Tax Reform & the Deficit Problem
To solve the deficit problem, Congress is focused on entitlements for the elderly and the poor. They should also focus on entitlements for the wealthy – tax expenditures – which are comparable in size to Social Security and Medicare, combined.
Tax expenditures are entitlements for upper income individuals and corporations. These entitlements are listed in “Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017” published 02/01/13 by Congress’ Joint Committee on Taxation. According to this report, 87% of tax expenditure entitlements go to people earning more than $100,000 per year.
Tax expenditures include entitlements for NASCAR, the tackle-box industry, farmers, oil companies and multi-billion-dollar benefits for hedge fund managers plus hundreds of other entitlements. Tax expenditures cost the US Treasury about a $1 trillion per year, which is more than the Federal deficit. And, tax expenditures are a transfer of wealth from the vast majority of middle income Americans to a small minority of upper income Americans.
Approving a bill to repeal all $1 trillion in tax expenditures would produce a $300 billion surplus in the Federal Government budget in 2014, but it would create a few undesirable results. Consequently, the highest priority tax expenditures (such as tax deductions for charitable contributions) should be restored after the blanket repeal of all tax expenditures.
A blanket repeal is necessary because every tax expenditure entitlement has a lobbying group supporting it and these lobbies contribute to political campaigns. The healthcare industry, as an example, has 2,374 registered healthcare lobbyists, 23 lobbyists for every member of Congress. Any attempt to repeal individual tax expenditures would fail. Only a blanket repeal of all tax expenditures will work.
While Congress has focused on reforming Social Security and Medicare, tax expenditure entitlements represent a more important fiscal challenge. Currently, the revenue from Social Security and Medicare taxes pay for the cost of these programs. Tax expenditures have no specific taxes to pay for their costs. Like Social Security and Medicare, future tax expenditures should include a corresponding tax to pay for them.
In an article on American tax issues, The Economist magazine (Jan. 21-17, 2012, page 14) argued: “It would be far better to close or limit loopholes and deductions, currently worth 7% of GDP, which distort behavior and mostly benefit the affluent.”
This is not to suggest that Social Security and Medicare should escape reform. The qualifying age for Social Security, as an example, needs to be raised continuously as long as life expectancy continues to rise. But, tax expenditures are a significantly greater problem. Many American are uninformed about the magnitude of tax expenditures and their impact on the Federal deficit. The print and television media has done little to enlighten anybody, possibly because they receive advertising revenue from the beneficiaries of tax expenditure entitlements.
The primary solution to the deficit is to repeal tax expenditure entitlements.
