If you had to pick the most encouraging development in tax policy over the last year, it's clear which you would choose: The sudden focus on the $600 billion in loopholes, breaks, and deductions known as tax expenditures.


The U.S. Capitol is seen Feb. 15, in Washington. (Haraz N. Ghanbari/AP)

That's in part because closing tax expenditures can, at least in theory, give both parties what they want. For Democrats, closing tax expenditures is raising revenues. For Republicans, it's cutting government spending. Grover Norquist disagrees with that, but among economists, even conservative ones, it's a consensus position. Former Federal Reserve chairman Alan Greenspan says that tax expenditures are “misclassified” because they are identical to outlays. Gregory Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls expenditures “stealth spending implemented through the tax code.”

David Brooks picks this argument up in his column today. "You might say that a tax break isn’t the same as a spending program," he writes. "You would be wrong."

"David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion 'weapons supply tax credit.' The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!'

I would go further even than that. Tax expenditures are worse than direct government spending for three reasons. First, the tax code is reviewed less regularly than the federal budget, and so ancient tax expenditures endure in a way that outdated spending programs usually don't. Legislators are constantly scouring federal spending for offsets to help them pass new programs. The same is not done to the tax code.

Second, when the government buys a plane from Boeing, then that's pretty much what happens: It buys a plane. When it offers a tax credit to manufacturers of aerial weaponry, it creates an incentive for all manner of firms to either begin making more aerial weaponry in order to qualify for the tax break or to change how their business files its taxes in order to qualify for the tax break. A sufficiently clever accountant could recast the production of airline food as the manufacturing of "aerial weaponry," for instance.

As bad as it can be when the government makes poor spending decisions, it's even worse when the tax code leads hundreds or thousands of firms to make poor spending decisions. And it can be hundreds or thousands of firms. To continue with the plane example, when the government spends $10 billion on a plane, that's pretty much how much it spends. When it tries to spend $10 billion on a tax credit for the manufacturing of weaponized aerial products, that's an estimate of how many firms will manage to qualify for the tax break. But tax lawyers often see angles tax bureaucrats miss, and if many more firms find a way to qualify, that $10 billion tax credit can end up costing $30 billion, or $40 billion.

For all that, it's nevertheless worth saying that most of the money in the tax expenditure space is in big, well-known tax breaks that most voters like. The deduction for employer-provided health care, or for mortgage interest, or for charitable contributions. Which is perhaps why, though the Obama administration, the Romney campaign, and House Republicans have all agreed that the tax code needs to be cleaned out, none of them have come forward with a comprehensive estimate of how they would like to see it done. That's one more way in which tax spending is like traditional government spending: It's easier to say it should be cut than to say how you would cut it.

Top stories

1) Jobless claims are at their lowest point since March 2009, report Jeff Bater and Tom Barkley: "The number of U.S. workers making new applications for unemployment benefits held steady last week, but the four-week average continued to decline--a sign that the nation's jobs market is showing gradual improvement. Initial jobless claims totaled 351,000 during the week ended Feb. 18, the Labor Department reported Thursday. That equaled the previous week's figure, which the agency revised higher from an earlier estimate of 348,000. While new jobless claims didn't budge, the four-week moving average fell by 7,000 to 359,000, putting it at its lowest point since the week of March 22, 2008. In the last six weeks, new claims have dropped four times. The four-week average has remained below 400,000 since early November, a level economists traditionally have said is needed for the economy to show an overall net gain in jobs."

@zerohedge: US economy soaring with 13 million unemployed, 46 million on food stamps and 29% of mortgage holders underwater.

But...

