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Forthcoming in 36 Ohio Northern Univ. L. Rev. 1 (2010).

Abstract

Tax expenditures have grown in importance to the point where they are now the dominant instruments for implementing new discretionary spending policies, and operate at a cost in forgone revenues unmatched since the Tax Reform Act of 1986. While it is true that some forms of government intervention are best delivered through the tax system, it cannot be the case that neutral design principles would lead to a situation where the federal government spends twice as much through tax expenditures as it does through explicit discretionary spending programs.

This paper, the Fourteenth Annual Woodworth Memorial Lecture, is a meditation on the corrosive effect of tax expenditures on the federal budget and Congressional political processes. Tax subsidies erode our ability to conceptualize the size and activities of government, or to engage in constructive political discourse about our allocative priorities in a world of scarce resources. The paper therefore attempts to shift attention from the decades-long debate over the normative tax base from which tax expenditures should be identified to the more pressing questions of how the political process privileges tax expenditures over explicit outlays, and how in turn the lower salience of tax expenditures distorts policymaking.

Tax expenditures are privileged because they are not treated as spending for any budget purpose: instead, they are budget “nothings,” and their costs are simply subsumed into the revenues baseline. The result is that their efficiency costs are typically underappreciated (as developed in an extended fable about the country of Freedonia), and the repeal of a poorly targeted tax subsidy, rather than being hailed as curbing wasteful spending, is decried as a targeted tax hike.

Pay-as-you-go (PAYGO) rules limit the growth of tax expenditures to some extent, because they require a “pay for” to be paired with a new tax subsidy, but those rules in turn inadvertently encourage the perverse phenomenon of the Congress Within a Congress, in which the tax-writing committees, having learned how to dispense even lump sum discretionary grant programs through the tax code, can function as a complete mini-Congress. The tax-writing committees now both raise revenues (their traditional role) and spend those new revenues, through increasingly transparent tax subsidies that satisfy both the tax-writing committees’ spending priorities and the PAYGO rules. The resulting package is presented to the two chambers of Congress as revenue-neutral, and therefore implicitly as having no significant distributive or allocative consequences, when instead it should be understood as a “tax and spend” proposal.

A slightly different version of this paper appeared in 123 Tax Notes 925 (2009).

Disciplines

Legislation | Public Law and Legal Theory | Tax Law

Date of this Version

March 2010

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