These exemptions, deductions and credits (collectively known as “tax expenditures”) will cost America’s Treasury some $1.1 trillion in forgone collections this year, reckons Donald Marron of the Tax Policy Centre (TPC), a research group. The figure climbs to $1.3 trillion when forgone payroll taxes and the cash outlays for refundable credits are included. At around 6% of GDP, they are up sharply from 4.6% in 1990. Eliminate tax expenditures, and a big chunk of the deficit would vanish.
A closer examination of tax expenditures, however, suggests that achieving those two goals will be difficult. The TPC reckons his plans would cost $500 billion-900 billion in 2015, depending on how the amounts are calculated. Although in aggregate there are enough tax expenditures available to cover those cuts, the totals are deceptive. For one thing, Mr Romney’s lower rates would automatically reduce the value of any tax expenditures he chose to eliminate. That is because taxing previously sheltered income yields less revenue when rates are lower. For another, Mr Romney has already ruled out touching some tax expenditures, such as the research credit, and others are highly unlikely to be eliminated, such as the fact that disabled workers don’t pay tax on some of their social security benefit.
Mr Romney can spare the bottom 40% any loss of income from reduced tax expenditures relatively easily. Whereas that group gets the lion’s share of refundable tax credits such as those for children, for earned income and for university expenditures, they collectively enjoy just 11% of all tax expenditures, according to the TPC. The reason is that exclusions and deductions are worth more to those who pay higher rates of tax; and those, of course, are the affluent.
The bigger challenge is crafting a reform that does not hurt the middle class at the expense of the rich. Mr Romney has pledged not to raise the preferential rate on capital gains and dividends; 75% of those benefits go to the top 1% of households. That group also prospers most from Mr Romney’s proposed cut in the top income-tax rate, to 28% from 35%. So Mr Romney would probably have to target the rest of the upper quintile, the upper-middle class who gain from other big tax breaks for employer-provided health care, mortgage interest, retirement savings, state and local taxes and municipal bond interest.
Even if Mr Romney could devise a workable plan, overcoming political resistance is another matter. Optimists note that a 33-year-old tax credit for ethanol, after surviving numerous assassination attempts, finally died last year. But the $6 billion saved by that was trivial. By contrast, Congress has steadfastly ignored Mr Obama’s proposal in his first budget (repeated ever since) to limit the tax break for mortgage interest and charitable deductions for rich households. Both ideas were fiercely condemned by interest groups. “As much as I’m a card-carrying member of the broaden-the-base, lower-the-rates, go-after-tax-expenditures club,” says Mr Marron of the TPC, “the politics and underlying economics suggest it’s hard to raise the money you need for these grand plans.”
from the print edition | United States
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