The President’s budget reform panel is being encouraged to sniff
for smoke in the midst of flames. At its latest public meeting it
was told that tax breaks are “backdoor spending.” There is a
two-fold problem in accepting such an equivalence. First, the
nation’s fiscal predicament is not any so-called “backdoor
spending,” but uncontrolled “front door” spending. Second, not only
are the two not quantitatively comparable, they are not
qualitatively so either.
The budget reform panel, officially named the National
Commission on Fiscal Responsibility and Reform, is akin to a fire
marshals’ convention in a burning building. How hard could it be to
follow the flames to an inferno? In the case of the federal budget,
the government is spending a quarter of all America produces — the
highest peacetime level in U.S. history.
Still, at its latest meeting, outside witness Maya
MacGuineas, of the Committee for a Responsible Federal Budget,
identified so-called “tax expenditures” as “the most important area
of the budget to reform.” She went on to state that it was her
organization’s belief that all stipulations applied to spending
should apply to such tax breaks too.
This is no less than ignoring the fire in search of the
flammable.
First, it is important to understand what tax expenditures
are: exemptions within the regular tax code. These allow
individuals to pay less in taxes than they otherwise would — such
as the mortgage interest deduction. They are tax breaks, in other
words.
From an economic standpoint, tax expenditures have their
detractors because they use the tax code to intervene in the
market. The market itself should decide where investments and
spending go, not tax breaks that encourage one course over another.
In their opinion, the goal should be for neutrality between
decisions.
From a tax policy perspective too, there are critics. They
believe the goal should be the broadest, fairest, flattest, and
simplest system possible. Exceptions mean taxes must be higher
elsewhere, in order to raise the same amount of intended
revenue.
With so many reasons to question them, it is easy to
denigrate them. So why then seemingly defend them? Because it is
all too easy to make a fundamental mistake in equating them with
government spending. And that error opens the door to an even more
serious one.
Admittedly, it is easy to mistake tax expenditures for
spending from a fiscal standpoint. As a subtraction from the
ledger’s revenue side, their effect is akin to an addition to the
ledger’s spending side.
It is from the qualitative perspective where tax
expenditures and spending are significantly dissimilar. Tax
expenditures amount to allowing someone to keep more of the money
they have earned. They keep a person’s money with its
earner.
Federal spending is the use of someone else’s money by the
federal government. It is giving someone else’s money to another
person. Regardless of how well-intentioned, federal spending
remains the distribution of the general taxpayer’s money to another
individual.
The use of one’s own money and the use of someone else’s
money are not the same thing.
If tax expenditures are to be examined as part of a
broader budget reform proposal — and there are certainly reasons
to do so — any revenue saved should be set aside for reducing the
underlying tax rates. The last thing an elimination of tax
expenditures should be used for is offsetting more federal
expenditures.
This is why the distinction between tax expenditures and
federal expenditures is so important. Blurring their sharp
distinction only makes it easier to continue the current fiscal
fiasco: the government’s use of others’ money as if it were the
government’s.
Federal spending is our fiscal problem, but even
this is symptomatic of a larger philosophical one: the inability to
distinguish between “thine and mine.” Without that distinction,
there is no theoretical brake on federal spending. The government
can simply continue to arrogate more of the nation’s resources to
itself and its own self-defined better intentions.
To fix the nation’s fiscal problems, we must control its
spending. To control spending, we must recognize that the money is
not government’s, but taxpayers’. And to do that we must
acknowledge that taxpayers have a greater claim on their money than
the government ever can.
If we are going to talk of reform, we must at least start
from a common understanding, and an accurate one, of what real
reform entails. This can not be done, if we fail to properly
recognize what should be the first fundamental principle between a
government and its citizens.
