Stop Giving Tax Breaks Away

It’s time for lawmakers to stop implementing government programs by creating tax write-offs and granting tax credit incentives.  All government programs must be funded instead by collecting tax revenues and spending the receipts directly to get work done and accomplish legislated objectives.

A Glut of Write-Offs

Many different tax offsets are written into the tax code to carry out the work of government.  The list includes tax deductions, exclusions, exemptions and credits, as well as deferring when tax payments are due and applying lower, preferential tax rates to certain types of incomes.

Home ownership is subsidized through mortgage interest deductions.  Tax offsets are provided for developing alternative energy sources, for purchasing energy efficient appliances and insulating homes.  Deferred taxes are granted to people who save for retirement.  Reduced tax rates are charged on capital gains income to encourage people and organizations to invest.  Companies pay lower taxes for hiring certain types of workers, for offering medical insurance coverage and sometimes for providing employees with transportation to work.  Workers receive tax credits to help with dependent care expenses and purchasing a first time home.  The government partners in charitable giving because certain donations can be deducted from taxable income.  Families have lower tax bills when they send students to college.  Businesses earn tax relief for purchasing equipment, conducting research & development, drilling for oil, exporting merchandize and putting up low cost housing.  State & local officials confer tax reductions to people who conserve land & water or send children to private schools, and for businesses that restore old buildings, start a new facility in a local area or shoot a movie in their state.  The lists goes on and on.

So many initiatives are implemented through the tax code that they reduce federal tax receipts by more than $1 trillion annually, which represents, surprisingly, roughly 30% of what the federal government spends in a year.  Nearly all individual taxpayers can qualify for some type of government sponsored tax relief.  Tax preparers charge millions of consumers each year to dig up tax deductions most people have never heard of.  Tax attorneys make a handsome living pouring through the tax code and creating inventive ways to trim business tax remittances to the bone.  Although the corporate tax rate in the U.S. is 35%, companies pay less than half this rate on average, and sometimes pay no income tax at all, due to the great variety of tax breaks made available to companies by lawmakers.  

Harmful Impacts 

On paper, creating tax write-offs versus collecting and spending tax revenues is a wash.  For example, Government A collects $100 million in taxes and spends $15 million on energy conservation.  Government B creates $15 million in tax credits, raises $85 million in taxes (rather than $100 million), and tells taxpayers to go out and spend $15 million to reduce energy use.  Both governments in this example achieve conservation and end up with $85 million to spend on other programs.

But funding the work of government through tax revenue reductions has significant disadvantages.  It makes the tax code unnecessarily complex, expensive to administer and difficult, sometimes impossible, to understand.  Tax write-offs reside on the revenue side of the budget where they receive less scrutiny and are more difficult to manage and control than direct expenditures, which appear in the budget as spending line items.  When the time comes to discuss government spending -- which initiatives should be refunded, which expanded, which reduced -- programs funded through tax reductions escape the debate.  Similarly, on the other side of the ledger, it’s hard to decide if taxes are too high, or whether they should be lowered, because tax reduction initiatives make it difficult to determine what the base level of taxation truly is.

Programs funded via tax reductions take on the persona of mandatory spending programs -- similar to Social Security, Medicare and Medicaid -- which are not subject to being reviewed and renewed each year.  Tax code funding is regressive: many types of deductions and credits can only be claimed by those who have a tax bill to pay; the higher the tax bill, the more valuable write-offs become.  Tax breaks can be unfair:  only about 1/3rd of taxpayers itemize deductions on their federal returns, so many income tax deductions created by Congress to further government programs are available to just a portion of the population.  Tax write-offs sometimes subsidize actions people will take anyway without receiving assistance, like sending their kids to college, buying a home and setting aside savings for retirement.

Shift to Direct Spending

Government initiatives funded through tax offsets provide great value and make substantial contributions to the public good.  But they all should be funded via direct spending rather than through tax reduction incentives.  If we agree to subsidize oil exploration, fine . . . put subsidies in the spending budget and pay companies to go out and find oil -- don’t wrap up incentives in complex tax avoidance schemes.  If we want more people to go to college, swell . . . write checks to cover part of the cost of tuition or books -- don’t do it by complicating the tax code and reducing tax bills for people who send dependents to university.  If the nation wants people to have energy saving refrigerators and light bulbs, great . . . give them away or issue rebate checks so people can go out and shop for themselves -- but don’t mold consumer behavior by shrinking the pool of tax dollars available for funding other social programs.  

Financing government initiatives by offering tax incentives sounds like a great idea.  People and businesses get to keep more of what they earn.  Government can be inefficient and wasteful, so why not let individuals and private organizations make decisions about how best to invest their own money rather than sending it in to the I.R.S. for government bureaucrats to spend?  A strong case can be made for charging lower tax rates on certain types of economic activities that benefit the public.  But these benefits come with drawbacks that are too costly to bear.  Proper oversight and control of government spending are needed now more than ever.  Simplify the tax code, equalize tax rates for everyone, get rid of write-offs, deferrals, preferences and all the rest.  It’s imperative that all government expenditures be removed from the tax code and placed openly in the spending budget where they genuinely belong.