Today’s Chin Music, Movement #2: Reform Tax Expenditures

March 5th, 2013 at 8:26 pm

Testified at an interesting hearing this morning before the Senate Budget Committee on reducing wasteful spending (of a particular sort) by reforming tax expenditures.  Here’s my testimony and here’s a summary post from the CBPP blog.

As OTE’ers know, restructuring, reducing, or repealing some of these deductions and credits should entice partisans on both sides of the aisle: R’s, because many of the tax expenditures are just ways in which we spend through the tax code, and D’s because many are “upside down,” i.e., regressive, i.e., return disproportionate benefits to those at the top of the income scale (see figure 3 in the testimony).  And both should like reducing the ones that are highly inefficient–I stressed, e.g., the deferral of overseas profits as a tax break that incentivizes all kinds of corporate activities that have much more to do with sheltering profits than efficient allocation of resources.

“In sum, tax expenditure reform offers an excellent option to reduce wasteful spending through the tax system, while helping to meet our fiscal challenges in ways that will simultaneously improve our deficit outlook, increase economic efficiency, and add much-needed fairness back into the code.”

I suspect at least some of you are thinking it’s a waste of time to apply logic to what has become a pretty illogical process.  You may be right, for now.  Certainly, I experienced some awfully closed minds up there today.  Even the Republican witness (Russ Roberts), to his credit, bemoaned all the waste in the tax code delivered through these regressive loopholes.

But ranking Chairman Jeff Sessions was having none of it.  In his view, closing a loophole, even ones that are clearly completely nuts–ones that nobody even has the chutzpah to support anymore–the carried interest loophole, e.g., that allows hedge fund managers to pay a tax rate on their earnings that’s half the normal rate–is a tax increase.  And he’s against that.

On the other hand, we got some great questions from members, like Sen. King who initiated a discussion about why historical averages for revenue collection and outlays cannot accurately guide us going forward (demographic change alone confirms that insight, but there’s more to it–I’ll get to this soon–working on a piece called “The Tyranny of the Average”).  Sen Whitehouse spoke very strongly and plainly about how some of these tax breaks, like the carried interest one just noted, are just so plainly morally wrong–so patently unfair–you just shouldn’t need much analysis to get you to the right place on it.  So did Sen Sanders.

And I continue to have high hopes for Sen. Murray’s budget, coming soon.  Not that it’s going anywhere fast, but they need an organizing document like this of their spending and taxing priorities.

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3 comments in reply to "Today’s Chin Music, Movement #2: Reform Tax Expenditures"

  1. readerOfTeaLeaves says:

    From Jesse’s Cafe, a link to a video on inequality – this post is at Bill Moyer’s blog:

    It’s hard to believe anyone looking at the data in the linked visualization of inequality and income distribution could make a legitimate case for retaining loopholes. Particularly those on carried interest.

  2. Th says:

    Senator Sessions didn’t seem too upset about the expiration of the payroll tax cut which was a huge tax increase. He does make it pretty clear why government spending on the wealthy is done through the tax code and spending on the middle class and poor is done on the spending side. Those golden handcuffs are quite comfy for them.

  3. Robert Bostick says:

    Jared, your approach is commendable and will likely receive considerable support from both sides. It could be a start for national discussions on the fundamental rational for taxation in a sovereign monetary system.

    Professor Warren Mosler writes, “I was recently forwarded an article entitled Taxes For Revenue Are Obsolete, written in 1946 by Beardsley Ruml, the former Chairman of the Federal Reserve Bank of New York and published in a periodical named American Affairs. While Ruml was writing about the merits of corporate taxes, it is his discussion about how the function of taxes changed after the nation exited the gold standard that make this a must read.

    As Ruml’s stated, with an “…inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue… It follows that our Federal Government has final freedom from the money market in meeting its financial requirements… All federal taxes must meet the test of public policy and practical effect. The public purpose which is served should never be obscured in a tax program under the mask of raising revenue.”

    He goes on to explain how, with Federal spending not revenue constrained, the first function of taxation is to regulate the value of the dollar, which we know as regulating inflation. The notion of the Federal government ‘running out of money’ and ‘dependence on foreign borrowing’ as well as ‘sustainability’ is categorically inapplicable.

    The operative CBO ‘scoring’ is the inflationary effect, rather than simply a revenue forecast. And while Social Security and Medicare may turn out to be inflationary, they are not ‘bankrupting the nation’ as most believe, including a Democratic Congress that cut Medicare spending with the recent health care bill and has all entitlements ‘on the table.’