Leonard Burman and Marvin Phaup argue in favor of curtailing tax expenditures in order to address the federal debt.
As the US tries to cut back its debt, the battle lines are already being drawn. Republicans are in favour of spending cuts; Democrats in favour of tax rises. Putting political ideology to one side, this column asks what objective economics has to say.
As the Congressional Super Committee grapples with painful options to cut the federal debt, taxes have become the sticking point. Democrats have insisted that tax increases be part of any agreement while Republicans counter that all the cuts must come on the spending side.
Absent ideological objections, there really should be no conflict. Public finance economists and academic tax lawyers have long recognised that there are a number of spending programmes run through the tax code.
- The biggest "tax expenditures" – the tax exclusion for health insurance and the mortgage interest deduction – are just subsidy programmes run through the income tax rather than a programme agency. (See Table 1.)
- Repealing or curtailing some of those subsidies would simultaneously increase tax revenues and cut spending.
It could, in principle, be a solution to the logjam over the debt.