Tax Reform: How to Cut Taxes & Pay for It

“Tax Expenditures” will cost the Treasury more than $1.5 trillion next year[1], which is more than Social Security and Medicare combined. Tax Expenditures include tax loopholes, deductions and preferential tax rates.[2]

Each Tax Expenditure has a lobby or interest group that supports it. Consequently, Tax Expenditures cannot be repealed or reduced one at a time. They must all be repealed at once, with provisions to reinstate the highest priority Tax Expenditures.

Congress should pass a bill that has two primary components:

1. Repeal all Tax Expenditures effective on January 1, 2018.
2. Establish a Tax Expenditure ceiling in dollars so that Congress can then restore the highest priority Tax Expenditures.

Note that a $500 billion ceiling on Tax Expenditures would free up $1 trillion to increase spending on military, healthcare, infrastructure, education and for reducing the deficit. Abolishing some Tax Expenditures has the additional benefit of eliminating government- induced distortions to free market economic behavior.

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[1] Forecast by Office of Management & Budget

[2] The Congressional Budget Act of 1974 defines tax expenditures as “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”