Thirty years ago, Republicans criticized tax expenditures for distorting the market. Now both parties view them as sacrosanct.
Thirty years ago, Republicans criticized tax expenditures for distorting the market. Now both parties view them as sacrosanct.
The super committee on deficit reduction has now disbanded without even having managed to agree on scaling back tax expenditures. These social welfare policies that are hidden in the tax code bestow their greatest benefits on high-income taxpayers, as I have shown elsewhere. They amount to over 7 percent of GDP, more than what we spend on either defense, Social Security, or Medicare and Medicaid combined, not to mention domestic discretionary programs, which cost far less than any of these.
Its inaction means that regular spending priorities -- with the exception of those that policymakers explicitly agreed in advance to shelter -- will now be made subject to automatic, draconian cuts. But tax expenditures, which no one has even mentioned, will remain completely immune to such reductions. This is because these policies enjoy a protected status granted to no other entitlement programs. Unlike other forms of direct spending, they are not subject to the annual budget process; they grow undeterred and lawmakers do not take account of their costs.
While in recent weeks lawmakers did at least advance (unsuccessfully) some proposals to reduce tax expenditures, what remains remarkable is that the privileged status of these policies has not provoked greater scrutiny. Certainly this owes in part to the continuing efforts of vested interest groups to build bipartisan support for their pet tax breaks. Their generous campaign contributions, showered on members across the political spectrum, combined with their intensive lobbying, help to explain why even in today's fiercely divided partisan climate, neither Democrats nor Republicans have expressed much willingness to challenge tax expenditures. Making matters worse, Grover Norquist and other conservatives have promoted the idea that any reduction in such policies amounts to a tax increase rather than a spending decrease.
When viewed with even a small dose of historical perspective, the unquestioned immunity of tax expenditures to reductions is incredible given what's at stake. Moreover, it demonstrates how dramatically our politics have changed in a space of less than two decades. From the Reagan era through Bowles-Simpson, bipartisan commissions charged with finding means of reducing spending have agreed that such policies should be scaled back as a means to increase federal revenues. Fiscal conservatives of yesteryear criticized tax expenditures for interfering with market forces. Far from epitomizing laissez faire economics, such policies actively involve government in altering market forces, subsidizing some industries to the exclusion of others. As a result, they promote the consumption of goods and services in some areas, such as health care and housing, generating artificial increases in prices.
Consider that the most recent political leader to sign into law large reductions in tax expenditures was Republican President George H.W. Bush. The 1991 deficit reduction package contained an amendment to limit the value of itemized deductions for wealthy households to the middle income rate of 28 percent, rather than 35 percent or higher. Such curbs remained in place throughout the 1990s but were terminated in 2001, when the second President Bush signed his first tax cuts into law. When President Obama proposed essentially reinstating such reductions, his proposal was portrayed by Republicans as if it were a tax increase on ordinary Americans and by some Democratic leaders as a threat to charitable giving (because it would limit the tax break that the most affluent would attain when they contribute to philanthropies and foundations).
Today's conservative defense of tax expenditures illuminates the transformation in their approach to governance over the past 30 years. Whatever they say, in practice they are no longer protectors of limited government power and spending. Rather, they are advocates of particular uses of government power and largesse -- specifically of measures that channel benefits to their wealthy supporters and favored industries.
The relative silence about tax expenditures among Democrats -- and their embrace of the approach to channel benefits to low- and middle-income people -- demonstrates how much they have succumbed to the Republicans' governing philosophy. Rather than fight the unfairness and fiscal irresponsibility inherent in tax expenditures, they have decided instead to try to direct them toward the priorities that matter to them. Under both Presidents Clinton and Obama, substantial tax breaks have been created and expanded for low- to moderate-income Americans. But in the long run, this way of governing threatens to undermine public support for government generally. As I show in my book, The Submerged State, the hidden design of these policies is such that even recipients themselves often fail to recognize that government has provided for them. When people can't see what government does in their own lives and at great expense to the nation, they gain little confidence in its effectiveness and have little reason to support it. As tax expenditures shrink both our federal revenues and our confidence in government, our ability to act collectively as a nation for the sake of the public good grows increasingly diminished.
Suzanne Mettler is the author of The Submerged State: How Invisible Government Policies Undermine American Democracy.