy of a politician calling for tax cuts and cuts in expenditures? As long as the media fail in their responsibility, we will have an increasing number of people seduced by false promises that by cutting taxes and appropriated funds we can cut the deficit.

 

If we are going to cut the deficit by cutting expenditures, the place to start is by eliminating most tax expenditures so that we can simplify the tax code, make it less economically distorting and perhaps even lower rates. Given the power of the rich and powerful, this cannot be done until the public understands the real economic issues. That won’t happen until the media do their job.