Thursday, August 15, 2019
Reuven S. Avi-Yonah (Michigan) & Nir Fishbien (S.J.D. 2020, Michigan), Tax Expenditures and Horizontal Equity: A Lost Lesson from Stanley Surrey:
Tax expenditures are “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.’’ The concept of tax expenditures was invented by the first Assistant Secretary for Tax Policy, Stanley S. Surrey, in the late 1960s, and was codified by the Congressional Budget Act of 1974, which requires that a list of tax expenditures be included in the US budget. The tax expenditure budget relies on the Haig Simons definition of income as the base, while acknowledging the fact that not all deviations from Haig Simons are treated as tax expenditures.
The basic problem with attempts to define tax expenditures against a Haig Simons baseline is that it is not clear why such deviations are normatively problematic. Put bluntly, who cares whether a specific tax provision is a deviation from some theoretical definition of income by two long dead economists? That, presumably, is why most of the literature now accepts the Weisbach and Nussim view that the debate between Surrey and Bittker was meaningless, and we should just learn to live with the tax expenditures.
Surrey would have disagreed, and this article represents an attempt to recapture his original view of tax expenditures and assess its present day implications. Part I briefly surveys Surrey’s career and explains how he came to invent the concept of tax expenditures. The most important lesson from this page of history is that Surrey in fact never intended to measure tax expenditures against Haig Simons. Instead, his aim was to identify departures from horizontal equity, i.e., the idea that taxpayers with equal ability to pay should bear an equal burden of tax. Part II of the Article moves overseas and examine how tax expenditures are treated there. Examples from Germany, Italy and Israel show that in these countries tax expenditures are assessed not against Haig Simons but against a constitutional norm of equal protection. While such constitutionalization of the analysis would not be appropriate in a US context, the foreign cases show that what people care about when discussing tax expenditures is fairness, not deviation from a theoretical baseline. Part III of the Article then attempts to assess the consequences of this line of analysis for some of the larger US tax expenditures.