2) Europe is headed for a recession, report Michael Birnbaum and Peter Whoriskey: "Countries that use the euro are headed for a mild recession this year, the European Commission said Thursday, the region’s second economic contraction since 2008, despite years of attempts to solidify the euro zone’s economic standing. The announcement was more pessimistic than a November estimate that predicted slight growth in 2012. And it came days after European officials agreed to hand Greece a $172 billion bailout, its second in two years...Across the full 27-country European Union, the largest single market in the world, growth will be flat this year, the estimate said. The slowdown could reverberate far beyond the continent’s borders, as fewer companies make large purchases and investments and banks stay cautious about lending."

3) Here's what Greece actually agreed to: "European creditor countries are demanding 38 specific changes in Greek tax, spending and wage policies by the end of this month and have laid out extra reforms that amount to micromanaging the country’s government for two years, according to documents obtained by the Financial Times. The reforms, spelt out in three separate memoranda of a combined 90 pages, are the price that Greece has agreed to pay to obtain a €130bn second bail-out and avoid a sovereign default that the government feared would throw Greek society into turmoil. They range from the sweeping - overhauling judicial procedures, centralising health insurance, completing an accurate land registry - to the mundane - buying a new computer system for tax collectors, changing the way drugs are prescribed and setting minimum crude oil stocks."

@zerohedge: This is just surreal: Greece will be allowed to fund Europe's insolvent banks only after satisfying 38 conditions

4) Mario Draghi invited the Wall Street Journal by for some serious real talk: "European Central Bank President Mario Draghi warned beleaguered euro-zone countries that there is no escape from tough austerity measures and that the Continent's traditional social contract is obsolete, as he waded into an increasingly divisive debate over how to tackle the region's fiscal and economic troubles. In a wide-ranging interview with The Wall Street Journal at his downtown office here, Mr. Draghi reflected on how the region's travails were pushing Europe toward a closer union. He said Europe's vaunted social model--which places a premium on job security and generous safety nets--is 'already gone,' citing high youth unemployment; in Spain, it tops 50%. He urged overhauls to boost job creation for young people. There are no quick fixes to Europe's problems, he said, adding that expectations that cash-rich China will ride to the rescue were unrealistic."

5) The White House unveiled the details of its web 'privacy bill of rights', reports Jennifer Valentino-Devries: "The White House on Thursday called for legislation to create a 'privacy bill of rights' that would give people greater control over their data--marking a turning point in online privacy efforts but likely setting off a long battle over how exactly the new policies will take shape. The rights outlined by the Obama administration include allowing consumers to access and correct personal data and to have their data handled securely. Businesses and consumer groups could use these guidelines to develop what the White House called 'enforceable codes of conduct,' or rules governing data collection and use. Businesses that agree to these rules would be bound to follow them or face scrutiny from regulators such as the Federal Trade Commission, which can investigate companies that mislead consumers about their practices."

Read the whole thing: http://1.usa.gov/zfQm6A

6) The U.S. is becoming less dependent on imported oil, reports Darius Dixon: "Spiking gasoline prices and fears of a military confrontation with Iran are ever-present reminders that the U.S. is nowhere close to weaning itself from imported oil. But amid those jitters -- and the accompanying political rhetoric -- comes a bit of good news: The United States depends significantly less on oil imports than it did just a few years ago. And official forecasts call for that trend to continue for the next couple of decades...In projections released last month, the EIA forecast that net petroleum imports will shrink to 36 percent of total U.S. liquid fuel consumption by 2035. That’s down from 49 percent in 2010 and well below the peak of 60 percent reached in 2005. That news came two months after the EIA reported that 2011 was likely to see the U.S. become a net exporter of petroleum products -- including gasoline and jet fuel -- for the first time in 62 years."

@WestWingReport: Lots of folks also seem to miss this fact: U.S. oil companies are now exporting oil; they blame falling U.S. demand

@morningmoneyben: Why does Obama keep unilaterally raising gas prices? Everyone knows he alone controls the price.

