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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

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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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