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![handle is hein.taxfoundation/iretcgadv0092 and id is 1 raw text is: IET
January 6, 2000 No. 95
WHAT'S WRONG WITH THE TAX
EXPENDITURE LIST / HOW TO
FIX IT
Every year, as directed by the Congressional
Budget Act of 1974, government revenue estimators
compile lists of tax expenditures - hundreds of
billion of dollars of purported
tax loopholes in the
individual and corporate [TIhere is a
income taxes. Congress's alternatve, it
Joint Committee on Taxation that treats
(JCT) has just released its list; Saving evenha
the Treasury will issue its list kind o tax sy
with the Administration's new
federal budget. tax ependitu
considered loo
The Budget Act defines
tax expenditures as revenue
losses attributable to provisions of the Federal tax
laws which allow a special exclusion, exemption, or
deduction from gross income or which provide a
special credit, a preferential rate of tax, or a deferral
of tax liability. In other words, a tax expenditure
is anything that allows taxpayers to keep more of
their own money than would be normal under the
ordinary workings of a pure tax system.
But what pure tax system? The JCT states
the legislative history of the Act indicates that tax
expenditures are to be defined with reference to a
normal income tax structure. [Emphasis added.]
This may have been Congressional intent, and it is
how the JCT and the Treasury do their calculations.
But this brief explanation of the reports' income tax
frame of reference is too cryptic to alert the average
reader that a whopper of an assumption has been
made.
Neither the JCT nor the Treasury makes it clear
in its report that there is more than one view as to
the proper basis for taxation. Neither points out that
what they call a normal or broad-based income
tax is a biased system that taxes income used for
saving and investment much more heavily than
income used for consumption. Neither points out
that there is a strong case for an alternative,
unbiased tax system that treats consumption and
saving evenhandedly (any of the major
consumption-based or saving-deferred tax reform
plans); under that kind of tax system, most reported
tax expenditures would not be considered loopholes.
Furthermore, under a neutral tax system, much of
the tax currently
strong case for an
nbiased tax system
consumption and
ndedly ..under that
stem, most reported
'res wvoud not be
~pholes.
the income is sav
collected on capital income and
some earnings of labor would
be considered unwarranted tax
penalties.
Under the broad-based
income tax, income is taxed
when earned. If it is used for
consumption, there is generally
no additional federal tax
(except for a few selective
excise taxes) on the enjoyment
of the goods and services. If
-d, however, there is a subsequent
tax on the earnings of the savings (the service
being bought when the assets are acquired) - a tax
on interest in the case of a bond, the corporate
income tax in the case of equity. This is the basic
income tax bias against saving. Additional biases
are created by taxing after-tax corporate earnings a
second time as dividends and capital gains, the
estate and gift tax on accumulated savings, and the
denial of immediate or full accounting for certain
business costs.
These multiple layers of tax on saving and
investment in current law derive from the Haig-
Simons definition of taxable income, which was
specifically designed to redistribute income from
Institute for
Research on the
Economics of
Taxation
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