Picking half a trillion dollars up off the ground

The Democratic Primary debates have begun and only one candidate, Elizabeth Warren, appears to be seriously talking about where to come up with the money to fund the many spending proposals on the table. By my count, this leaves 23 candidates who need a serious tax revenue plan, so please send this post to your favorite candidate. I can tell you where to find $500 billion and simplify the U.S. tax code by 75% at the same time.

If you still do your own long-form taxes, or work your way through the tedious TurboTax® online data interview, or pay for hours of time with own your personal tax preparer, what you are really doing is making your way through dozens of forms, and hundreds of lines of rules, exceptions, deductions, credits, and quirky calculations that just might apply to you, but most likely don’t.

Behind each of these forms, rules and calculations is something called a tax expenditure, a special Congressional carve-out that says that someone pays less in taxes, but probably not you. Budget-wise, tax expenditures, which essentially stop tax revenue from coming in, are exactly the same as “normal” governmental spending, except that it is much more hidden from public view. This is why Congress likes them: political favors with little scrutiny or visible consequence.

The 2017 tax revision did little to help this situation. Almost all of the old rules remain in effect, and many new ones were added, but the rise in the standard deduction and other changes mean that even fewer of these carve-outs are likely available to you, indeed shifting even more to the upper-middle and 1%-class taxpayers, and yet millions of Americans must still go through the tedium of figuring this out when they calculate their taxes. The tax filing industry thrives on calculating tax expenditure impact, and charges you for it.

There is one basic rule of taxation, but thousands of exceptions. The rule is “Every dollar of income in all its forms is taxable at a sliding scale, unless we (the IRS) say it isn’t.” Then come the thousands of exceptions worth, in total, about $1.5 trillion every year. These exceptions, representing taxes that could be collected, but aren’t, are these tax expenditures.

Many of these tax expenditures are very popular, and used by a large percentage of taxpayers. Two thirds of this revenue pot, or about $1 trillion in annual tax revenue shortfall, comes from the top twelve tax expenditures, which I have written about before. These include the earned income credit and the exclusion for employer-paid healthcare insurance. [1]

So where is the remaining $500 million dollars? It gets increasingly more difficult to find accurate numbers for the hundreds of tax expenditures as you go further down the list, but if these are like most other categorized government expenditures, the money follows a pattern, in this case, a negative exponential curve:

Estimated tax expenditures

What this graph is saying is that, after the top twenty or so tax expenditures in annual cost, the dollar cost of the remaining ones (this graph should go out to the hundreds on the X axis) get individually small, but they total to about $500 billion annually. And being small is exactly the point. These small tax expenditures were mostly designed by industry lobbyists to favor a very small group of clients, mostly very rich, and most were inserted into the tax code quietly and anonymously by favored members of Congress. Most, then are the very definition of special interests, targeted specifically to wealthy/powerful corporate and individual taxpayers.

Freeing that half-trillion dollars

So, how do we bring this $500 billion of annual giveaways into the light and “re-purpose” them? My long-standing proposal has been to replicate the successful legislative strategy used in the very unpopular move to close redundant U.S. military installations in the 1980s. In those years, a bipartisan “Base Realignment and Closure Commission” threw a large number of bases “on the table” for closure or reduction, requiring a visible bipartisan consensus to get them again back “off the table” and continuing in service. The process was painful for many communities, but a necessary one, saving hundreds of billions of dollars in the years since and, I would argue, still a continuing need in order to rein in “Defense” spending (much of which is actually just “corporate welfare”).

Similarly, a “Tax Realignment and Closure Commission” would pick a target, say, every form, calculation, tax credit, and deduction used by fewer than one in 5,000 taxpayers, which comes to about 28,000 individuals or businesses, most of whom are in the richest top 0.1%. These tax expenditures would be “marked for sunset,” ending within, say, three years, unless the commission “rescues” them on a bipartisan basis.

Better yet, would be a more aggressive one-in-1000 sunset, or about 138,000 out of some 138 million current taxpayers. Of course, you just might be one of those 138,000, but probably not, and that is the point. You pay higher taxes or get fewer services from the government because they get tax breaks that you don’t get. The deeper you go here, the more of that $500 billion you pick up, either to reallocate to fund more broad-based government spending programs or to reduce the taxes of everybody else.

Another key benefit of this type of reform (and I would argue a big one) is that literally thousands of pages of tax code rules, and thousands of IRS “private letter rulings” and court cases, just disappear from relevance. That dreaded tax preparation “interview” gets much shorter, and tax distribution gets much more fair.

So, send this link to your Member of Congress, as well as your favorite candidate for the upcoming election. This is real tax reform that could actually be achieved.


Notes:

  1. The very popular home mortgage interest deduction was worth $108 billion per year prior to the 2017 tax changes, but it has now dropped off the Top Twelve list after the standard deduction changes, dropping down to about $33.9 billion this year. Here is the most recent list of the top thirteen:

 

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