Taking on Tax Expenditures

Two very influential writers–WaPo’s Ezra Klein and New York Times columnist David Brooks–chose today to address the murky but essential subject of “tax expenditures”–the ever-growing use of tax incentives to promote a vast array of worthy and unworthy social and economic objectives. Both rightly note that tax expenditures are a large and unescapable part of the federal budget, not just–as many conservative disingenuously claim–some sort of act of forebearance whereby Uncle Sam selectively allows Americans to “keep their own money.” Both also note that any long-term plan to address the country’s fiscal problems must include a close look at tax expenditures. And both seem to think that wary gestures in the direction of limiting tax expenditures recently taken by the Obama administration and GOP candidate Mitt Romney, in the context of rate-lowering “tax reform,” could lead to real progress.

But as Cornell University professor Suzanne Mettler noted in a major article on tax expenditures for the Washington Monthly‘s July/August 2011 issue, Barack Obama actually did try to limit major tax write-offs for wealthier Americans back in 2009:

In his first budget to Congress, President Obama proposed to rein in the tax breaks given to the most affluent Americans via deductions for charitable contributions and home mortgage interest by capping their value at a rate lower than the marginal tax rate assigned to those in the upper income brackets. Instead of being able to deduct 39 or 36 percent of the value of their mortgages, in other words, single Americans making more than $174,400 per year would only be able to deduct 28 percent—the same as those who earn $83,600 a year. (This change would actually have reinstated restrictions on tax breaks that existed during the 1990s, signed into law by President George H. W. Bush and ended by his son George W. Bush in 2001. During the decade in which these restrictions were in place, housing prices and charitable contributions soared.) Obama’s proposal was projected to save the federal government $267 billion over ten years—45 percent of the funds needed to finance health care reform.

This modest effort to limit tax expenditures, noted Mettler, immediately generated a vast and powerful lobbying effort, especially by charities.

The proposal never had a chance. Rent-seeking crony capitalism reigned, with interest groups protecting the subsidies that benefited themselves and the affluent, and ordinary Americans had no inkling of what had transpired.

The stakes in this unequal fight, Mettler argued persuasively, were much higher than the proposed budget savings that were subsequently lost. Lost, too, was an opportunity to secure public recognition of what she calls a “submerged state” of subsidies that even beneficiaries often do not acknowledge or understand. Indeed, it’s a big part of the political anomaly whereby many millions of middle-and-upper-income Americans are by any realistic definition on the “public dole” but consider themselves overtaxed and under-supported victims of more visible and direct expenditures for the poor, the disabled and the elderly via public safety net programs.

And while many tax expenditures originated with conservatives, progressives have often become their staunchest supporters, despite the perfidious corrosive impact not only on the budget but on public support for an effective pubic sector:

For too long, progressives have accepted the conservative playbook, creating and expanding tax expenditures on the assumption that they can tilt some of their benefits to low- and middle-income Americans. As long as this cornerstone of the submerged state is left intact, it fosters the delusion that governance is generally ineffective and unhelpful to most Americans, and it prompts people to attribute to markets more credit than they are due.

So yes, it’s encouraging that there is a small renewal of interest in the “submerged state” and its massive costs and sometimes overrated benefits, even if the interest is in part ironically attributable to Mitt Romney’s efforts to look slightly less plutocratic as he seeks to cut tax rates on the wealthy and corporations. Let’s hope this isn’t just another one-day story.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.