Tax cut bills are now moving in both the House of Representatives and the Senate. With budget deficits growing and tax cuts set to make the situation even worse, policymakers must address spending through the tax code in order to achieve real tax reform that will help get the nation’s finances in order.
There are a plethora of tax breaks and loopholes that are essentially spending through the tax code because they are similar to traditional government spending programs. They are easier for politicians to support than spending programs because they are sold as tax relief. But the budgetary effect of the tax breaks is the same as government spending, it increases deficits if not offset by spending cuts or tax increases elsewhere in the budget.
These “tax expenditures” add some $1.6 trillion annually to deficits. If included in the federal budget, they would represent more than a quarter of government spending.
Tax expenditures have grown considerably since the last tax reform in 1986. Yet the current tax debate is not comprehensively addressing the issue. While the tax debate has shone a spotlight on a few of the tax breaks that pervade the tax code, such as the state and local tax deduction and the mortgage interest deduction, many more have so far been left untouched. The House and Senate bills differ on how they treat several deductions.
Creating true tax reform that makes the tax code simpler and fairer will require addressing tax expenditures because they complicate the tax code and the wealthiest taxpayers get the most benefit. Eliminating or limiting tax expenditures will also offset lost revenue from cutting tax rates, which will allow tax cuts to spur economic growth for the long haul. The tax reform plan from the Simpson-Bowles Fiscal Commission showed how tax expenditure reform can finance sustainable tax cuts that can generate lasting growth.
The unpaid-for tax cuts currently being debated will add to the national debt, which will only slow the economy in the long run as higher debt drags down economic growth. Aggressively dealing with tax expenditures is the only way to achieve genuine reform that can promote significant growth.
National Debt and You