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Reagan’s Chief Economist Breaks With Norquist’s Big Spending Plan

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"Reagan’s Chief Economist Breaks With Norquist’s Big Spending Plan"

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Our guest blogger is Sima Gandhi, a Senior Policy Analyst at the Center for American Progress Action Fund.

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For years, right-wing lobbyist Grover Norquist has pressured candidates to sign a pledge promising never to repeal expensive tax subsidies for oil companies and other special interests, and hundreds of elected officials have, sadly, complied.  Earlier this week, however, Norquist lost a major ally in his quest to protect hundreds of billions of dollars worth of special tax expenditures—President Ronald Reagan’s chief economist.

In a Wall Street Journal op-ed this week, conservative economist Martin Feldstein writes that “[w]hen it comes to spending cuts, Congress is looking in the wrong place.” Instead of looking at direct spending programs, he argues that “If Congress is serious about cutting government spending, it has to go after [tax expenditures].”

Indeed, if the government cut all of its $1.2 trillion in tax expenditure spending—the special credits, deductions, and preferential rates that deliver subsidies to certain individuals and corporations—it would raise nearly enough to pay off this year’s estimated $1.5 trillion deficit. Or it could use the savings to cut tax rates by over 40 percent.

So Feldstein is right that Congress could massively slash the deficit simply by cutting off big industry’s tax subsidies—tax expenditures amount to nearly 25 percent of total government spending.  Unfortunately, he also correctly observes that there are political barriers to doing so:

Democrats are reluctant to cut such programs, because once built into the tax law they don’t have to be reauthorized each year, but remain on the books unless they are repealed… Democrats can thus cleverly avoid the traditional accusation of being the party of “tax and spend.” Republicans also are reluctant to cut these tax perks, because they regard the additional revenue collected by the federal government as a “tax increase”—even though the increased revenue is really the effect of a de facto spending cut. A Republican who would vote to cut or eliminate an ordinary spending program therefore won’t do so if it is packaged as a tax benefit.

How are tax expenditures, which transfer money by reducing tax liability, equivalent to direct government expenditures, such as a check? Let’s take an example. Suppose the government wants to incentivize businesses to make their facilities more accessible to the disabled. It could cut a check to businesses in order to subsidize the cost of building ramps, making restrooms wheelchair accessible, etc. Or, it could offer an “architectural barrier removal tax deduction” and a “disability access tax credit.” These tax credits, just like the check, transfer money from the government to businesses that make their facilities more accessible. The difference? Businesses get the money by paying lower taxes instead of through a government payment.

When it comes to controlling the deficit, and getting rid of government waste, lawmakers can no longer afford to ignore tax expenditure spending. It’s time to audit the tax code. This means measuring and evaluating tax expenditures, so that subsidies that don’t work are cut or reformed. And subsidies that do work are continued.

More importantly, it means integrating tax expenditures into the budget process. Tax expenditures, because they are largely ignored during the budget process, do not receive the same level of review and scrutiny that direct expenditures receive.  Politicians can no longer afford to ignore one-quarter of government spending every time it drafts the federal budget.

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