The Agenda

Tax Expenditures Not a New Problem

Matt Yglesias prints a chart on federal tax expenditures, showing that they have grown in real terms from $526 billion in 1982 to $1.024 trillion in 2010. ThinkProgress describes this as a “proliferation” of tax expenditures, and Yglesias offers this:

Ever since Ronald Reagan’s election in 1980, American politics has been dominated by the presence of a large and powerful ideological movement that’s primarily dedicated to the cause of tax cuts. One result, as shown by my econ team colleagues’ suite of charts is that we increasingly make public policy by creating tax loopholes.

I am as opposed to (most) tax expenditures as the next tax reformer. But I don’t think this chart is compelling. Real tax expenditures rose 95 percent from 1982 to 2010. But over the same period, real GDP grew 126 percent. Tax expenditures have been shrinking as a share of the economy.

Blaming the Reaganites for increases in tax expenditures is especially off base. Ronald Reagan, after all, signed the Tax Reform Act of 1986, a revenue neutral reform that sharply cut tax rates by eliminating many tax expenditures. As you can see in the chart, tax expenditures fell in real terms during the late 1980s as a result of the Act, and then continued to lag GDP growth for about a decade.

Tax expenditures started rising more sharply in the late 1990s for a few reasons. One is that Congress started enacting more tax expenditures, like the Child Credit and more favorable treatment of capital gains. Another is that the stock market boom of the late 1990s increased the amount of capital gains as a share of the economy. A third is simply that the economy as a whole was growing quickly.

Tax reform to rein in tax expenditures would be a good idea today, so long as they’re the right tax expenditures: favorable cap gains treatment is good policy, and the Child Credit is pretty defensible too. I’d much rather put the mortgage deduction and the health care exclusion on the chopping block. But overall, the long term trend is not an explosion of tax expenditures as a share of the economy. The mortgage deduction was a bad thing in 1986, and getting rid of it then would have been a good idea, too.

Josh Barro — Mr. Barro is the Walter B. Wriston fellow at the Manhattan Institute. His research is focused on state and local fiscal policy.


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