This is a guest post by Concord Coalition intern Rob Ryan
Politicians and economists have long stressed the importance of simplifying our nation’s tax code. Tax reform that eliminates many tax breaks, also known as “tax expenditures,” can foster economic growth and make meaningful progress in reducing future federal deficits -- perhaps even while lowering tax rates.
While Congress and President Trump did indeed slash rates with the Tax Cuts and Jobs Act last December, they failed to reduce the number of tax breaks that riddle the tax code. The result was not true tax reform, but a large deficit-financed tax cut that, according to the Congressional Budget Office (CBO), will add $1.9 trillion to annual deficits over the next decade.
The Joint Committee on Taxation (JCT) highlighted this failure to clean up the tax code in its recent report, “Estimates of Federal Tax Expenditures for Fiscal Years 2017-2021.” The report shows that the tax code now actually contains more tax expenditures, not fewer.
Tax expenditures are essentially spending programs in disguise that favor certain individuals, businesses, industries and activities. The Budget Act of 1974 defines tax expenditures as “revenue losses attributable to provisions of the Federal tax law which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.”
In 2017, the loss in government revenue due to the plethora of tax expenditures totaled 9 percent of the economy. If all tax expenditures were counted as a federal spending program, it would exceed the size of Medicare and Social Security combined.
The December tax law eliminated nine tax breaks but created 17 new ones, according to Politico. The law also revised 55 pre-existing tax breaks.
Some of these revisions do limit revenue losses. Most notably, the tax law downsized the cost of the charitable contribution deduction by 25 percent, the home mortgage interest deduction by 50 percent and the state and local tax deduction by 80 percent. According to the Committee for a Responsible Federal Budget (CRFB), however, the total cost of tax expenditures will only fall this year from $1.6 trillion to $1.5 trillion.
With federal deficits projected to reach $1 trillion by 2020, the recent increase in the number of tax breaks is a step in the wrong direction. The tax code remains overly complex and fails to provide sufficient revenues to fund planned federal spending -- which Congress and the president substantially boosted just last spring.
The good news is that there are many ways in which Congress and President Trump could reduce the revenue-losing loopholes and complexity of the tax code. By broadening the tax base in this fashion, they could make meaningful progress toward reducing deficits and putting the federal budget on a more responsible course.