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April 13, 2011

Ending Tax Giveaways Isn’t Raising Taxes

OK. Now we all agree that the deficit needs to be cut by some huge amount in the next decade. That's some progress. We also mostly agree that the deficit cutting has to start real soon. That's even more progress. And President Obama says he believes that you can't and shouldn't make the deficit go away just by raising taxes. Serious people in both parties agree and acknowledge that the growth trajectory of entitlements is unsustainable and needs to be brought back to earth and that there isn't enough spending to cut in the non-entitlement parts of the budget to ever get deficits under control. No matter what you think about Rep. Ryan, he took entitlements out of the closet and put them on the table. No matter what you think of President Obama, he acknowledged today both the general need for huge deficit reduction and the specific need to control Medicare and Medicare costs.

This is all real progress, sort of – we are still on track to spend more money and have a bigger deficit this year than last despite the "historic" cuts agreed to last week in an historically high budget. Even though the right issues are on the table, none of the big decisions – the really hard decisions – have been made.

Some Republicans have drawn a line in the sand against "any" tax increases. This argument goes beyond deficit reduction; it is actually an argument (with which I largely agree) that government has become too large in relation to the gross national product. If this were not the case, if government somehow had become too small (hard to imagine), than raising taxes would be a very good way to close the deficit and cutting programs would not.

Many Democrats say the rich are not paying their fair share. Some rich people like President Obama say that as well. Of course, taxes are only a minimum. Anyone who feels undertaxed can actually contribute more to government. But put that aside; the rich are getting more than their fair share of benefits from the government; handouts to the rich need to be cut completely. The trouble is that many of these handouts to the rich are hidden in the tax code. They don't look like expenditures and closing loopholes looks like raising taxes which can be an excuse for keeping government bloated. Nevertheless, the tax loopholes need to be closed as part of reducing the deficit. They do make a difference.

Let's look at just one egregious example: the infamous Hedge Fund Tax Break, estimated to cost the treasury somewhere between three and five billion per year. The only rational explanation for this break is that it is the best loophole that lobbying money can buy. So far it has enjoyed bipartisan protection. Listen to Huffington Post in 2009:

"If there is one tax loophole that looks dead in the water, it's the law that lets hedge fund and private equity managers pay a 15-percent capital-gains rate on the multimillion-dollar fees they collect -- substantially less than the top income tax rates paid by their secretaries, chauffeurs, and the pilots of their private jets….

"But reformers seeking to raise the taxes of the super-rich should not assume this is a slam dunk. The Democratic majority in the Senate has looked at this provision before -- most recently two years ago. Many Senate Democrats saw the legislation as biting the hand that fed them and breathed a sigh of relief when, on December 6, 2007, Republicans mustered enough votes to filibuster the proposal to death."

It wasn't a slam dunk. This tax break is still on the books. No one from either party can claim any deficit reduction creds without committing to eliminate this and a host of other special purpose tax breaks. This may look like raising taxes but it isn't – putting these handouts to the rich on the tax side of the ledger is simply an accounting gimmick. These expenditures are very much like entitlements in that Congress doesn't know how much they're going to cost until after the fact – if at all.

Well, you may say, this is outrageous but $3-$6 billion a year is chump change. You're right, of course; but there are a lot more handouts to the rich buried in the tax code. Rep. Ryan proposed going after some of them but we need to go much, much further.

For example, according to a spreadsheet for the Tax Policy Center based on federally supplied numbers from the tax expenditure , the 2010 budget awarded almost $9 billion in tax breaks for energy. If you are thinking this is all some green boondoggle, you're wrong. Yes, there are credits here for solar, wind, and corny ethanol – but they are out-numbered by the various tax breaks for oil and other fossil fuels. Does anyone really need an incentive to drill for oil when the price is over $100 barrel (yes, I know it was lower last year)? One excuse for distorting the "alternative energy" market with grants both in the tax code and outside it is the amount of subsidy given to traditional fuels. It's a good argument; the answer should be don't subsidize any of them and we've taken a huge step towards a better energy policy and deficit reduction.

Natural Resource and Environment subsidies in the tax code amounted to over $2 billion in 2010. The biggest item here is $770 million for "Excess of percentage over cost depletion, nonfuel minerals". Do you think anyone you know benefitted from that?

The point is that the tax code is full of loopholes which are handouts to the rich. Closing narrowly-targeted loopholes should not be considered raising taxes by Republicans or Democrats. Closing these loopholes would be a very good indication of whom Congress is working for; loophole closing is the one easiest places to start closing the budget gap even though it certainly won't get us all the way there. Welfare should be for the involuntarily needy. It can't be for the middleclass because we're the ones who are paying for it anyway. It certainly shouldn't go to the rich.

Related posts:

We Can't Have All the Medical Care We Want

Read Rep. Ryan on His Budget Plan

Rep. Ryan's Budget: Change You Can Believe In

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