I only am escaped to tell thee …

by Henry Farrell on February 8, 2007

From the acknowledgements page of Christopher Howard’s _The Hidden Welfare State: Tax Expenditures and Social Policy in the United States_ (“Powells”:http://www.powells.com/s?kw=christopher%20howard%20hidden%20welfare%20state&PID=29956 has cheap hardbacks).

No one in his right mind would choose to study and write about tax expenditures (better known as tax loopholes) knowing in advance that it entailed a ten year commitment. Investigating the ins and outs of the byzantine U.S. tax code is simply not its own reward, which is why many people pay lawyers and accountants good money to do it for them. If someone were going to study tax expenditures for longer than a day or two, he or she would need to come upon the topic by accident. Over time, that someone might develop a curious affection for tax expenditures, much as one does for a stray dog or cat that keeps hanging around the house. Even then, one would have to remind oneself constantly that studying tax expenditures was not the ultimate goal, but a means of saying something interesting about a larger issue, like U.S. social policy. At least that has been my experience.



P O'Neill 02.08.07 at 6:08 pm

Of course the complexity is exactly what makes them so suitable for distribution of favours, not to mention the glaringly irrational but common view that they are “less costly” than subsidies.


Shelby 02.08.07 at 7:37 pm

Well, the complexity and the tedium. And does anyone know how other countries’ tax systems stack up in comparison?


Richard J 02.08.07 at 9:16 pm

The UK tax system is rather fundamentally broken in places, very often because carelessly written anti-avoidance legislation has created several stupid problems in respect of legitimate commercial transactions, while at the same time giving ample scope for messing around with poor drafting.

Nothing, however, is quite as bad in the UK system as the well-known (and theoretically soon to be amended) flaw in the Luxembourg-French double tax treaty that allows a Luxembourg company to hold French property and escape both income and capital gains taxes on this property in either country. Curiously, the only other French treaty with the same flaw is the Danish-French one, which is starting to give rise to the strange phenomonen of Danish SPVs…


DC Tax Wonk 02.08.07 at 9:37 pm

p o’neill: It’s not merely that they’re perceived as less costly than direct subsidies — it’s that they’re viewed as being better than free, in the bizarre early-21st-century world of U.S. national politics, because politicians can sell what is in substance a spending program as a “tax cuts.”

In other words, pass an appropriations bill giving $5000 to every 18-year-old to attend post-secondary education, and it will be immediately attacked, amid cries of “socialism! communism!” as an enormous spending increase of $500 million over 10 years (“and just how do you propose to pay for that?!?”).

By contrast, pass a tax bill giving a $5000 tax credit to 18-year-olds (or their parents, since an 18-year-old college freshman is extremely unlikely to have $5000 of federal income tax liability) and everybody’s happy: Republicans can crow to their base that they’ve cut taxes by $500 million over 10 years, while Democrats can say that they’ve once again ridden in their shining armor on white horses to come to the aid of beleaguered middle-class voters.


mq 02.08.07 at 11:28 pm

Comment #4 is so right on, I can’t even tell you. And the quote in the post…also, oh so true.


mcd 02.09.07 at 12:50 am

#4 implies that the tax credits are a meaningless game, or irrational. But it’s perfectly sensible, from a right-wing point of view. Giving benefits in the form of credits limits the benefits to affluent households with more than $5000 tax liability, while shutting out poor households. It also really reduces the federal tax revenues, leading to the “need” for spending cuts. In programs that benefit lower-income households.


Slocum 02.09.07 at 3:02 am

Comments 4-6 Are somewhat over simplified and overly cynical, I think. There’s no doubt the U.S. tax code is too complex. But there are some very important beneficial aspects to tax deductions and tax credits (which are not the same). For example, tax deductions are a pretty effective way of funding non-profit and charitable organizations. Think of it as a 2-1 match, where the government puts in $1 for every $2 donation. So, for example, an individual donates $100 to United Way or a public TV station or a university endowment. He deducts that $100 from his income, and reduces his income tax by $33. No need for a government bureaucracy to determine who gets the funds — rather, any citizen can, in effect, initiate a mini-government grant to a worthwhile organization by putting up 2/3 of the money and having the feds kick in the other 1/3 (assuming a 33% tax bracket). When European universities look longingly at the endowments of U.S. universities, understand that this is where those endowments come from.

With tax credits, on the other hand, quite often it is the case that there are phaseouts, so that affluent taxpayers cannot take these credits. This is definitely the case with tuition tax credits:

“The amount of the credit begins to phase out if your modified adjusted gross income (MAGI) is between $41,000 and $51,000 for a single return and between $82,000 and $102,000 for a joint return.”



Martha Bridegam 02.09.07 at 3:14 am

On the contrary, there’s a substantial liberal consensus in favor of the U.S. low-income housing tax credit.


modlibs 02.09.07 at 8:00 am

Actually, the rules for deductions to charities are very strict and taxing (no pun intended). Individuals often take deductions they are not allowed (assuming they itemize), but it does not mean the tax code was designed to be this way. In fact, requirements for tax deduction substantion have increased significantly in the last couple of years (even while certain closely held distributions have been opened up to charitable giving possibilities).

The tax law is overly complicated and is often that way because of high capital donations. Simplification would require honesty and diligence on the part of all legislators involved and that is the most complex part of the entire situation.

Also, the tuition issue can be avoided with simple trusts. As for credits, there are phase-outs in place for relatively wealthy individuals. The AGI limits are generally more than fair.


Far Away 02.09.07 at 11:28 am

It’s highly aggregated but there are comparisons of tax expenditures (and other things) for more than 20 OECD countries in the analysis of net social expenditure by Adema and Ladaique http://www.oecd.org/dataoecd/56/2/35632106.pdf
There are earlier version on the website as well.

This looks at the effects of adding selected tax expenditures for social purposes to direct government spending, but also takes account of taxes clawed back from benefits, as well as mandatory private welfare spending

The US provides more through tax breaks than any other country (over 2% of GDP), but Germany and France also provide significant amounts.

This doesn’t include tax breaks for pensions, because these can’t be added on to current public spending, but there is a discussion of these and the USA comes out at the high end.


Anselm 02.11.07 at 11:06 pm

Keep in mind, it is much more politically expedient to revoke a tax credit than it is to cut a public spending program. The news headline ‘government revokes tax exemption for x’ never causes as much fuss as ‘government slashes social funding for x’.

As an exception to this, however, see the Canadian treatment of income trusts, where a revocation of flow-through status just raised holy hell there. That’s unusual though.


AsutinRoth 02.12.07 at 10:29 pm

This thread really does point out a primary difference between fiscal conservatives and fiscal liberals.

If you provide for a tax credit for some activity, the fiscal conservative recognizes this as an incentive on how to spend their money, as the government will agree not to take their money under the proscribed set of circumstances.

Only a fiscal liberal would characterize it as a spending program, as that conclusion has to start from the mindset that all money is the government’s to begin with, so whenever a targeted program allows taxpayers to keep more of their income, it is a ‘spending’ of government resources.

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