Debt Talks: In Zeal to Cut Spending, Some Eye Tax Breaks

Budget brinksmanship produced a fresh cascade of partisan rhetoric as summer begins in Washington. President Barack Obama chided Republicans for favoring millionaires and billionaires and compared them to children unable to finish their homework, and House Speaker John Boehner, R-Ohio, responded by again condemning Democrats' insistence on job-killing tax hikes.

The exchange crystallized the stalemate gripping Washington: Democrats refuse to endorse wholesale cuts without a fresh source of revenue, while Republicans want to slash spending and leave taxes alone. But economists contend that staunch Republican resistance to tampering with taxes creates a false distinction between trimming government programs and eliminating tax benefits.

Coming from an economic perspective, there is no fundamental difference between certain tax breaks and spending programs, said Ethan Pollack, a senior policy analyst at the Economic Policy Institute. Let's say you're going to give sommmeone a subsidy for childcare expenses and another one a tax break. You could design that credit to be the exact same as the subsidy. The fact that one is in lower revenue and the other is in higher spending is somewhat irrelevant.

The point is not entirely lost on policymakers. The bipartisan Simpsons-Bowles deficit commission stated bluntly in its final report that Washington has riddled the system with countless tax expenditures, which are simply spending by another name, noting that those tax earmarks amount to $1.1 trillion annually. As debt talks intensify Obama has singled out exemptions for affluent slivers of society or for specific industries like oil companies. But such references to a broken tax code help to obscure the broad reach of tax expenditures like the earned income tax credit, deductions for charitable giving and the home mortgage interest deduction.

The way many of the politicians and political commentators communicate this is they use words like loophole, said Donald Marron, director of the Urban-Brookings Tax Policy Center. The challenge there is that while those epithets are true for a subset of these things, a lot of the tax breaks are things that affect millions and millions of Americans, and I would describe them more as entitlements that run through the tax code.

But few people are aware of the massive scope and cost of tax expenditures. Suzanne Mettler, a professor of government at Cornell, found in a study that many people who benefit from tax credits, exemptions and deductions deny that they are participating in a government social program. Mettler said that the effective invisibility of deeply entrenched tax expenditures is bad for democracy.

The forces that want to keep these in place are highly mobilized to keep the status quo, but people who might object to that might not be aware of the existence of them, Mettler said. If we're going to see increases in any type of direct spending programs like welfare or unemployment insurance, that shows up in the regular budget battles. Tax expenditures can grow simply by being left alone.

Mettler said that tax expenditures tend to skew disproportionately towards the affluent. Despite the perception that the home mortgage interest deduction mainly benefits the middle class, she found that 69 pecent of its benefits flow to the top 15 percent of earners -- those with larger homes, bigger mortgages, and a more favorable marginal tax rate. Similarly, higher earners are able to write off a greater proportion of their charitable donations. Mettler noted that Obama's 2009 proposal to lower the size of deductions people could claim on mortgages and charitable contributions met with swift resistance.

That is not to say that tax expenditures solely benefit the rich. Pollack said the earned income tax credit, which accrues to people with low income, has done an insane amount to reduce poverty. A study by Marron's organization found that while high-income households draw the majority of benefits from tax expenditures, Americans occupying lesser income brackets derive a greater share of tax credits designed to offset their tax burdens.

Tax expenditures are unlikely to draw the same type of attention as proposed changes to hugely visible government programs like Medicare. But at a time when measures to reduce spending are dominating the conversation in Washington, there are signs of a thaw. Simpson-Bowles offered a bipartisan consensus that they needed to be reined in, and a symbolic Senate vote to repeal long-sacrosanct ethanol subsidies produced a statement by Sen. Lindsey Graham, R-S.C., that No one on the Republican side is going to vote to raise taxes, but I think many of us would look at flattening the tax code, do away with deductions and exemptions and take that revenue to help pay off the debt.

There's a substantial number of Republicans who are willing to draw this distinction, Marron said. There is a difference, and it's not just rhetorical - I think the Republicans can continue their opposition to increases in rates but embrace some sort of revenue increases.

Mettler said that the deficit talks could represent an opening to address tax expenditures, although the historical precedent makes her wary of the political prospects.

Each time there is some sort of deficit reduction commission, going back to the Reagan era, as soon as these plans are discussed in Congress people immediately say they are not going to change these programs, she said. In Congress you could say there's been much less will on either side of the aisle to scale them back, and I think it's because we're not having an honest conversation about how they function, how expensive they are, who they assist and so forth.