LIKE most sins, tax breaks are easier to condemn than to resist. Politicians regularly decry the inefficiency and complexity that tax breaks introduce to the overall tax system, while merrily adding to the pile. Bill Clinton created the child tax credit. George W. Bush slashed the rates on capital gains and dividends. Barack Obama created a new “American Opportunity” credit for university expenses while showering temporary tax benefits on renewable energy companies, homebuyers and employers who hired the unemployed.
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.
Tax expenditures now look likely to play a central role in the economic debates that are raging in this year’s election. Mitt Romney has promised to slash personal and corporate rates and pay for the cuts by eliminating tax expenditures. To fend off accusations that his plan is fiscally irresponsible and a giveaway to the rich, he has promised that it would not add to the deficit or favour the rich over the poor and the middle class.
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.