[VIDEO] President Trump’s Budget Blueprint Sparks Concerns: Jonah Goldberg, Mara Liasson & Guy Benson on Special ReportPosted: February 27, 2017
The conversation on corporate tax expenditures is complicated by an official tax baseline that relies on a misleading definition of spending through the tax code.
The US government uses the term tax expenditure to describe both privileges granted to politically favored special interests and patches to the tax system that address economic inefficiencies created by the income tax code. This use of the term confuses two very different phenomena and muddies policy discussions about tax reform.
A new study from the Mercatus Center at George Mason University examines the current accounting of tax expenditures, presents case studies of some corporate tax expenditures, and proposes reforms to reduce favoritism in the tax code. The study investigates the difference between tax expenditures that privilege a particular group at the expense of others and tax provisions that, if properly accounted for, would not be counted as tax expenditures at all.
A corporate tax expenditure is defined as a provision in the tax code that allows a firm or group of firms to not pay a tax which would otherwise be collected.
- The modern US tax system is built on the income tax. This system double-taxes investment and savings, distorting market decisions and slowing economic growth.
- To correct these distortions in the income tax, some special tax provisions were created to mitigate biases against savings and investment and offset other distortions.
- Current methods employed by Congress’s Joint Committee on Taxation (JCT) and the administration’s Office of Management and Budget (OMB) for assessing the fiscal impact of tax expenditures use the income tax as the “baseline” from which to make their count.
- Under the current accounting methods, broadly available tax expenditures that correct for economic bias are economically indistinguishable from government-provided tax subsidies that benefit some businesses and industries at the expense of others.
- A superior tax expenditure baseline would rely on consumption, which would provide a more equal
treatment of economic activity and focus attention on tax provisions that truly provide unfair advantages.
However, even by the standards of a consumption baseline, most corporate tax expenditures are unnecessary privileges that provide unfair advantages to certain industries and firms.
- Sixty-five percent of corporate tax expenditures privilege certain activities or industries while excluding others.
- The proliferation of corporate tax expenditures results in disparate effective tax rates that distort consumption and investment and motivate wasteful rent-seeking.
- The growth of tax expenditures also increases compliance costs by contributing to the lengthening of the tax code, which in the past 30 years has nearly tripled in length, from 26,300 pages in 1984 to the almost 75,000-page behemoth it is today.
James Pethokoukis writes: US productivity growth, at least as measured, has been in low gear for a decade. And especially so since the Great Recession, averaging just 0.6% annually from 2010 through 2014. We’re aren’t going to consistently hit 3% GDP growth, much less 4%, like that.
Then again, productivity growth has slowed in most OECD countries over the past decade. A new OECD research note doesn’t think the problem is a lack of innovation, so much as an inability to spread innovation broadly throughout advanced economies. “A breakdown of the diffusion machine” is what the OECD calls it.
The gap between high productivity firms and low productivity firms is increasing. (Maybe also helping to explain rising inequality.) So why aren’t innovations spreading as fast as they used to? The WSJ’s analysis of the paper sums it up nicely:
One key reason appears to be that the process of “creative destruction” identified by Austrian economist Joseph Schumpeter as essential to capitalism’s dynamism appears to have lost some of its ferocity. In the OECD’s words, “market selection is weak.” One reason for that is government policy, which the OECD said favors incumbents across a whole range of areas, from regulations designed to protect the environment, to taxation. As a result, older firms that suffer from low productivity growth endure, often “trapping” workers in jobs for which they are over qualified. Read the rest of this entry »
Your periodic reminder that the unbearable largeness of government is ongoing and eternal, despite a half-dozen recent showdowns over federal spending, comes from Sunday’s Washington Post. Excerpt:
After 2 1/2 years of budget battles, this is what the federal government looks like now:
It is on pace, this year, to spend $3.455 trillion.
That figure is down from 2010 — the year that worries about government spending helped bring on a tea party uprising, a Republican takeover in the House and then a series of ulcer-causing showdowns in Congress.
But it is not down by that much. Back then, the government spent a whopping $3.457 trillion.
Measured another way — not in dollars, but in people — the government has about 4.1 million employees today, military and civilian. That’s more than the populations of 24 states.
Back in 2010, it had 4.3 million employees. More than the populations of 24 states.
These numbers underline a point not made often enough: The stimulus was supposed to be a surge, a temporary increase to be pulled back after the crisis was averted. Instead, predictably, it just created a new baseline level of government spending.
Whole thing here. Link via the Twitter feed of the Post’s Dan Froomkin, who comments: “I’m still appalled by this poorly argued anti-government diatribe masquerading as a front-page WaPo story on Sunday.”
Serious about balancing the budget without raising taxes? Then read this Reason classic from Nick Gillespie and Veronique de Rugy: “The 19 Percent Solution.”