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48 IRET Congressional Advisory 1 (1995)

handle is hein.taxfoundation/iretcgadv0046 and id is 1 raw text is: Cogesional August 18, 1995 No. 48 CBO GROSSLY OVERSTATES BUSINESS TAX SUBSIDIES The Congressional Budget Office has issued a deeply flawed report, Federal Financial Support of Business (June 1995), that purports to catalog federal subsidies to business. If done properly, such a study could help the Congress in its efforts to downsize government by exposing for scrutiny wasteful or otherwise inappropriate business- assistance programs. While some business-aid programs may be meritorious, others ought to be eliminated because they provide meager benefits, are excessively costly, or do not serve a compelling national h oi interest. biased agai The CBO erroneously investment. A claims that most federal aid to tax provision business comes from tax brands as subsidies, not from federal business ri spending or credit programs. eliminate, ta The CBO conclusions are saing anld i based on a tax standard that is virulently biased against saving and investment. Actually, most of the tax provisions that the CBO brands as federal aid to business reduce, but do not eliminate, tax biases against saving and investment. Compared to a neutral tax system, these provisions at most moderate tax penalties; they do not assist business financially. If the CBO's tax standard ever became law, it would sharply increase tax rird th list etlal s th fedo xb )estm4 disincentives against saving and investment - thereby worsening government barriers that hold back economic growth. In categorizing taxes, the CBO study relies on list of so-called tax expenditures that appears in federal budget documents each year. The staffs of both the U.S. Treasury Department and the Congressional Joint Committee on Taxation compile a listing of how much special assistance supposedly is provided to taxpayers by various tax code provisions. According to the CBO, for a provision in the tax code to be categorized as a tax expenditure, it must be a special exemption from a general rule, and it must provide a subsidy. In its report on federal aid to business, the CBO includes those so-called tax expenditures that it regards as primarily directed towards taxpayers who engage in commercial or business-related activities. By uncritically accepting the concept of tax expenditures and the methods the government uses to compute them, the CBO has conditioned the validity of its results on the validity of the tax expenditures paradigm. The CBO breezily assures its aibaed readers that they can rely on its arensey the tax expenditures listing, a n Tax analysts generally agree sav~ig and on which provisions constitute ly, most of the tax expenditures, with few it the CBO exceptions. Whether this al aid to CBO assertion is valid, but do not theoretical and operational iases against difficulties plague the whole nt. notion of tax expenditures. The most basic problem is that tax expenditures should be measured as preferential deviations from a baseline that defines a neutral tax, one that does not alter the price relationships that would be cast up by the market system operating free from government intrusion. The government, however, has selected as its baseline a version of the income tax that tax analysts generally recognize as weighing more Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www. ret.org

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