I Just Solved the Sequester!

February 27th, 2013 at 7:19 pm

OK, maybe the title to this post is slightly inflated, but only slightly.

A central reason we’re heading into the self-inflicted wound known as sequestration is because R’s refuse to budge on any new revenues in a deficit reduction deal to offset the $85 billion in auto-cuts about to hit our already wobbly economy.  The problem, they say, is on the spending side, not the revenue side.  D’s insist on balance—the solution must include both spending cuts and revenue increases, they maintain.

But what if I offered you–them–a solution that scratched both of those itches at once…a way to simultaneously both cut spending and raise revenues?  That would be irresistible, right?

Well, I’ve got exactly that.  I’m working up testimony on this for the Senate next week but the solution is so damn compelling—and the sequestration deadline only hours away—it would be downright unpatriotic to keep it to myself a second longer.

So, are you ready?

It’s tax expenditures!

Wait a minute…where’re you going?  Get back here right now!  I’m telling you, this should work.

Tax expenditures are how we spend through the tax code.  So when you repeal or reduce them, you do two things at once: you raise revenues and you cut spending.  Something for everyone!  (If you insist on being annoyingly wonkish, CBO scores them as revenue, but who cares about those nerds!)

Let me give you a classic example of the arbitrary distinction between taxing and spending, from this awesome new paper on tax expenditure reform by a few of my CBPP colleagues.

Child care provides an example of why tax expenditures generally are the equivalent of spending programs… Many low- or moderate-income people receive a subsidy, provided through a spending program, to help cover their child care costs. Many people with higher incomes similarly receive a subsidy that reduces their child care costs, but they receive it in the form of a tax credit. The child-care spending programs that serve lower-income families are not open-ended entitlement programs; they serve only as many people as their capped funding allows, and only about one in six eligible low-income working families receives this assistance.  By contrast, the child care subsidies for higher-income families operate as an open-ended entitlement provided through the tax code, and all families eligible for the tax credit can get it. The current structure, in which child care subsidies are constrained for lower-income families but unlimited for higher-income families, makes little sense. (It would also make little sense to target the child care subsidy for low-income parents for deficit reduction while leaving the child care subsidy for higher-income parents untouched because the former is delivered through a “spending” program and the latter is delivered through the tax code.)

The authors make a similar point regarding education supports:

On the spending side of the budget, the federal government provides Pell Grants to help low- and moderate-income students afford college. On the tax side of the budget, so-called 529 accounts help parents pay for college by providing tax subsidies that are most generous for upper-income households. Both of these policies are government subsidies to promote higher education; the tax/spending distinction is not meaningful here.

And when you sum them up, these tax expenditures are friggin’ large.  The figure below shows that if they were classified as a spending category, they’d be the single biggest one in the budget.

Now, just like every spending program shouldn’t be cut (one reason why the sequestration is so boneheaded), neither should every tax expenditure be reduced or repealed.  So how do we decide?

Well, I’ve figured that out too!  We run them through JB’s Three Dimensional Tax Expenditure Evaluator, which tests each one on the basis of 1) revenue forgone, 2) efficiency, and 3) fairness.  Anyone with even a passing familiarity with the tax code won’t be at all surprised how easy it is to find candidates that fail bigtime on all three.

You want examples?  You either have to wait for my testimony next week or page through the CBPP linked above.  But by way of a hint, you’ll see carried interest, various types of deferrals, and the mortgage interest deduction in there (again, you don’t have to repeal them; the latter could usefully be transformed to a 15% credit).

Better yet, you could just avoid the political morass of picking and choosing which tax expenditures to go after and simply cap deductions for high income households at 28%, an idea the President has had in his budget for years (I realize that suggesting an administration idea could queer the whole deal so forget I mentioned it…).

The larger point is that once you accept that tax expenditures are spending through the tax code, you’re done.  You should have sign-on from both D’s (new revs) and R’s (new cuts).  It’s bye-bye sequester and hello ticker tape parade for me down Constitution Ave.  See you there!

Source: Marr et al, CBPP

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16 comments in reply to "I Just Solved the Sequester!"

  1. Sandwichman says:

    Makes sense — which is why it won’t fly with the “deciders.”


  2. Bill says:

    This all sounds good, but I am a little troubled by the footnote at the bottom of the chart: “Tax expenditure estimates do not account for interaction effects; estimate does not include outlays.” Makes it sound like the numbers are being cooked. Can you explain?


  3. Bill Gatliff says:

    Today’s Daily Digest was so full of good, I don’t know where to begin. But like the true gentleman and scholar you are, you didn’t even have to go to some of the very best stuff to create a valuable read.

    For example, consider the subtle message coded in the difference between the two ways that child care support is delivered through our tax code—especially when you juxtapose that with the “makers vs. takers” philosophy. You let that pass without comment, while I had to pause and catch my breath for a few minutes.

    Impressive. Most impressive.


  4. Kevin Rica says:

    You can’t take away any childcare tax credits.

    Those are for women. You have shown your true colors if you want women to be dependent on their husbands and children on their fathers.

    How can women be independent if the government refuses to help?


  5. xpostfactoid says:

    Aw, come on, Tom Coburn made this case almost two years ago http://bit.ly/XrCR7L


  6. R. Nemo says:

    Republicans don’t want solutions. They just want to destroy everything in the name of “freedom.” Which means nothing. They are insane–plain and simple.

    Good luck at the hearing; they won’t hear you…


  7. LeRoy Matthews says:

    Study my Letter on Diana@Philosophyinaction.com. (Search: Crazy Inbox)

    The idea that if the politicians pay out a little less of the $ they’ve Stolen from the Hard-working, Productive, Long-suffering, Taxpayers, etc., we’ve wounded ourselves DOESN”T MAKE ANY DAMN SENSE.

    The so-called “federal government” is not only BANKRUPT, It’s Head- Over- Heels In Debt, & Operating Way In The Red, & It Has A Huge, & Increasing, Budget Deficit. There’s virtually zero $ for anything whatsoever,


  8. Sharon says:

    That chart is a thing of beauty.

    Why are we talking about cutting Social Security when a sober look at
    “tax expenditures” would clear a lot of budget space?


    • dougfir says:

      Social Security has a dedicated funding source and is not part of the budget deficit. It does need a minor tweak to fix the long term outlook, much as the funding scheme was tweaked back in the 70s after the Greenspan commission looked into the numbers.


  9. RCS says:

    The more I think about “limiting deductions”, the more it scares me, because when you limit deductions, you give people incentive to hoard their money by putting it into things like the stock market.

    I think the economy was better when the top marginal rate was high and there were almost limits on deductions, because rich people spent their money on just about anything (lunches, conferences, r&d, someone to stand outside the hotel and greet guests, etc.) rather than give it to the government. While that may have stifled government revenues, it made the economy broader.

    I think there may be a small grain of truth in “trickle down” – however our low tax rates coupled with limited deductions push people to just put their money into the stock market or speculate with it.


  10. Israel Medina says:

    This just blew my mind!! Your explanation was precise and anybody can easily understand!! you sir have awake my mind, I found you in yourtube and I already bought your book “All Together Now” and the book the new new deal because I saw the interview you did with the author, I want to thank you because of your blog and videos I know have found a new passion!! I wish more people will be interested in the economy, will be looking forward for your testimony, Thank you and keep up the good work!!


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