The Moral Conundrum of Tax Expenditures

Recently I attended a seminar on addressing the lack of savings among the poor and policy proposals that might counteract that lack of savings. The first part of the discussion focused on policies that try to harness the power of incentives to help low-income individuals create long-term economic prosperity and a buffer against risk.

The second part of the seminar, in connection with the concept of savings incentives, focused almost entirely on the tax expenditures that the federal government “spends” in the tax code that primarily benefit the wealthy—the top .1% of the income distribution, whose incomes top $400,000 per year. The point: we “spend” more on programs on the rich than we do on tax transfers to help the poor save.

I don’t know what the ideal tax rate for the rich is to benefit everyone, and those who claim they do have much more than the “efficiency vs equality” debate in mind. Intrinsic in a tax debate is a set of moral values that weigh individual liberty, social goals, aiding the poor, combating corruption at all levels, and incentivizing the self-esteem that comes with economic independence and work.

The term “tax expenditure” is a non-partisan term. Conservatives and liberals alike use the term to talk about the concept of tax revenue that the government does not collect because of its policies written into the tax code. Examples include capital gains being taxed at a lower rate than labor income, mortgage interest deductions, and the like. But there are others that could very well be included in this list: how capital interest isn’t taxed for those spending on education, how social security income is not taxed until you pass a certain point, and the entire Roth retirement scheme.

Tax expenditures are typically discussed with a change in policy. For example, changes in exemptions and rates of the estate tax have reduced the amount of money in state coffers over the past twenty years.

One justification I can understand is that we want some way of accounting for opportunity cost of forgoing tax revenues by comparing it to other programs towards which we could have spent that money. However, I only see that reason working if we also calculate economic expenditures of proposed policy changes alongside them—that is, how much does the economy suffer in forgone income because of the deadweight loss of a tax? While those figures are calculated by academics, rarely are they taken into account by government entities because that cost does not seem to appear in their ledger.

If we are talking in term of maximizing government revenue as our objective function, then yes, money not coming in and money going out can be equated. But that isn’t (or shouldn’t) be the objective of government.

My core discomfort with treating any money in the economy not in reach of the government as government spending is that it places ALL money in the economy within the purview of the state and therefore any money not collected by the IRS can be classified as a government expenditure.

This opens up an interesting moral conundrum. Technically all the billions we are supposed to be getting back (thank you, H&R Block, for your entertaining, short accountant character, and for reinforcing stereotypes of CPAs everywhere are tax expenditures. All just desserts of one’s labor or human capital are subject first to the state’s decision of whether or not to confiscate it for its fiscal goals, then individuals, making the state appear to be the beneficent distributor of money while at the same time maintaining a type of total civil forfeiture as a distinct possibility if a majority of Congress decided to make it so?

Why do we still use terminology like this? It seems to me that if we are going to have a figure for tax expenditures, we should have side-by-side figures for “economic expenditures” due to taxation and allow voters to use their moral value systems to decide. Without the information, we are left to bicker about who is spending what money where and why and bemoan money the government doesn’t have.

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