Here's a fiscal riddle: What's almost as big as all the money appropriated each year by Congress, more significant for the trajectory of the federal debt than the Bush tax cuts and barely gets noticed at all? It's the more than $1 trillion a year in spending done through the tax code, a collection of mostly obscure provisions that threatens to devour the federal budget.
From the deduction for home mortgage interest payments, to special tax breaks for racetrack owners and purchasers of plug-in hybrid cars, Congress has punched hundreds of expensive holes in the government's tax base. Decades of accumulated decisions have turned the Internal Revenue Code into a multipurpose policy tool while undermining its ability to perform its most basic function: generating money to pay Washington's bills.
The tax discussion that is coming this fall perfectly illustrates the blinkered approach that dominates in Congress when it comes to scrutinizing what policy wonks call "tax expenditures." When lawmakers return in a week from their summer recess, they are poised to start debating the merits of raising income tax rates on the top 3 percent of taxpayers. That's a necessary fight because most of the tax cuts enacted in 2001 and 2003 are set to expire at the end of this year, and failure to act would bump up tax rates on almost everyone. And it's critical because of the potential economic and political effects of any change in law and policy.
This fall's debate, however, won't begin to address what many experts and politicians say is the larger problem: the inefficiencies, economic distortions and budgetary blindness caused by the current tax system. Advocates from opposite ends of the ideological spectrum — including Reagan economist Martin Feldstein and House Minority Leader John A. Boehner of Ohio on the right and the Center for American Progress and Texas Democrat Lloyd Doggett on the left — want to change the way politicians think and talk about tax policy. Their argument is that as long as lawmakers and the public believe there is a hard and fast line between "taxes" and "spending," they will never pay sufficient attention to tax expenditures, which blur that boundary, add to government borrowing and escape tough scrutiny.
"With a national debt that is already too big and scheduled to get bigger, I believe even those who never met a tax break they didn't like will eventually be forced to acknowledge that this spending through the tax code cannot go unchecked any longer," says Doggett, a senior member of the House Ways and Means Committee.
Changing the terms of the debate over spending through the tax code is particularly urgent now, they say, as the federal debt swells from emergency spending programs and declining revenue. President Obama's bipartisan fiscal commission is exploring limits on tax expenditures as a way to hold down the rise in borrowing, and recommendations to do so are expected to be part of the commission's post-election report. Democratic lawmakers, in particular, are starting to call for more frequent and more thorough analyses of targeted tax breaks.
Still, in spite of the attention that the fiscal commission might bring to this issue, lawmakers have plenty of practical reasons to avoid the discussion. Attempts to teach politicians and the public new ways to think about taxes and spending will run headlong into the same powerful factors that have repeatedly prevented a detailed dissection of the tax code since its last overhaul a quarter-century ago. Big, popular tax breaks such as the mortgage interest deduction benefit from their status as entrenched middle-class entitlements. Smaller items in the corporate tax code are immune, thanks to parochialism fueled by lobbying campaigns and lawmakers with hometown interests. Some on the right reflexively oppose anything that can be labeled a tax increase. Together, those forces forestall most serious discussions about curtailing tax breaks.