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

Monday, March 25, 2013

Dean: The Tax Expenditure Budget Is a Zombie Accountant

Steven Dean (Brooklyn), The Tax Expenditure Budget Is a Zombie Accountant, 46 UC Davis L. Rev. 265 (2012):

Like a student cutting the electrical cord on his television to help him study, governments across the globe rely on commitment devices to generate fiscal discipline. From the collapse of the Congressional Supercommittee in the United States to the near-cataclysmic failure of a mechanism designed to prevent the European Union debt crisis, the evidence suggests that faith in such commitment devices is misplaced. This article explains why by conducting a long-overdue autopsy on one such device that stubbornly refuses to stay dead: the tax expenditure budget. For almost half a century Congress has published a shadow budget to publicize the costs of tax subsidies to prevent abuse. Cataloguing the reasons for its demise has the further benefit of putting to rest the popular misconception that a failed commitment device like the tax expenditure budget can be resurrected as a reliable source of information.

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From the paper: "Second, the tax expenditure budget systematically underestimates the cost of tax expenditures that are included on the tax expenditure budget."

I think the opposite is true. For example, if the mortgage interest deduction were eliminated people would have the option of liquidating bank accounts and other investment assets to prepay their mortgages in whole or in part. Taxable interest income and investment income would decrease in the absences of those liquidated assets. Static tax expenditure analysis therefore overestimates the amount of revenue that would be gained by eliminating the tax expenditure.

If I recall correctly, several tax expenditure study authors have pointed out the fact that the true revenue loss is less than the static estimate because of behavioral responses by taxpayers.

Posted by: AMTbuff | Mar 25, 2013 4:25:59 PM