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Spending in Disguise

Donald Marron

Published: June 28, 2011
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Abstract

A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences — preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise.

Reprinted with permission of National Affairs and with support from the John D. and Catherine T. MacArthur Foundation. The text below is an excerpt from the complete document. Read the entire report in PDF format.


With the United States on track for a third year of trilliondollar deficits, public debate is now focused on getting America's fiscal house in order. The challenge is straightforward: The federal government spends much more than it collects in tax revenue each year and will continue to do so even after the economy recovers.

The argument over how to close that gap is often dominated — sometimes debilitated — by sharp disagreements about how much should come from spending cuts and how much from tax increases. But that division can be misleading. A great deal of government spending is hidden in the federal tax code in the form of deductions, credits, and other preferences — preferences that seem like they let taxpayers keep their own money, but are actually spending in disguise. Those preferences complicate the code and often needlessly distort the decisions of businesses and families. The magnitude of these preferences raises the possibility of a dramatic reform of the tax code — making it simpler, fairer, and more pro-growth — that would amount to simultaneously cutting spending and increasing government revenue, without raising tax rates.

Such a reform would not eliminate the need for serious spending cuts, of course, nor would it take tax increases off the table. But it could dramatically improve the government's fiscal outlook and make the task of budget negotiators far easier. It will only be possible, however, if we clearly understand how spending is hidden in the tax code and what reformers might do about it — if we see that tax policy and spending policy are not always as distinct as we might think.

End of excerpt. The entire essay is available in PDF format.