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Cutting Even the Worst Tax Breaks is not “Cutting Spending”

3 min readBy: Scott Hodge

With President Obama and Congressional Republicans at loggerheads about how to cut the deficit, there is a big push from many quarters in Washington to find a politically palatable method of raising new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenues without actually calling it a tax hike. A number of groups seem to have received the same memo that said: “Americans want to cut spending and don’t want to raise taxes. However, if we describe tax breaks as ‘spending in the tax code,’ we can raise new revenues and get credit for eliminating waste in the budget.”

Don’t get me wrong: many of these tax preferences have similar economic effects as spending programs. They involve politicians directing resources towards chosen winners and losers. But eliminating those preferences should be done as part of cutting tax rates and reforming the tax system, not merely as backdoor way of raising taxes.

The latest contribution to this effort comes from Donald B. Marron, director of the Urban-Brookings Tax Policy Center. In his new article in National AffairsSpending in Disguise,” he argues that “A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences – preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise.”

This begs the question, isn’t there is a moral distinction between government spending and tax preferences, in that spending involves redistribution from one taxpayer to another while tax preferences must involve some kind of voluntary action by the taxpayer? After all, if the government takes $1,000 from me and gives it to the Department of Energy for switch grass research, I have no choice in the matter. My $1,000 has been redistributed to the company conducting switch grass research. Isn’t it far less coercive for officials to induce me to keep $1,000 of my own money if I do something that politicians think is worthwhile, such as purchasing new windows for my home from whomever I want?

The current effort to describe elimination of such preferences as “cutting spending” shows why questions like that are important. I’m sure there are millions of taxpayers who decided not to take advantage of the tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for replacing their windows. Should they get credit for “saving” the government money by not doing so? Here is a bumper sticker: “I saved Uncle Sam money by buying an Ford 150 rather than a Chevy Volt.”

Supporters of this rhetoric also are not consistent. In not mentioning that nearly half of American households pay no income taxes (according to the Tax Policy Center) and the IRS paid out $100 billion in “refundable” checks to people who had no income tax liability, they avoid facing the conundrum of “cutting” that “spending” by raising taxes dramatically on low-income earners. Now there are merits in asking everyone to pay at least something toward the basic cost of government, but no one should label that as a spending cut. As we discuss whether or not we should subsidize the purchase of Volts through the tax code, shouldn’t we have an honest discussion about whether we should continue to use the IRS as an ATM for social benefits?