The Vicious Cycle of Fiscal Incoherence

The Vicious Cycle of Fiscal Incoherence

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Making matters worse, however, President Obama has pledged not to raise taxes on anyone earning up to $250,000 a year – that is, 98 percent of taxpayers. Even less credibly, leading Republicans pretend we can keep cutting taxes and still fix the problem.

Unfortunately, such intellectual hide-and-seek extends to the realm of leading budget experts, as witnessed by Martin Feldstein’s column in the Wall Street Journal this week on “tax expenditures” – the collection of deductions, credits, and other write-offs that enable individuals and businesses to significantly reduce their effective tax rates.

To be sure, Feldstein was right about a few things. Tax expenditures now cost the government at least $1 trillion a year in lost revenue, they represent a form of spending through the tax code, many of the write-offs are unjustified, and we should examine tax expenditures as part of future deficit-cutting efforts.

But, alas, Feldstein went on to confuse as much as to enlighten.

In his first paragraph, he describes tax expenditures as “a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.” Two paragraphs down, he says that the congressional Joint Tax Committee has identified, for instance, “more than a dozen tax-based programs that subsidize education and training.”

It all seems like the tax-based version of “waste, fraud and abuse.” In fact, tax expenditures are something quite different.

Like the spending side of the budget, which is dominated on the domestic side by programs that people clearly support (Social Security, Medicare, and Medicaid), tax expenditure are dominated by a few key write-offs that are extremely popular and, politically speaking, very tough to scale back.

Specifically, the two most costly tax expenditures by far are the tax-free benefit of employer-provided health care and the home mortgage interest deduction, according to the Office of Management and Budget.  Following behind, in descending order of cost, are the tax-free treatment of 401(k) plans, the deduction for charitable contributions, the deduction for state  and local taxes, and other popular provisions.

That’s not “waste, fraud, and abuse,” at least not the way people understand the term. Those are provisions that people support and would be very reluctant to part with under almost any circumstance.

Feldstein knows that. Perhaps that’s why he did not tell us forthrightly about the composition of tax expenditures. Such candor might have raised too many hackles about his proposal to scale them back.

At some point, however, the American people must come to grips with fiscal reality. The costliest programs on both the spending and tax sides of the ledger are the ones that people care about. Those are the ones that policymakers will have to scale back in order to restore fiscal sanity.

Suggestions to the contrary, whether by top elected officials or leading economists, only feed public ignorance – and set the stage for a public backlash against any effort to address the deficit head-on.

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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.  

Lawrence Haas
is former senior White House official and award-winning journalist, writes widely on foreign and domestic affairs. His articles have appeared in The New York Times, USA Today, Los Angeles Times, Baltimore Sun, Miami Herald, San Diego Union-Tribune