Top op-eds

1) Mitt Romney is a closet Keynesian -- but that doesn't matter, writes Paul Krugman: "Speaking in Michigan, Mr. Romney was asked about deficit reduction, and he absent-mindedly said something completely reasonable: 'If you just cut, if all you’re thinking about doing is cutting spending, as you cut spending you’ll slow down the economy.' A-ha. So he believes that cutting government spending hurts growth, other things equal...Should those who don’t share the right’s faith be comforted by the evidence that Mr. Romney doesn’t believe anything he’s saying? Should we, in particular, assume that, once elected, he would actually follow sensible economic policies? Alas, no. For the cynicism and lack of moral courage that have been so evident in the campaign wouldn’t suddenly vanish once Mr. Romney entered the Oval Office. If he doesn’t dare disagree with economic nonsense now, why imagine that he would become willing to challenge that nonsense later?"

2) Tax expenditures need to be part of the debate over the size of government, writes David Brooks: "We Americans cherish our myths. One myth is that there is more social mobility in the United States than in Europe. That’s false. Another myth is that the government is smaller here than in Europe. That’s largely false, too. The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks...Attention is shifting to tax expenditures and not just direct spending. It’s becoming clear how gargantuan, opaque and inefficient the U.S. government has become. Maybe before long our political leaders will actually summon the political will to take on the special interests that defend these tax breaks. This should be the top priority: A tax reform effort that simplifies government frees the economy and focuses social support on those who actually need it."

3) Government can do little to change gas prices, writes Matthew Yglesias: "Nothing Santorum or Boehner or Gingrich or Obama says is going to change the fact that the United States is an increasingly small part of the global demand picture. When China, India, or Brazil get richer, their citizens start trading bicycles for scooters and mopeds for cars. They’re flying more airplanes. This increases the global demand for oil and pushes prices up. All else being equal, this is inconvenient for American drivers. But it’s far from clear that it’s on net harmful to the American economy. American firms are hoping to export goods and services to rapidly growing economies. Every time Boeing sells a plane to an Asian airline, that increases the demand for jet fuel and makes driving marginally more expensive. But we’re better off in the fast-growing world than in the slow-growth, cheap-gas world of three years ago."

4) Pricing carbon could be a big revenue raiser, write Henry Waxman, Sherwood Boehlert, Edward Markey and Wayne Gilchrest: "The debate over how to reduce our nation’s debt has been presented as a dilemma between cutting spending on programs Americans cherish or raising taxes on American job creators. But there is a better way: We could slash our debt by making power plants and oil refineries pay for the carbon emissions that endanger our health and environment. This policy would strengthen our economy, lessen our dependence on foreign oil, keep our skies clean -- and raise a lot of revenue. The best approach would be to use a market mechanism such as the sale of carbon allowances or a fee on carbon pollution to lower emissions and increase revenue. Using these policies, the United States could raise $200 billion or more over 10 years and trillions of dollars by 2050 while cutting carbon emissions by 17 percent by 2020 and 80 percent by 2050, providing transition assistance to affected industries, and supporting investments in clean-energy technologies."

5) The elderly should not be exempt from cuts, writes Robert Samuelson: "One hallmark of the Obama administration’s budget policy has been to exempt the elderly from major cuts, even though spending on the elderly -- mainly through Social Security, Medicare and Medicaid -- represents 40 percent or more of the budget. The main reason is political: The elderly (it’s presumed) would vote against politicians who would cut their benefits. But to justify the policy, politicians and others often portray the elderly as financially vulnerable with scant savings. Surprise: It’s not true. Yes, the poorest 50 percent of the elderly have little savings; but above the midpoint, savings rise sharply and -- including the present value of Social Security -- average more than $2 million for the richest 10 percent of the elderly. Don’t take it from me. This information comes from President Obama’s top economists."

