Tax Expenditures Misunderstood

Aaron Carroll points out a graph posted by Greg Mankiw with regards to tax expenditures. Over the past 25 years discretionary spending by the federal government and effective spending in the form of tax expenditures have grown in a similar fashion. As the section from David Leonhardt notes, "closing loopholes has much stronger support among economists and columnists than it does among voters." While this should be expected, the shocking data is that "Only 23 percent of Americans benefit from the mortgage deduction, but 93 percent support it." This provides a strong example of the government failing to educate Americans on the actual effects of certain policies.

From Aaron Carroll of The Incidental Economist

Tax expenditures are real

A number of commenters seemed to deny even the existence of tax expenditures when we wrote about the health insurance tax deduction last week. Today, Greg Mankiw has a nice post that shows the danger of ignoring tax expenditures:

The blue line is total discretionary outlays of the federal government, and the brown line is the sum of tax expenditures.  Both are in constant dollars.  Note that these two categories of spending are about equal in magnitude.  It is just as important to focus on stealth spending implemented through the tax code as on explicit spending.

David Leonhardt adds:

The mortgage interest deduction, for example, saves more than $5,000 a year for the typical household in the top 1 percent of earners. Most middle-income households don’t benefit from the deduction at all, because they instead claim the standard income tax deduction. And the mortgage deduction is the second-largest tax break for individuals, costing about $80 billion a year, more than the budgets for the Education Department and Justice Department combined.

Yet despite all the substantive arguments for such plans, I still wonder whether one of them is the most likely outcome.

The truth is, closing loopholes has much stronger support among economists and columnists than it does among voters. Only 23 percent of Americans benefit from the mortgage deduction, but 93 percent support it. Other big breaks, like the exclusions for health insurance and 401(k) contributions, are popular, too. On the corporate side, Eric Toder of the Urban Institute has pointed out that the biggest breaks also tend to be popular, like the credit for research and development.

Tax expenditures are real, and ignoring them is no way to get a handle on spending.