Tax Expenditures: The Spending that Dare Not Speak Its Name

In our statement on the president's FY 2011 budget request to Congress, we mentioned a column in Tuesday's WaPo by Len Burman [1] in which he called for a freeze in tax expenditures. The column, however, deserves more attention than just the one liner we added in the OMB Watch statement.

Here's the paragraphs from which we drew our reference:

At the same time the president promised restraint on a sliver of the federal budget, he proposed new tax breaks for child care, retirement savings and small-business capital gains. This is a perverse kind of gift: Many of the goodies the political Santas leave under our trees will be paid for, with interest, by our kids.

But suppose Obama's "freeze" were also applied to tax expenditures. Say we postponed its effect until fiscal 2013 so that the effects do not threaten a nascent economic recovery. Capping tax expenditures at 2012 levels for three years and indexing the cap for inflation after that, as proposed for non-security discretionary spending, would reduce the deficit by about $3.5 trillion. That's right -- 14 times as much as what the president's spending freeze would save.

What is not commonly mentioned in budget discussions are the hundred of tax breaks for businesses and individuals designed to subsidize certain activities. These tax breaks cost the federal government over $1 trillion per year. Some object to calling these breaks "tax expenditures" because the money was never in the hands of the government so it could never spend it. It's an alluring philosophical argument, but totally blinkered economically and budgetarily. Not collecting $X in taxes form an oil company because it drills for oil in a certain location is the same thing as the government collecting $X dollars in taxes and then turning around and writing a check to that oil company because it drilled in a certain location.

Chapter 16 of the Analytical Perspectives [2] of the President's Budget is a good place to begin looking at tax expenditures (click on Federal Receipts [3]). It's quite a read.

The Joint Committee on Taxation also enumerates tax expenditures. See here [4].