Before the end of 2010, but safely after the November 2 congressional election, the National Commission on Fiscal Responsibility and Reform, better known as the Deficit Commission will present recommendations on how the federal government can alter its current financial collision course.
The Congressional Budget Office forecasts annual federal budgets deficits in excess of $ 1 trillion for the foreseeable future. This is a conclusion with which few disagree, at least not very loudly. The news media suggest parallels with a debt-ridden Europe. Will the U.S. follow Greece into fiscal collapse? Do America and the weaker sisters of the European Union share the similar futures of ruin because they all indulge in the same addictions: entitlements?
Entitlement programs, as the name implies, bestow specified benefits to individuals as a matter of right. Recipients are entitled to collect benefits as long as certain conditions hold; and the government is obligated to deliver them. They are not supposed to be subject to budget negotiations or legislative appropriations.
The history of entitlements in the U.S. starts with Depression era Social Security, unemployment compensation; welfare - the 1935 Aid to Families with Dependent Children (AFDC) which was transformed in 1996 into the Temporary Aid to Needy families (TANF); education and unemployment for veterans; reduced-price school lunches; the Great Society’s Medicare and Medicaid; Earned Income Tax Credits that supplement low wages, and carries through to programs like the State Children’s Health Insurance Program started in 1997.
A Wall Street Journal article of September 14, 2010 “Obstacle to Deficit Cutting: A Nation on Entitlements” is typical of those who argue that cutting entitlements are the necessary and inescapable steps that must be taken toward fixing federal deficits. An important observation comes early in the piece:
"We have a very large share of the American population that is getting checks from the government," says Keith Hennessey, an economic adviser to President George W. Bush and now a fellow at the conservative Hoover Institution, "and an increasingly smaller portion of the population that's paying for it."
The tax base Hennessey refers to is not shrinking just because of the falling fraction of the population paying taxes, but because of the decreasing portion of income that is still taxable as a result of another form of “entitlement”: tax expenditures.
Tax expenditures , more commonly called tax breaks or loopholes, are revenue “losses” incurred by the government due to provisions in the tax code that give tax relief to defined categories of taxpayers for engaging in certain activities. Some critics object to referring to these provisions as leading to revenue “losses” because the use of that term implies it was the government’s money to lose in the first place. However, since the provisions are deliberate departures from the regular treatment of taxable income to subsidize a particular objective, they are the functional equivalent of a budgeted and appropriated expenditure. In other words, giving some a tax break in the hope, expectation or requirement that they spend the incremental funds has the same budget impact as the government writing a check. Moreover, unlike appropriations or grants, tax expenditures are not, in practice, subject to congressional approval every year and are thereby at a lower risk of modification and/or cuts. Once a tax expenditure is granted, it’s difficult to reduce or eliminate. From a political point of view, the reduction in a tax expenditure is labeled a tax increase. They become almost as difficult to shrink as traditional entitlements.
On top of all those similarities, tax expenditures to individuals (as opposed to business) serve some of the same social purposes as ordinary entitlements including medical care and child care as seen in the numbers below. (The table was developed by the Tax Policy Center and can be found in their Tax Policy Briefing Book. As indicated on the graphic, the figures are from the Table 19.1 of the Analytic Perspectives section of the U.S. Government Budget Fiscal Year 2010.)
Searching for deficit-cutting opportunities among conventional entitlements without a similar inspection of the tax breaks would amount to a deliberately incomplete search for budget solutions. Such a selective search would also be questionable on grounds of equity.
There are two more important features of tax expenditures that are critical to include if fairness is to be taken seriously.
An obvious but often neglected point: tax breaks are only useful to those who have substantial tax liabilities. Moreover, the value of the tax expenditures increases with your taxable income. Skipping tax expenditures would leave benefits that go exclusively to upper income taxpayers largely untouched. One of the few exceptions is the Earned Income Tax Credit which performs as a negative income tax for low income households, primarily with children.
Tax breaks don’t come under the scrutiny of the Civil Rights act of 1964. Title VI of this landmark law, in part, says “No person in the United States shall, on the ground of race, color, or national origin, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any program or activity receiving Federal financial assistance”. Although weakly enforced, it is intended to prevent discrimination by government agencies that receive federal funding for transportation, education and community development. It’s also the legal foundation of what is now known as environmental justice.
There are few, if any, available mechanisms to address racially or economically disparate impacts of federal subsidy through the tax code. That would include the most familiar tax expenditure of them all, the interest deduction on home mortgage that fostered so much middle class suburban home ownership.
Additional postings will address additional issues of fairness and equity embedded in what amounts to spending programs administered by the Internal Revenue Service.
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