The Money Our Tax System Spends

I just came across an excellent article from Bloomberg on “tax expenditures” (“Tax System Is America’s Biggest Spender“). Tax expenditures are subsidies that government gives through tax breaks (rather than by grants or other payments). The heart of the article’s argument is basically this:

The tax system is also equivalent to a collection of individual mandates, like the one in the Obama health-care law, with penalties for Americans who fail to buy insurance. For many people, that’s how our system works. You and your neighbor might have the same income, but if, unlike your neighbor, you fail to have a mortgage or buy as much health insurance, then you have to pay higher taxes.

On one hand, people are up in arms over a mandate in law that will increase the tax liability of people who do not buy health insurance. On the other hand, most of us take for granted a tax code that decreases the tax burden for people who buy homes, pay for college, have children, give to charity, etc. Taxes on businesses have their own set of breaks.

Not only do we take the tax breaks for granted, we defend them vigorously. Some people are running around campaigning for a flat tax to “simplify the tax code.” That’s bogus. Computing how much tax you owe is easy–once you’re computed all the deductions and tax credits. It’s all these deductions that make things complicated. But you never see politicians talking about really simplifying the tax code because simplifying the tax code means getting rid of fun deductions that we all expect. As the article points out, even staunch conservatives like Grover Norquist aren’t ready to be this honest with the public about tax breaks.

The article’s recommendation is that we make the benefits of tax breaks as visible as other federal benefits:

Here’s our proposal: Let’s replace all tax expenditures with explicit subsidies — that is, with actual federal payments — so we can really see the costs and debate all spending programs on an equal footing. Doing so would help us answer crucial questions, such as whether we get more bang for our buck by subsidizing homeownership or by spending more on schools

This would help create an honest discussion. And, there are good reasons to keep these tax breaks. Someone who just took out a 30-year mortgage did so with understanding that they could deduct the interest they paid on that mortgage. Removing that deduction now would dramatically change the affordability of that loan.

The federal tax code doles out $1.3 trillion in tax breaks/tax expenditures every year. That’s too much money to ignore.

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