Redefining tax expenditures

Joint Committee on Taxation chief Ed Kleinbard was recently quoted to the effect that he wants to reshape and revitalize tax expenditure analysis.

This is potentially a very good thing. As per a recent article of mine (in the Tax Law Review) and book chapter (in my book Taxes, Spending, and the U.S. Government's March Towards Bankruptcy), TE analysis was undermined from the start by its being intertwined with (a) support for Stanley Surrey's particular tax policy agenda (progressivity and comprehensive income taxation), and (b) a sideshow concerning whether one could define a normative income tax baseline that everyone could accept.

In illustration, I recall years ago discussing with Bruce Bartlett, at an American Enterprise Institute event, an article he was writing on TE analysis. He was somewhat hostile to the concept because he saw it as a tool of the Surrey agenda, and I pointed out that in many ways he should really like what it does, since stealth spending programs packaged as tax cuts but that increase government intervention in the economy should not be what he likes best. I believe he agreed.

The real point behind TE analysis is analytical and independent of the Surrey agenda. People define taxes and spending based on form, but attribute substance to the formal distinction. Thus, an identical program can appear to make government "smaller" if it's done through the tax system or "bigger" if it's done via direct appropriations.

The underlying conceptual problem is that the taxes-spending distinction even if reformulated is vacuous. So TE analysis uses and reformats a distinction that in the best of all possible worlds would instead be discarded. But a more satisfying distinction lies between distributional and allocative policies - the former aim at who ends up with what, the latter at level and allocation of investment, etc. In the context of a distributionally rationalized income tax, TE analysis can help avoid confusion between what one might call "synthetic spending" that is formally packaged as if distributional - e.g., a "tax cut" - but that is economically equivalent to a direct outlay (and equally needs to be financed). The real contribution that TE analysis can make is to address this confusion and defang it a bit.

I'm hoping that the Joint Committee will adopt changes that move in this direction, making TE analysis both more useful and less controversial.