Friday, November 12, 2010

Tax expenditures

Source of graph: Tax Policy Center

I understand that the Deficit Reduction Commission is considering reduction of tax expenditures within its recommendations. According to the Tax Policy Center
The tax expenditure budget comprises the estimated revenue losses attributable to various exclusions, exemptions, deductions, nonrefundable credits, deferrals, and preferential rates in the tax code........

OMB’s tax expenditure budget for fiscal 2008 totaled $878 billion.
It seems obvious that reductions in tax expenditures should be considered as well as cuts in government expenditures and increases in taxes, and indeed that tax expenditures should regularly be considered in budget negotiations.

Of course, tax breaks are supposed to encourage activities that our public policy defines as desirable such as contributions to charities and educational expenditures.

There have been proposals to reduce Social Security pensions while allowing tax breaks for private savings plans that would be seen as complementing social security and to reduce Medicare while allowing tax breaks to private supplementary private supplementary savings plans that would complement Medicare. It seems to me that these proposals would cut the deficit. They might also result savings that could be invested in the private sector rather than in the public sector as Social Security and Medicare savings are now. On the other hand, it would be relatively affluent people who would put savings in such plans so that we would see tax expenditures going to subsidize the affluent.

I hope that the Commission will also suggest review of the rules relating to allowable industrial expenditures. Companies do not pay taxes on their contributions to employee health plans nor on the salaries that they pay to their employees. Classifying these contributions thus means that they are not taxed, and therefore would seem to involve tax reductions to corporations analogous to tax expenditures. How about treating amounts exceeding specified limits of as corporate profits distributed to employees (rather than to stockholders). The government contributions to its employee health plans might be a benchmark for allow costs for corporate health plans, and the pay for Congress or the president for allowable remuneration for executives. This might be seen as double taxation, but I would rather perceive it as an excise tax on excessive corporate remuneration of senior executives.

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