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Wednesday, February 16, 2011

McMahon: Taxing Tax Expenditures?

Tax Analysts Martin J. McMahon Jr. (Florida) has published Taxing Tax Expenditures?, 130 Tax Notes 775 (Feb. 14, 2011):

This report is a chapter from a coming book, The Proper Tax Base; Structural Fairness From an International and Comparative Perspective: Essays in Honor of Paul McDaniel, edited by Yariv Brauner and Martin J. McMahon Jr. After briefly recounting the historical development of tax expenditure analysis and its enshrinement in the budget process by the Congressional Budget and Impoundment Control Act of 1974, the report details the core values of tax expenditure analysis as articulated by Stanley Surrey and Paul McDaniel in their 1985 book Tax Expenditures [Harvard Univ. Press]. It explains the history of tax expenditure analysis from tax reform to spending reform and notes that other academics have refuted all criticisms of tax expenditure analysis. The report examines a proposition that flows from the heart of tax expenditure analysis: If tax expenditures are the functional equivalent of direct spending subsidies, they should be taxed in the same manner that direct subsidies would be taxed under a Schantz-Haig-Simons normative income tax. After concluding that taxing tax expenditures in this manner can only be administratively feasible for credits, and possibly exclusions, but likely not regarding deferral-based tax expenditure subsidies, the report examines recent calls by leading academics for extensive repeal of tax expenditures in the name of either tax reform or spending reform to bring under control both the budget deficit and the congressional procedures that have contributed to the enormous growth of the deficit in recent years. All the income-base-broadening proposals can be traced to the creators of tax expenditure analysis, McDaniel and Surrey, and most, if not all, of the failures of the income tax system today derive from the failure of the political process to appreciate and apply the wisdom in Tax Expenditures.

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The author is (apparently quite unintentially) very funny. He states " It explains the history of tax expenditure analysis from tax reform to spending reform and notes that other academics have refuted all criticisms of tax expenditure analysis."

His article further states "Some of their criticisms
are so silly as to hardly need refutation. An example
is the assertion that tax expenditure analysis posits
that ‘‘lurking behind the concept of the tax expenditure
is a more sinister premise. . . . It is the
subtle disposition to think of all income as virtual
state property, and forbearance to tax away every
last penny of it as itself a tax expenditure.’’23"

I and many others do not believe that this position is so "silly." Talk about political bias showing.

Further his article states "Probably the most vigorous, truly intellectual
criticism of tax expenditure analysis has been that
the normative tax base is beyond definition and that
the provisions labeled as tax expenditures in Surrey
and McDaniel’s model are actually reflections of
social and economic values regarding the proper tax
base.25 The JCT staff concluded in a 2008 report that
‘‘the proponents of traditional tax expenditure
analysis have failed to respond convincingly to the
criticisms of the ‘normal’ tax as underspecified,’’26
because ‘‘there no longer is a near-universal consensus
view as to the ideal tax system.’’27

But the author believes he and his friends know how to separate good normative tax deductions from bad ones.

This is not scholarship - this is a philospher king declaiming that, thanks to his rigorous analysis (another laugher), he can tell us how we should be taxed.

Posted by: Ed D | Feb 16, 2011 7:39:28 AM

I have been a critic of the tax expenditure concept for some years as reflected in several articles. The most direct criticism of mine of that concept was in a piece I co-authored with Jeff Lehman titled "Tax Expenditure Budgets: A Critical View," 54 Tax Notes 1661 (March 30, 1992). While that article stimulated responses from some who admire the tax expenditure concept, I am unaware that its arguments have been refuted by anyone.

Posted by: Douglas Kahn | Feb 16, 2011 11:32:52 AM