Tuesday, April 9, 2019
Katherine Pratt (Loyola-L.A.) presents Making Tax Expenditures Work at San Diego today as part of its Tax Law Speakers Series hosted by Jordan Barry and Miranda Perry Fleischer:
Federal Tax Expenditure reform is needed now more than ever. Repeated attempts to reform Tax Expenditures have accomplished little, however, in the last three decades. Enacting a federal partial-replacement Value Added Tax (VAT), such as the Graetz Competitive Tax Plan, could provide a catalyst for Tax Expenditure reform. The Tax Expenditure literature, including the literature on the institutional design of Tax Expenditures, assumes mass filing of federal income tax returns. The elimination of 120 million Form 1040s upends this background assumption and prompts reconsideration of the institutional design of Tax Expenditures.
Building on Edward Kleinbard’s work on framework legislation, this Article proposes rules to better integrate Tax Expenditures into federal budget processes. The proposal would make Tax Expenditures “work” for their ongoing funding, by subjecting many Tax Expenditures to performance review and competitive appropriations. The proposed framework legislation would incorporate fiscal imperatives: (1) for Congressional committees, including but not limited to the tax writing committees, to identify the performance goals and outcome measures for federal expenditure programs; (2) for Congressional committees with subject-matter expertise and authority (a) to evaluate new, individual Tax Expenditure proposals prior to enactment and (b) to perform periodic functional review of large, related expenditure programs; and (3) to identify, collect, and analyze the data required to measure Tax Expenditure performance. To overcome structural impediments to functional review of related expenditure programs, Congress would need to create a management structure that facilitates effective coordination between Balkanized federal agencies and between the Executive and Legislative branches of government.
An obvious goal is to repeal ineffective, inefficient, or inequitable Tax Expenditures on a large scale. A less obvious goal is to improve Tax Expenditures that are not repealed. Effective Tax Expenditures might be consolidated or otherwise redesigned to reduce their taxpayer and administrative costs and improve their performance with respect to defined metrics. For example, enactment of a partial-replacement VAT presents an opportunity to improve the EITC by simplifying eligibility requirements, testing for eligibility ex ante, encouraging savings, and increasing liquidity for EITC recipients. A redesigned EITC could be structured to create liquid savings, not solely an incremental wage supplement in the form of reduced payroll tax withholding, and better insulate low-income taxpayers from liquidity shocks that create pernicious poverty traps.