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The High Cost of Low Taxes

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"The High Cost of Low Taxes"

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Edmund Andrews helps bolster my faith in the Fiscal Times by doing a piece on the vast quantity of revenue lost through “tax expenditures”—specialized deductions that either drive the deficit up, or else force higher overall rates to pay for them:

The aggregate cost of these tax breaks hit a new milestone in 2009, according to estimates by the Treasury. In what appears to be a first, the revenue losses from tax expenditures last year — $1.08 trillion — slightly exceeded total collections of personal and corporate income taxes.

But analysts say that automatic cost escalation, which is similar to the formula-driven growth of Medicare and Social Security, could add almost $3 trillion to the public debt over the next ten years.

Accomplishing social policy through the tax code has become popular since over the years the GOP leadership has simultaneously become stupider and more dogmatically anti-tax. Consequently, it’s become politically much easier to add money to the deficit by establishing a $500 tax credit to subsidize something or other than by establishing a $500 direct expenditure to subsidize it even though the economic and budgetary consequences of these approaches are identical.

You can see this dynamic at work in the point of view of former Ways & Means Committee Chairman Bill Archer who at various points in the article seems to understand what Andrews is saying perfectly well and then offers:

Archer said he philosophically disagrees with the idea of equating tax breaks with spending. He said the idea of “tax expenditures” implies that the government has a full claim of ownership on people’s incomes, which he said is wrong.

It implies no such thing. The point is simply that if you establish a tax credit and pay for it by raising tax rates, that has the same consequences as establishing a direct expenditure and paying for it by raising tax rates. Similarly, if you establish a tax credit and pay for it by borrowing more, that has the same consequences as establishing a direct expenditure and paying for it by borrowing more.

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