6) Romney gets the auto bailout wrong, writes Steven Rattner: "As a presidential aspirant, Mr. Romney evidently hasn’t felt a need to be consistent or specific as to what should have been done to address the collapse of the auto industry starting in late 2008. But the gist is that the government should have stayed on the sidelines and allowed the companies to go through what he calls 'managed bankruptcies,' financed by private capital. That sounds like a wonderfully sensible approach -- except that it’s utter fantasy. In late 2008 and early 2009, when G.M. and Chrysler had exhausted their liquidity, every scrap of private capital had fled to the sidelines...I consider myself an ardent capitalist, and well recognize the risks of government intervention, particularly the 'moral hazard' of rewarding failure and the scary prospect of politics’ entering private sector decision-making. But when markets fail, as they did for both autos and banks in 2008, government should have the ability -- in fact, the obligation -- to step in."

California rock interlude: Dawes plays "When My Time Comes" live at the Rock and Roll Hotel.

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Still to come: Subsidizing manufacturing comes with risks; costs are shooting up for health reform's high-risk pools; you will soon have a 'no track' button for your web privacy; the House transportation bill is undergoing some changes; and The Princess Bride can help you give feedback on college papers.

Economy

States are weighing measures to end bias against the unemployed, reports Shelly Banjo: "More than a dozen states are considering legislation to make it illegal for companies to discriminate against the unemployed. State lawmakers say they see the bias turning up in a nation with an 8.3% unemployment rate: Companies that explicitly advertise that they won't hire someone who isn't currently employed. The proposals from Connecticut to California range in scope from banning advertisements that require current employment to allowing unsuccessful job candidates to sue businesses under the same discrimination laws that apply to bias on the basis of religion, race, gender or national origin. The efforts come as the percent of the long-term unemployed--people looking for work for more than six months--has consistently topped 40% since December 2009, when it broke that threshold for the first time since 1948, the year such data began being collected."

The Greek Parliament approved Greece's debt plan, reports Charles Forelle: "The Greek Parliament's approval Thursday of the country's debt-restructuring plan--and of tough measures aimed at forcing it on creditors--has narrowed the options for most of the investors holding on to the country's beleaguered bonds. The restructuring is designed as an exchange of existing bonds for new ones with less than half the face value. The swap is expected to be proposed formally Friday and run until March 9, according to a Greek official, giving creditors two weeks to contemplate their moves. What they will do depends on who they are and what sort of debt they are holding. How it plays out will determine whether Greece actually has to use the new powers it has just given itself to force creditors into line. Many lawyers and analysts say it is likely, but not assured, that Greece in the end will have to use force."

Tax breaks for manufacturing carry risks, reports Kathleen Madigan: "The U.S. tax code is a mess. Favoring one sector over others will only make it messier. U.S. President Barack Obama and GOP candidate Rick Santorum recently released proposals that would give manufacturing enterprises a tax break. Santorum advocates factories pay no federal income tax at all. The goal is to make manufacturing a contributor of economic growth and a provider of middle-class paying jobs. The unintended consequences, however, are likely to be businesses gaming the system for a cheaper tax rate and a government policy that values some jobs over ones that are more needed. While certain employees, companies and regions will benefit, the U.S. economy as a whole is unlikely to be better off from the proposed tax changes."

@ModeledBehavior: Also: "You’d be hard-pressed to find any economists who aren't industry lobbyists who think.. manufacturers’ deduction is a good idea"

Movie trailer interlude: Pixar's "Brave".

Health Care

High-risk pools are costing significantly more than expected, reports Sarah Kliff: "Medical costs for enrollees in the health-care law’s high-risk insurance pools are expected to more than double initial predictions, the Obama administration said Thursday in a report on the new program...Those who have enrolled in the program are projected to have significantly higher medical costs than the government initially expected. Each participant is expected to average $28,994 in medical costs in 2012, according to the report, more than double what government-contracted actuaries predicted in November 2010. Then, the analysts expected that the program would cost $13,026 per enrollee. The costs also are significantly higher than those of similar high-risk pools that many states have operated for decades. States spent an average of $12,471 on enrollees in 2008, according to the National Association of State Comprehensive Health Insurance Plans."

