More on tax reform and “tax expenditures”

Last updated on: February 24, 2015 at 9:22 pm by Jane the Actuary

More on tax reform and “tax expenditures” 2015-02-24T21:22:10-06:00 Jane the Actuary

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So the other day I wrote up some initial thoughts on tax reform, and what kinds of differential-treatment in the tax code could be removed as a part of an overall reform project. And this morning I observed that the president’s budget plays lots of games with taxes in the budget (that is, moving government “spending” from a tax deduction to a benefit targeted at lower-income groups, e.g., with respect to child care). But here’s one thing I did find in the mess of budget documents at the White House site: a report on “tax expenditures.

The two key paragraphs:

The Congressional Budget Act of 1974 (Public Law 93–344) requires that a list of “tax expenditures’’ be included in the budget. Tax expenditures are defined in the law as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’’ These exceptions may be viewed as alternatives to other policy instruments, such as spending or regulatory programs.

Identification and measurement of tax expenditures depends crucially on the baseline tax system against which the actual tax system is compared. The tax expenditure estimates presented in this document are patterned on a comprehensive income tax, which defines income as the sum of consumption and the change in net wealth in a given period of time.

Which means that, per this definition, the “baseline” is a flat tax.

The standard deduction and exemptions are “tax expenditures.”

And reduced tax rates for lower levels of income are “tax expenditures.”

Now, the report doesn’t see it that way. They treat these items as part of the baseline. And perhaps the full text of the law spells out that these items are indeed to be a part of the baseline. But (I’m feeling contrarian today) why should they be?

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