Political Nirvana

Imagine being a member of Congress.  (Get your mind out of the gutter –  I’m asking you to imagine your role as a policymaker.)  You have an idea for a big new program – one that will cost lots of money, but it will also bring in lots of contributions in the future.  So here’s the problem – you’ll be seen as one of those crazy liberal spendthrifts.  That’s not going to help you get re-elected.

Don’t worry…I have a solution.  What if you could start that new program AND also call yourself a “tax cutter”?  Ah…political nirvana.  I can please everyone – Democrats can start new programs and Republicans can lower taxes.  The solution is referred to as a tax expenditure.  Congress gives a tax break (a deduction, a credit or an exclusion) while promoting a particular activity.

There are approximately 200 tax expenditures in our tax code.  See the chart below.  This chart is from a great (recent) paper on tax expenditures, titled “Tax Expenditures, The Size and Efficiency of Government, and Implications for Budget Reform” by Leonard E. Burman and Marvin Phaup.  (A couple of years ago, I wrote about Professor Burman’s Congressional testimony on this subject.)

Here are two more scary numbers (the point being that tax expenditures are a HUGE part of our tax policy):

1. the dollar value of tax expenditures is as large as the amount that we take in from income taxes (not including payroll taxes)

2. the dollar value of tax expenditures is approximately 8% of GDP; total tax revenue (including income, payroll and all taxes) is normally around 18% of GDP

What do you think the largest tax expenditure is?  Think about it.  I’ll be that most of you would have guessed the mortgage interest deduction.  That’s what I would have guessed if I weren’t as smart as I am.  Just kidding.  That’s what I would have guessed.  But, the largest tax expenditure is the exclusion of employer-supplied health insurance.  In other words, I don’t consider my employer’s $10,000 contribution for my health insurance premium as income.  Of course, this leads to lots of issues – and I’ll blog about those on a different day.

See the chart below with the largest tax expenditures.  The source is the same paper as above.  One thing to note: the cost of the tax expenditures (in the chart) are misleadingly low – they only include lost income from the income tax; they don’t include lost income from the payroll tax.

Finally, think about one last problem with tax expenditures.  We don’t see them on a regular basis and once they’re in the code, they’re very difficult to remove.  If you did remove one, you’d be one of those crazy liberals who likes to raise taxes.

Have a great week.

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