Wednesday, November 17, 2010

'What the Heck is a 'Tax Expenditure' and Why Should I, Ricky Bobby, Care Anyways?'

Do you ever get the strange feeling that someone might be getting a better deal under the same federal tax code than you are?

Well, they are…millions of your fellow Americans are.  To the tune of close to $1 trillion in saved tax payments per year. Each year.  And you keep paying all of your taxes like a great American without even knowing why.

Here’s the answer: ‘Tax Expenditures’.

There is a very technical definition in the federal budget books but the basic idea behind tax expenditures is that they represent the amount of tax revenue that is not sent to Washington each year because someone had a better lobbying or trade association than you do or did.

More precisely, they accomplish essentially the same public policy goals/special favors that spending programs are created to do. Washington could send you a check for the tax-deductible part of your mortgage interest each year, for example, and it would have the 'same' effect on the federal budget as you continuing to take the deduction and not paying taxes on that amount.

And, yes, that number you saw above was correct.  Close to $1 trillion more tax revenue would be sent to Washington each year if the tax code was not absolutely machine-gun riddled with special tax treatment and most favored status for hundreds of thousands of different entities, other than you, of course.

To put that $1 trillion in lost revenue into perspective, our annual deficit was ‘only’ $1.4 trillion in FY 2010 that just ended, down from 'only' $1.5 trillion a year earlier so that $1 trillion in tax-hidden revenue sure looks enticing.

Until you realize it means the end of your mortgage interest deduction and employer-paid health insurance deduction, that is.

You are gonna start hearing a lot about tax expenditures in the Bowles-Simpson report coming up so you might as well understand just what the heck they are so you can call or write your congressman and senator and tell them what to do about them when the Commission sends a bill to Congress to vote on.

First off, a disclaimer:  We have come to the conclusion that the US tax code is counterproductive, archaic and sclerotic and about as adapted to current times as Hammurabi's Code written in hieroglyphics. We should 'can it' and move to a completely new tax system based on consumption taxes such as excise taxes, VAT taxes or the so-called ‘Fair Tax’…but not as an add-on to the current corrupted individual income and payroll tax system.

We also have advocated the abolition of the entire US corporate income tax code, much for the very same reasons:  it is riddled with favors and special treatment for certain industries vis-à-vis other industries and acts as a yoke on the creative genius of the American free enterprise system to grow, innovate and, most importantly, make things here instead of over in China and India and create jobs over there, not here.

We think the size of the federal government is way too expansive now with spending at 25% of GDP and the debate going forward should be over the 'size' of government, not merely over how to 'pay' for an ever-escalating monolith in Washington but more on that in a later post.

So call us the ‘Abolitionists of the US Income Tax System’ if you want.  The entire code reads like hieroglyphics, doesn’t work well any more and should be replaced with a tax system that reflects the dynamism of the 21st century.

Getting back to ‘tax expenditures’, take a quick look at this article by Donald Marron. He identifies the crux of the problem when he says:

'The Office of Management and Budget has identified more than 170 such tax expenditures…The deductibility of state and local taxes, for example, runs almost $70 billion each year. Favorable tax treatment for life insurance savings is about $23 billion. Credits for alcohol-based fuels total almost $9 billion. And dozens of rifle-shot provisions benefit narrow interests, such as special tax rules for NASCAR venues.

Living in the heart of NASCAR country might not be the best place to advocate the end to favorable tax treatment of NASCAR venues. However, the good people at Joe Gibbs Racing and Childress Racing gross over $100 million in revenue each year….and the earnings from race winnings are just a small part of that number with the rest being big corporate endorsements and the like.

If you have ever seen ‘Talledega Nights: The Legend of Ricky Bobby’, you know that race car drivers and owners are free enterprisers and true blue Americans to the nth degree.  We think people would still flock to see them race and have car crashes going 200 mph if their special tax expenditure line-item was repealed.

A full discussion of how to reduce these amazing budget deficits and this gargantuan national debt, or at least stop adding to it, can not be done without the inclusion of the repeal of many of the special tax break provisions currently residing in the US code.

You pay your full amount of taxes (sans the mortgage interest deduction or the amount your employer deducts for providing you with health insurance) each year, right?

So should everyone else, don’t you agree?

* for a full list of tax expenditures ranked by size, see http://www.whitehouse.gov/sites/default/files/omb/budget/fy2011/assets/receipts.pdf and go to page 220-222

picture courtesy of autoblog.com

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