tax expenditures

That's a lot of spending through the Tax Code as described by Urban-Brookings Tax Policy Center Director Donald Marron at lunch today before the National Economists Club -- between $600 billion and $700 billion annually, and that's counting both individual income and corporate tax preferences, but corporate preferences are small in comparison. In the last normal year, in 2007 before the recession and the stimulus bill, federal spending was 19.6% of GDP according to Treasury, but "spending-like tax preferences" raised that to 23.7% of GDP. 

Martin Feldstein makes such a proposal in The Washington Post today in "How To Cut the Deficit Without Raising Taxes."  Here is the main idea:

Here is a practical alternative toward the same end: Congress should cap the total benefit taxpayers can receive from the combined effect of different tax expenditures. That cap could be set as a percentage of an individual's adjusted gross income and perhaps subject to an absolute dollar amount.

To be clear, the cap would not apply to the amount of any deduction but would limit the total tax savings that result from such deductions. Someone with a 25 percent marginal tax rate who pays annual mortgage interest of $4,000 would still deduct that $4,000. The cap would apply to the $1,000 tax saving that individual could expect on mortgage interest, not to his or her deduction.

The Congressional Budget Office has a well deserved reputation for excellent analysis and for "calling them as they see them." On April 30, CBO analyzed tax arbitrage by U.S. colleges and universities. The Internal Revenue Code bars recipients of tax-exempt bond proceeds from directly reinvesting at higher rates, but the Congressional Budget Office found that most colleges and universities will do so indirectly with the $5.5 billion of muni's to be issued for them in 2010. Tax arbitrage is a pipeline directly into the pockets of U.S. taxpayers. That $5.5 billion will be spent on qualified purposes for university buildings etc., but until they are built they're invested in taxable assets at much higher rates of return. These institutions also benefit from tax-free charitable contributions for those who are well off enough to itemize their deductions, about 25% of the taxpayers. That tax expenditure has been estimated by the Joint Committee on Taxation as costing taxpayers $32.1 billion over five years FY09-FY13.

     Here is an article I just published in The Fiscal Times, prompted in part by Leonard Burman's work,  on the staggering size and automatic growth of "tax expenditures" -- tax breaks, for us non-budget mavens.

     Everybody knows that tax breaks -- on everthing from mortgage interest to green-energy projects -- permeate American life and often amount to backdoor government spending.  Republicans love to promote tax cuts, because they seem to strike a blow against Big Government.    Democrats love them because many tax breaks are a way to fund favored social programs.