Tax cuts come with more than meets the eye

Posted: Tuesday, November 16, 2010

You might have noticed that politicians like to brag about cutting taxes. Some do it more frequently than others, but it's rare to find a politician who's never once boasted of his tax-cutting credentials.

Unbeknown to most Americans, however, the so-called "tax cuts" our politicians like to brag about are often just government spending programs that happen to be administered via the tax code. These programs are officially known as "tax expenditures," and they're used to provide funding in almost every area the government deals with from education to business investment.

Unfortunately, the large and growing cost of tax expenditures - currently more than $1 trillion per year - is one of the most important contributors to our nation's dire long-term fiscal situation. For years, lawmakers have enthusiastically created scores of new tax expenditures, in part because pretending their favorite programs are tax cuts makes them easier to enact, and easier to defend against potential critics. But today, lawmakers on both sides of the aisle have finally begun to acknowledge what serious analysts have long known: tax expenditures must be scaled back as part of dealing with the federal budget deficit.

Presumptive House Speaker John Boehner, R-Ohio, for his part, has been sending mixed signals when it comes to his commitment to reining in government spending done through the tax code. On the one hand, Boehner recently confessed that "what Washington sometimes calls 'tax cuts' are really just poorly disguised spending programs that expand the role of government in the lives of individuals and employers."

But on the other hand, Boehner's plan to move Congress toward a "cut-as-you-go" system (or "CutGO"), suggests he's not taking the issue very seriously. CutGO would require that new "spending" (not including tax expenditures) be offset with reductions in other "spending" (again, not including tax expenditures).

Unlike Congress' existing PAYGO regime, CutGO would allow tax expenditures to grow unchecked. Indeed, it would actually encourage lawmakers to spend more via the tax code, since such spending would not have to be paid for. Notably, CutGO would also hamper efforts to improve government efficiency, since the elimination of unnecessary or wasteful tax expenditures could not be used to fund similar, potentially cost-saving direct spending programs.

The effects of CutGO would be particularly noxious given lawmakers already face a number of strong incentives to overspend via the tax code. For example, in addition to all the political advantages that come from being called "tax cuts," tax expenditures also enjoy immunity from the appropriations process and from the government's reviews of its own performance. This allows most tax expenditures to continue indefinitely without any review or even any limitation on their size.

A number of organizations, including most recently the Pew-Peterson Commission on Budget Reform, have recommended putting tax expenditures on a more even footing with ordinary spending programs. The types of reforms proposed by these groups would go a long way toward curbing overspending done through the tax code. Among the specific reforms under discussion are limits on the size of tax expenditures; expiration dates to force their periodic review; regular analyses of the effectiveness of tax expenditures in achieving their goals; and a reworking of the Congressional committee system so that committees with actual expertise in program areas would be responsible for tax expenditures in those areas.

In sharp contrast to Boehner's CutGO plan, these proposals would actually reduce the incentive for lawmakers to "just call it a tax cut" when deciding how to craft policy. A more efficient government, more rational tax code, and improved long-term budgetary outlook will be much closer within reach if we implement these types of reforms.

• Carl Davis is a senior analyst with Citizens for Tax Justice, 1616 P Street NW, Suite 200, Washington, D.C. 20036; website:; e-mail:

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