House Majority Leader Eric Cantor (R-Va.) says he won't consider cutting tax deductions, loopholes and other exemptions written into the tax code that benefit favored taxpayers, unless taxes are also reduced elsewhere. The idea is that anything that raises federal revenue must be a tax increase, even if it’s cutting these “tax expenditures.” And Cantor’s current position seems to be that he is willing to refuse a truly sweet debt deal for Republicans based on this logic. This isn’t just bad policy. It's ideologically incoherent.
It’s at least as fair to think of tax expenditures as, well, expenditures, not taxes. Congress has set general rates of taxation — on people, corporations, certain goods. The argument isn’t about whether to raise those general rates, which are the figures that really affect Americans’ incentives to work or invest. It’s about whether to allow people to pay less than they would owe without their special exception for buying this (a new home, for example) or selling that (ethanol). When Congress grants these exceptions, it not only distorts the economy to the benefit of a few, it has an effect that’s identical to spending more. Which is why Congress has used the tax code for decades as a way to increase federal intervention into the economy without making it seem as though it’s actually increasing spending.
Yet, now, Republicans such as Cantor turn around and claim that this tax expenditure charade is built on high principle, not political gimmickry, even though they would do more to reduce government’s influence over economic activity by revoking tax expenditures and putting the savings toward debt reduction, not by defending them. So much for small government.
The debate should be a mirror image of what we are having now. Those benefiting from the special treatment and their allies should have to demonstrate why they deserve it, instead of blasting any effort to revoke their benefits as an economy-killing tax increase. Republicans should be eager to eliminate the rampant inefficiency in the tax code, not demanding concessions for doing so.
Cantor has also argued that getting rid of tax expenditures only produces a small amount of revenue. That's true — if you limit yourself to cutting minor tax expenditures. Feldstein points out that tax expenditures are the largest form of non-defense spending in the budget, other than Medicare and Social Security. President Obama and congressional Republicans aren’t really going after the big ones, which include backdoor taxpayer subsidies of homeowners and of America’s bizarre system of employer-sponsored health care. These are popular. And just the sorts of things you’d want to curtail if you were serious about fairer, leaner, more efficient government.