U.S. Budget: Tax Expenditures Our Only Chance for a Just Deficit Fix

With the budget debate firing up again this week, Michael Tomasky says there's just one serious way to cut our deficit—by focusing on tax expenditures, the tax loopholes and deductions that are bleeding federal coffers dry.

The budget is likely to revert to Topic A in Washington this week, as Vice President Joe Biden’s bipartisan negotiations resume at Blair House and the Senate Gang of Six (maybe) finally releases its report. The key to making sense of this latest round of wrangling is to keep an ear out for the phrase “tax expenditures,” because how that issue is handled will largely determine whether we end up with a serious and equitable solution to our financial problems—or an ideological one that extracts flesh from the targets (poor people, domestic programs) that are running out of flesh to extract.

More on tax expenditures in a moment, but first some background. Fixing our long-term budget problems requires work in three basic areas. First, spending cuts. That, you know about. You hear about it ceaselessly from the Tea Party caucus and Republicans generally. You know that $38 billion (it was really only about $25 billion) was wrenched from the 2011 domestic budget, and that conservatives want far, far more than that. Non-defense domestic spending, remember, constitutes just 12 percent of the federal budget.

Second come entitlements. You may know that everyone agrees that Social Security and Medicare must be reformed before the baby boomer onslaught hits. Well, in truth, not everyone agrees about Social Security, but these dissenters have trouble attracting attention. Medicare, though, is in legitimate trouble. Costs are rising rapidly, and no one really knows how well or whether the health-care reform bill from last year will contain costs.

The third leg of the stool gets far less media attention than the other two. It’s revenue. To put it more plainly, taxes. As in raising them. Yes, this is the part that doesn’t get talked about, for the straightforward reasons that Republicans have sworn a blood oath against doing so, and Democrats would like to do it (most of them) but are terrified of broaching the subject. So it is avoided not only by those who prefer avoiding it, but also by those who’d like to discuss it.

And yet we need to discuss it. The tax burden in the United States is at its lowest point since the late 1950s. We are not spending ourselves into oblivion, as you hear some jowly bloviator say on television every day. We are de-taxing ourselves there. Back in those good old days that conservatives love to invoke, we were paying more in taxes. Substantially more. Especially the rich.

Putting the squeeze on the deductions is the only way to generate revenue and prevent asphyxiating cuts to the domestic budget.

So what do we propose to do about taxes? As you may know, President Obama wants to raise the rates on the top 2 percent of households. That’s all well and good. But even if that effort succeeds—and I doubt it will, which we’ll get to in a future column—it would bring in about $36 billion a year. For the federal government, that’s change that drops out of its shoe.

And so: tax expenditures. Basically, they are deductions and loopholes, for both individuals and corporations, that rob the treasury of resources. Many of them exist to encourage a type of behavior—the home-mortgage interest deduction encourages home ownership—while others were just won the old-fashioned way, by lobbyists. They tend to advantage wealthier taxpayers (who are more likely to itemize) and corporations. And in many cases, if the government just appropriated money for the same purpose, it would be fairer and might cost less. See this report ( PDF) from the Center on Budget and Policy Priorities for the details.

Everyone this year says it is finally time to eliminate these expenditures. The president’s commission, Bowles-Simpson ( PDF), wants to do it. That other commission, Rivlin-Domenici ( PDF), agrees. Even Paul Ryan agrees ( PDF), or so he says. All of their reports contain language along these lines. All of their reports also recommend dramatically lowering personal income-tax rates. The lost revenue will be made up by eliminating these tax expenditures—“broadening the base,” another phrase you’ll want to watch out for.

This all sounds nice. Even I wouldn’t mind paying less in taxes. But why does it worry me? Eliminating deductions is really hard. Lowering overall rates is really easy. And politicians tend to do what’s easy, especially when one of the two parties considers the hard work to be a venal sin. Republicans have classified elimination of tax expenditures as tax increases, and they won’t do it. Sen. Tom Coburn (R-OK) might. Two other GOP senators might. Of all 287 elected Republicans in Washington, just those—three—have indicated that they might support elimination of some loopholes. Besides which, powerful lobbies are organized to keep that home-mortgage deduction in place, to say nothing of the corporate ones.

This is why tax expenditures are so important. They cost $1.1 trillion a year, and given that we’re not going to increase income taxes much if at all, putting the squeeze on the deductions is the only way to generate revenue and prevent asphyxiating cuts to the domestic budget. And it’s why I fear that when all is said and done, we’re going to come out of this with lower tax rates and very few loopholes closed—the worst of all possible worlds in revenue terms, which is really what the Republicans want. So as the negotiations slouch toward crunch time, watch for the recommendations on tax expenditures. They provide the only chance for a just solution to our problems.

Newsweek/Daily Beast Special Correspondent Michael Tomasky is also editor of Democracy: A Journal of Ideas.