[Rhodes22-list] Taxes - Timely Article

[Brad Haslett]

Here's an article from today's WaPo that dovetails neatly with our recent
discussion.  Care to make a bet about the home interest deduction?  No one
in the Congress has the guts to take on that sacred cow!

Brad

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*The $800 Billion Tax Loophole
*

By Maya MacGuineas
Special to washingtonpost.com's Think Tank Town
Thursday, January 18, 2007; 12:00 AM

Democrats are in a bind when it comes to their domestic economic agenda.
They have promised a number of new and costly initiatives such as fixing the
Alternative Minimum Tax, providing middle-class tax relief, and increasing
spending on homeland security and education. But they have also made a
commitment to fiscal responsibility. So how can they deliver on their
promises without opening themselves up to the old "tax and spend" label?
Reforming tax entitlements -- a large, mostly under-the-radar part of the
federal budget -- might just give them a way out of their predicament.

As a result of the 1986 bipartisan tax reforms, the tax base was broadened
and the tax code was greatly simplified. But these reforms have been
gradually undone as Congress has created scores of new tax breaks and
loopholes. Want to preserve historic buildings, encourage alternative energy
sources, help working families, or give certain industries a boost without
appearing to increase spending? Voil? -- a new targeted tax break is born.

Most tax expenditures are really spending programs designed to look like tax
cuts. Picture them as vouchers for healthcare, mortgage payments, daycare,
transportation -- name the tax break. Dressing these programs up as tax cuts
makes them a much easier sell for politicians who fear the "big spender"
label. But call them what you will, they drain the money from the Treasury
and extend the scope of government. All told, this portion of the budget
represents $800 billion in lost government revenues annually.

Not only do these tax breaks mask the true size of the government, they are
a terrible way to make policy. They regularly pay people and businesses to
do what they would do anyway, making them both poorly targeted and
unnecessarily expensive. They are also extremely regressive. A particular
tax exemption might be worth 35 cents on the dollar to a wealthy individual
and only 10 cents to someone on the other end of the income scale who faces
a lower tax rate. It would be hard to justify a housing policy that does
more to subsidize the rich than the poor, yet that is exactly what the $80
billion a year home mortgage interest deduction does.

Moreover, tax expenditures do not get nearly the level of scrutiny they
should. (If they did, would we really have a government program that
subsidizes millionaires who buy vacation homes?) New government programs
should only be created following vigorous debate over whether a proposed
policy is important enough to warrant government intervention, and if it is,
whether it will be effective. Discussions about new tax programs however,
tend to focus almost exclusively on the cost. Billions of dollars of
targeted tax cuts have been passed in the past few years with little or no
discussion about the worthiness of their goals. And unlike spending
programs, which are subject to congressional review, tax expenditure
programs are pretty much on automatic pilot.

Reforming this area of the budget would not only be a critical step in
improving the tax code (and probably the closest thing we will see to
fundamental tax reform in the next two years) it could also generate tens --
if not hundreds -- of billions of dollars in savings.

The first step should be capping a number of existing tax breaks. Capping
two of the largest breaks -- the home mortgage interest deduction and the
exclusion for employer-provided healthcare, would easily provide over $50
billion a year in savings. Both of these changes would reduce the large
subsidies that go to the highest earners while freeing up resources. Getting
rid of a host of other tax breaks that subsidize certain businesses or
industries could easily generate another $25 billion. A thorough review of
the over 150 existing tax expenditures to determine which ones have outlived
their usefulness would yield still more in savings. As Democrats search for
ways to offset the costs of their new agenda, reducing the $800 billion tax
loophole would be an excellent place to start.

*Maya MacGuineas is the Director of the Fiscal Policy Program at the New
America Foundation.*