Thursday, March 31, 2011
This paper takes tax expenditure analysis one step forward by showing how the mischaracterization of tax expenditures systematically leads to more overall spending (bigger government), higher taxes, larger deficits, and a misallocation of resources away from cash spending programs in favor of tax expenditures. For those who favor smaller government, and lower taxes, this should be a source of concern. Moreover, since tax expenditures tend to benefit families with higher incomes, the misallocation of scarce resources away from traditional spending programs raises equity concerns as well.
Integrating tax expenditures into the budget process and subjecting them (and all other spending) to effective controls could improve the efficiency of government and soften the blow from the belt tightening that is necessary if we are to avoid a debt crisis. An added benefit is that reduction in tax expenditures could simplify the income tax and make it less prone to abuse, especially if part of the revenues from the trimmed tax expenditures were used to cut marginal income tax rates. That is, controlling tax expenditures might increase the chance of executing badly needed tax reform.
Policy makers should not expect this important change to be the last budget reform they will be called upon to make, however. Good budgeting requires limits, a comprehensive scope, and real time scoring of decisions against limits. Adding tax expenditures to the budget process is a logical and necessary step toward that goal but the path is likely a long one.