Domestic Policy

A 'no track' button is coming as part of the White House's privacy push, reports Julia Angwin: "A coalition of Internet giants including Google Inc. has agreed to support a do-not-track button to be embedded in most Web browsers--a move that the industry had been resisting for more than a year. The reversal is being announced as part of the White House's call for Congress to pass a 'privacy bill of rights,' that will give people greater control over the personal data collected about them...The new do-not-track button isn't going to stop all Web tracking. The companies have agreed to stop using the data about people's Web browsing habits to customize ads, and have agreed not to use the data for employment, credit, health-care or insurance purposes. But the data can still be used for some purposes such as 'market research' and 'product development' and can still be obtained by law enforcement officers."

Billions in small-business contracts are being awarded to large firms, reports Olga Khazan: "Here are just a few of the companies that were considered a small business in the past year: Apple, Chevron, Verizon, Bank of America and Disney. At least, that’s what one advocacy group found when it perused the Federal Procurement Data Systems for government contracts for the past year. Each year, the government attempts to award at least 23 percent of all federal contracts to small businesses. But new research from the American Small Business League (ASBL) shows that 72 large companies received $16.4 billion in federal small-business contracts, which the group attributes to a combination of policy loopholes, human error and mis-categorization...The Small Business Administration cautions that it has not yet released its official data on contracting for 2011 and therefore can’t speak to the accuracy of ASBL’s findings. SBA will publish its official 2011 Small Business Procurement Scorecard this summer"

A record number of Americans hold bachelor’s degrees, reports Richard Pérez-Peña: "More than 30 percent of American adults hold bachelor’s degrees, a first in the nation’s history, and women are on the brink of surpassing men in educational attainment, the Census Bureau reported on Thursday. The figures reflect an increase in the share of the population going to college that began in the mid-1990s, after a relatively stagnant period that began in the 1970s. They show significant gains in all demographic groups, but blacks and Latinos not only continue to trail far behind whites, the gap has also widened in the last decade...For many years, colleges have enrolled and graduated more women than men, and a historic male advantage in higher education has nearly been erased. In 2001, men held a 3.9 percentage-point lead in bachelor’s degrees and 2.6 percentage points in graduate degrees; by last year, both gaps were down to 0.7 percent."

Maryland will become the latest state to allow same-sex marriage, reports Aaron Davis: "Maryland will join seven states and the District in allowing same-sex marriage, ending a year-long drama in Annapolis over the legislation and expanding nationwide momentum for gay rights. The Senate passed the measure by a vote of 25 to 22 Thursday night, and Gov. Martin O’Malley (D) has vowed to sign it into law. To win some of the final votes needed for passage in the House of Delegates last week, backers agreed to conditions that could help opponents place the new law on the November ballot. With polls showing the Maryland electorate almost evenly split on the issue, a referendum all but promises another contentious battle before the issue is settled in the state."

@7im: The moral arc of the universe is long but it bends toward Maryland

McSweeney's interlude: Lines from The Princess Bride that double as comments on freshman composition papers.

Energy

The House transportation bill is being reworked, reports Burgess Everett: "House Republicans are reworking Speaker John Boehner’s signature energy-infrastructure package to lower the price tag, shorten the duration and eliminate a controversial provision on transit funding. The bill has drawn criticism from transit advocates as well as fiscal conservatives, who have expressed concern that the existing $260 billion, five-year version wouldn’t cut enough from current spending and would diverge from the 'user-pays' model that many on the right prefer. The White House has also threatened to veto the House proposal while expressing support for a competing $109 billion, two-year transportation bill in the Senate...The longer-term the bill is, the more offsets that must be identified to pay for the legislation because money available from the Highway Trust Fund is about $20 billion less per year than current funding levels."

@drgrist: In terms of political power, taxpayers subsidies, & climate pollution, the auto/road/sprawl complex dwarfs even Big Oil.

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.