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.
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