Wednesday, February 16, 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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