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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, March 31, 2011

Burman Presents Tax Expenditures and Budget Reform Today at NYU

Burman Leonard E. Burman (Syracuse University, Maxwell School) presents Tax Expenditures, the Size and Efficiency of Government, and Implications for Budget Reform (with Marvin Phaup (George Washington, Trachtenberg School of Public Policy and Public Administration)) at NYU today as part of its Colloquium Series on Tax Policy and Public Finance convened by Daniel Shaviro (NYU) and Mihir Desai (Harvard Business School). Here is part of the Conclusion:

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.

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Unlike so many tax articles, Burman's are invariably very well researched and written, and this one is no exception.

However it still seems to me that the arguments in favor of the tax expenditure concept are unpersuasive, or at least that many items commonly called tax expenditures really shouldn't be, including several items listed here.

For example, what is the tax expenditure attributable to the preferential rate for capital gains? The usual answer is to calculate what would be raised by taxing capital gains at 35% instead of 15% and to call that amount a tax expenditure. But if we consider the baseline to be the law as it stood immediately after the 1986 reform, with both regular income and capital gains taxed at a top rate of 28%, then we should only count the difference between 28% and 15% as a tax expenditure, and even that is offset by the extra revenue brought in by taxing regular income at 35% instead of 28%. Since capital gains have never been taxed at more than 28% under the entire 1986-code era, it seems peculiar (to use a word from the article) to count it as an expenditure. It's a hypothetical expenditure relative to a hypothetical code, and that's one hypothetical too many.

Similarly the "exclusion" for employer-provided health insurance premiums is to talk about the exclusion of something that has never been included, which seems ... what's the word? ... peculiar.

It's possible to say that we could adjust the tax rates to account for the broader tax base, keeping overall tax revenue the same, and indeed that's suggested here. That would certainly be my preference, and would be most in spirit with the basis of the 1986 code, but even then the terminology is puzzling: we would be changing the amounts of "tax expenditures" radically, but no actual money would change hands: in what sense was there an "expenditure" before the change?

Still unconvinced.

Posted by: Nonce | Mar 31, 2011 5:59:54 PM