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

Thursday, July 11, 2013

TPC: Evaluating Broad-Based Approaches for Limiting Tax Expenditures

Tax Policy Center LogoTax Policy Center: Evaluating Broad-Based Approaches for Limiting Tax Expenditures, by Eric Toder, Joseph Rosenberg & Amanda Eng:

This paper evaluates six options to achieve across-the-board reductions to a group of major exclusions and deductions in the income tax: (1) limiting their tax benefit to a maximum percentage of income, (2) imposing a fixed dollar cap, (3) reducing them by fixed-percentage amount, (4) limiting their tax saving to a maximum percentage of their dollar value, (5) replacing them with fixed rate refundable credits, and (6) including them in the base of the existing Alternative Minimum Tax (AMT). We discuss issues of design, implementation, and administration, and simulate the revenue, distributional, and incentive effects of the various options.

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Most articles on tax expenditures are poor (shockingly so), but this one is very well done.

Looking at the list of tax "expenditures" and resulting dollar amounts in table 1, I'm struck yet again by how unpersuasive the entire concept of tax "expenditure" is. Fourth on the list is the deduction for state and local taxes; isn't this most obviously and intuitively motivated by the idea that taxpayers should pay according to their actual means and real income? Instead the tax "expenditure" argument recasts it as a government spending program, of a very strange and unnatural type.

Similarly the exclusion for employer-paid health insurance is in first place. But this describes the exclusion of something that has never been included, and the current rates were all set under the assumption that employer-paid health insurance was excluded. So treating this as a tax "expenditure" seems similarly forced.

A more natural definition would be to take the 1986 law as the basis of comparison. Any new item that lowered tax liability relative to the 1986 law (exclusion of first 250,000/500,000 of capital gain on home sales, exclusion of state sales taxes) would be a tax "expenditure". Preferential capital gains rates would be a tax "expenditure" but only up to the difference with 28%, and so on. Increases in rates relative to 1986 would be negative tax "expenditures". Has this comparison ever been done? It would be very interesting.

Posted by: No-no-no | Jul 11, 2013 9:02:55 AM