Monday, July 2, 2012

Despite Republican Promises, Tax Expenditures Are Not Going Away

Both Mitt Romney and Paul Ryan have proposed fiscal plans that include large tax cuts. They both suggest that their plans will not increase the deficit because the revenue reduction will be balanced by spending cuts and reductions in tax expenditures. Tax expenditures are those tax deductions, rebates and subsidies that are built into the tax code in order to encourage tax payers to behave in a certain manner. An article in The Economist provided a look at what this promise would entail if had been made in good faith. 

The author makes use of data and analyses provided by the Tax Policy Center (TPC). It concludes that if Romney is to keep his promise and balance the budget, he will have to obtain $500-900 billion from increased revenue extracted from these tax expenditures. To see what might be involved in this process, the article provides this tally of the largest categories of tax expenditures.

There is about $1.1 trillion involved in all the categories. The top ten listed here add up to $705 billion. Clearly, if such large amounts of revenue are to be recovered, many of these large programs will have to be gutted. This will not be an easy task because these government spending programs are quite popular and have come to be viewed more as entitlements than examples of federal largesse. They are also quite popular with the lobbyists of the organizations that benefit from them. Let’s see who might be upset by cuts in these programs: the housing industry, financial organizations, the healthcare complex, charitable organizations, corporations, states, and, foremost, wealthy people. Certainly, the Republicans are preparing to wage war with that assembly of special interests—right?

Actually, Romney and Ryan could gain some credibility with the common man by means testing some of these program cuts so they only affect the wealthy. Since they are based on tax rates, they benefit most those who reside in the high-rate incomes groups. Suzanne Mettler provides some data to illustrate this effect in her book The Submerged State. Consider those who benefit from the mortgage interest deduction:

And those who benefit from retirement contribution deductions:

Which of these tax expenditures are Romney and Ryan targeting? Ominously, they refuse to say. A sympathizer might applaud their political skills in avoiding pre-election battles and controversies. One who has observed Republican actions in recent years might come to a different conclusion.

When the Republicans last held the presidency under George W. Bush, they inherited a surplus. What did they do with it? As soon as possible they converted it to a deficit. Was this some sort of Keynesian impulse designed to create jobs? No, it was actually intended to make sure that the surplus could not used for wasteful government spending on things like repairing roads and bridges. It was at this point that Cheney issued his infamous comment: "Reagan proved that deficits don’t matter." Certainly deficits didn’t matter to the Republicans at the time. But, now that a Democrat is in office, they claim to believe that deficits are the most important problem we face.

I rather think they showed their true intentions when they were in power. Their goal is not fiscal rectitude; the intention is to limit government programs, particularly those that have an income redistribution element to them. They seem to believe that once the government is eliminated, all will be well and a new era of prosperity will ensue. Debts will somehow be resolved.

If Romney and Ryan refuse to describe the expenditure cuts (tax increases) they are in favor of, it is because they know that none of this is ever going to happen. Even if they wanted to greatly decrease tax expenditures, they know that a Republican Congress would never approve.

This is as brazen an example of lying as we are likely to encounter.

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