Beyond Chest-Thumping–Tax Expenditures

I found Stan Collender’s response to my piece about nourishing an environment for deficit cutting quite amusing.  So, no more fiscal “chest-thumping,” eh?  Just do it, eh?  Stan must think policymaking takes place in a political vacuum.  George Hager, who also responded , thankfully seems to know better.

Stan says we’ve had quite enough “hearings, debates, working groups, discussions, summits, task forces, commissions, and votes,” thank you, and now we need action – that is, real live spending cuts and tax increases.  But, no, dear Stan – by definition, we haven’t had enough of that stuff, for we lack the prerequisites for action.  George lists three and suggests we need the presence of at least two of them at any one time to see action: (1) a fiscal situation that is “dire or embarrassing,” (2) a President committed to the effort and willing to cast aside “a key pledge” for the greater goal, and (3) an opposition party willing to sacrifice “a bedrock position” to reach fiscal nirvana.

Actually, it’s simpler than that.  What convinces a President or loyal opposition to dispense with pledges and positions, to anger constituencies, to, in the words of Lincoln, “think anew?”  Is it leadership?  Yes, in rare cases.  More commonly, though, it’s a political environment that, for elected officials, makes inaction at least as politically risky as action.  That is, the singular prerequisite for action – at least on the fiscal front – is political fear.

The examples George cites make the case better than I could.  Ronald Reagan and Tip O’Neill saved Social Security because they feared the consequences of failing to do so; the first President Bush and Congress inked a deficit-cutting plan because they feared the consequences of waiving Gramm-Rudman’s across-the-board spending cuts if they failed; and an incoming President Clinton cut a deficit-reduction deal with his congressional party-mates because he feared the consequences of ignoring the deficit-conscious 19 percent of Americans who had voted for Ross Perot the previous November.

But let’s return to Stan’s “just-do-it”-ism, for the time will come when the political landscape is altered; when Americans will demand the kind of action that our leaders can now avoid; when, in the view of those leaders, fear trumps inertia.  Anticipating as much, budget experts are now building public cases for their fiscal blueprints.  And while all eyes focus, of course, on the big-ticket items – big tax increases or cuts in big entitlements like Social Security and Medicare – a newer target is drawing lots of attention as well.

It’s called “tax expenditures,” which is a fancy way of referring to the hundreds of credits, deductions, and other write-offs that our tax code offers to millions of individuals and thousands of businesses.  Bob Greenstein, executive director of the Center on Budget and Policy Priorities, focused on it at last week’s fiscal summit of the Peterson Foundation, and the Washington Post and The Fiscal Times highlighted the issue yesterday in a combined piece by both news outlets.

Tax expenditures are a juicy target.  They currently cost the government more than $1 trillion a year and that number will likely grow as more people become eligible for them, they make the tax code more complicated, and they often provide greater tax benefits to the wealthy than to middle- and lower-income Americans.  They also don’t get nearly the scrutiny they deserve, if only because, like the tax code as a whole and entitlements on the spending side, they run on automatic pilot, continuing from year to year unless policymakers take specific action to change them.

So, yes, on tax expenditures, plow ahead.  But keep two things in mind.  First, while the term “tax expenditures” sounds generic, raising hopes of a pain-free approach to deficit reduction, make no mistake – they are as politically loaded as Social Security.  The big money is in the most popular write-offs, including the tax-free treatment of employer-provided health care, the mortgage interest deduction, and the deduction for state and local taxes.  Curbing these and other tax breaks is no effort for the politically weak-kneed.

Nor, second, may the revenues from curbing them come quickly.  Reducing tax expenditures will be more popular in the context of deficit-neutral tax reform that would also reduce tax rates.  Fine.  Tax reform is long overdue, and a cleaner, more efficient tax code can only help the economy.  But, as occurred two decades ago, the revenue payoff may not come until a few years later.

Remember what happened?  President Reagan and Congress reformed the tax code in 1986, slashing rates and scaling back tax expenditures.  A few years later, the deficit began to surge again.  With individual tax rates low, Clinton and Congress raised them at the top, the deficit began to fall, the economy picked up, revenues soared, and, by the late 1990s, surging deficits had turned into record surpluses.

We can only hope that history repeats itself.

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Lawrence J. Haas is former Communications Director to Vice President Gore and, before that, to the White House Office of Management and Budget. He's now a public affairs consultant who writes widely about foreign and domestic affairs, including fiscal policy.