Tax loopholes must go

Friday , March 09, 2012 - 12:48 PM

An Editorial

The good news is that at least some members of Congress and their staffs seem to be busy doing real work.

CQ Today, the authoritative online news journal covering Congress, is reporting that small bipartisan groups in both the House and Senate are back at the tough task of tackling the long-term federal deficit challenges that threaten the economic health of the nation. The activity is taking place quietly, out of sight of the distorting lenses of election-year campaigning and ideological posturing.

The groups are trying to craft specific legislative language for bills that would produce gradually declining deficits through various combinations of increased revenue and decreased spending. Such language is essential to any serious effort to enact a serious plan, but it was not part of the conceptual reports produced by the presidentially appointed National Commission on Fiscal Responsibility and Reform in December 2010 or the Domenici-Rivlin report released a month earlier through the Bipartisan Policy Center, a Washington-based non-profit group.

The aforementioned ideological posturing often boils down to spending cuts (generally favored by Republicans) versus higher taxes on the wealthy (generally favored by Democrats), but the real challenges are much more complicated than that.

For example, if the current efforts in the House and Senate are going to make meaningful progress, they will have to take hammer and chisel -- a jackhammer might be better -- to the federal tax code.

The code's knottiest problem, however, is not the marginal tax rates applied to adjusted gross income but, rather, the preferential tax adjustments designed to encourage and subsidize certain kinds of activities. These add about $1 trillion to the budget deficit every year. The conventional term for these structural provisions is "tax loopholes." Legislators call them "tax expenditures" because their effect on the budget is identical to the effect of spending.

They include countless subsidies for corporations and big business (such as multi-billion-dollar incentives for oil exploration) as well as provisions for individuals and meant to encourage homeownership (the mortgage interest deduction), health care (employer-based health insurance not counted as income) and education (subsidized student loans) and to fight poverty (the earned-income tax credit).

All of these tax expenditures, however worthwhile, present problems. Suzanne Mettler, a professor of government at Cornell University, has noted many of them in her research and writing about what she calls "The Submerged State."

Because tax expenditures are buried in the tax code, people who use them often are not even aware they are benefiting from a government program. That tends to reinforce negative notions that government isn't really helping people.

In addition, most of the dollar value of preferential tax treatment, with some exceptions, goes to people with very high incomes -- in other words, people who don't really need them.

Someone who can obtain and make the payments on a million-dollar mortgage, for example, probably doesn't need a government subsidy to buy a house. But any attempt to cut off the benefit at lower mortgage amounts would face fierce lobbying opposition from real estate and banking interests.

The quiet congressional work on long-term deficits may be aimed at producing bills for consideration during the lame-duck session that will follow the November election. Such sessions sometimes generate admirable levels of legislative courage, given that fair numbers of elected officials won't be returning.

When it comes to the complex challenges of real budget reform, it will take courage to make progress.

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