What is a Tax Increase?

It would seem to be an easy question to answer but much of the recent conversation in Washington has revolved around nailing down what, exactly, constitutes a “tax increase.” Everyone acknowledges that raising tax rates is a tax increase, but that’s not what everyone is talking about right now. Our tax code is horribly complicated and filled with loopholes and exemptions that corporations and the rich love to take advantage of to get out of paying some of their taxes. Should eliminating a tax break be considered a tax increase?

Many Republicans have started arguing that yes, getting rid of a tax break is a tax increase. Eliminating a tax break for an oil company, for instance, increases their taxable income, which increases the taxes that company pays to the government. The logic here is that eliminating a tax loophole increases the government’s revenue, and an action that ends up increasing the revenue the government takes in is a tax increase. On some level that makes sense, but let’s go deeper.

Speaking with this logic, say the government buys planes from Boeing for $5 million. Say also that there is a certain conservative politician that passes a law that cuts off the previous contract the government had with Boeing and instead gives Boeing a $5 million tax break for every plane they give the military. For his work, that politician would be praised for both cutting spending and for lowering taxes–a conservative’s wet dream! He got rid of a costly government expense and lowered taxes on an American company, all while keeping America safe! The only problem, of course, is that the reduced spending and reduced taxes are completely illusory. All the facts are  the same: the government gets planes and Boeing gets money, but the Congressman cooked the books so that it looked like he did something he didn’t. Now do this a couple thousand times and you have the current US tax code.

For this reason, a tax break or tax loophole is best viewed as a tax expenditure. When the government says that ethanol companies get X amount of a tax break on their corporate taxes, it is saying that they are spending X dollars on the ethanol industry. Sure its not classified as a spending item, but the effect is the exact same as if it was a spending item. Ethanol companies are X amount richer than they would be if they didn’t have their special tax write-off. Its the same effect as the government just collecting all the taxes they are due and then handing out a check to its favorite companies.

Tax breaks aren’t a terribly efficient way to spend money either. Its probably more efficient to just make energy-efficient doors and windows cheaper at the point of sale by offering a government rebate to either the buyer or the seller rather than making someone document their door purchase and claim it on their tax filing the next year.

The government allows people to deduct the interest they pay on their mortgage from their taxable income. This, in effect, is the government giving away checks at tax time to homeowners for doing something of questionable overall economic value. Is someone who owns a house more valuable to society than someone who rents? Why is the government paying people to own homes? That is what tax breaks do. They pay people to do something. Then you get down to choices. There’s only so much money to go around and if we are letting businesses skip on some of their tax payments because they provide their employees  health insurance, then we miss out on revenue and end up having to cut Medicare. Tax breaks aren’t free, but they are underhanded ways for the government to give a check to its favorite industries.  They should at least be acknowledged as the expenditures that they are.

Update: Here is a thorough discussion of tax expenditures by a former director of the CBO.

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