A Tax Code Full Of Favors: A Review Of "the Hidden Welfare State" By Christopher Howard
President Clinton is said to fret about his legacy. Will anyone remember him after he is gone? He's being too hard on himself. There is one large group of Americans who will always look back with fondness on the Clinton years: the country's accountants and tax lawyers. With five tax brackets and a dizzying array of new tax credits, professional tax advice has since 1993 moved from being a luxury to an absolute necessity. And the thousands of accountants now getting ready for their winter trips to Anguilla and Boca Raton are surely grateful.
Give the president credit for this: He's settled the old argument over whether tax credits and deductions should be considered a form of government spending. When the Kowalskis, who earn $40,000 a year and have two kids in the army, must pay substantially more tax than the Gonzalezes next door, who earn exactly the same amount of money but have two kids enrolled in community college (and, thanks to the president, they will), how is it possible to deny that one family is being subsidized at the expense of the other?
As a graduate student in political science, Christopher Howard became interested in the -- as he calls it -- "invisible" tax side of American social policy. You could bury a small town under the weight of all the books and articles published about public housing. But the home mortgage interest deduction -- which, at $50 billion a year, costs more than all other federal housing outlays combined -- is shrouded in obscurity, unstudied and (except by the hearty brotherhood of flat taxers) undebated.
In "The Hidden Welfare State" (Princeton University Press, 250 pages, $39.50) Mr. Howard, now a professor at William and Mary, provides a quick aerial overview of tax expenditures as a group. Altogether, he estimates, they reduce federal revenues by about $350 billion from what they would have been if the federal tax code contained no exceptions to its general rules -- that's a sum roughly equivalent to the cost of Social Security. He then presents case studies of four particular tax expenditures: the home mortgage deduction, the nontaxability of employer-provided pension benefits, the earned income tax credit and the targeted jobs tax credit. Mr. Howard debunks the image of the tax credit as a corporate loophole. Unquestionably, the corporate income tax code is riddled with favors to big donors. But the bulk of the benefit of tax expenditures goes to the middle class.
One of Mr. Howard's insights might have been borrowed from a Steve Forbes speech. Defenders of tax expenditures often argue that tax credits involve fewer administrative headaches than spending programs. Mr. Howard observes that this is untrue -- all that has happened is that the burden of administering the program has been shifted from the federal bureaucracy to the individual taxpayer who seeks to qualify for it.
Mr. Howard certainly did not intend his book as a brief for the flat tax. His own preference is for a tax code even more punitively redistributionist than the present one. Still, two powerful indictments of the present income tax system emerge from this book. The first is that tax expenditures are much more cavalierly created than social programs. Employer-created health and pension benefits have gone untaxed for 70 years. This 1920s decision has reshaped American life, both for good (high levels of health coverage without a state-controlled health insurance system) and evil (employers, not patients, have become the real decision-makers in the health marketplace). And nobody seems to have given the decision more than the most casual thought before it became impossible to alter.
Second, tax expenditures blunt taxpayer resentment of high rates. Americans are a tax-averse people; they begin to mutiny whenever a peacetime government asks them for much more than a quarter of their income in taxes. But while it makes little difference to the individual taxpayer whether he pays a quarter of his income because he's in a 50% bracket with large deductions or because he's paying a flat 25%, it makes an immense difference to the economy -- and to the integrity of American political culture.
Over the years, the Republican Party has more often than not sought to beat back Democratic tax schemes less by holding the line on tax rates than by seeking to carve out special exemptions. The tactic has exacted a heavy moral price, as Americans who seek tax relief are encouraged not to demand lower rates across the board but to beg this or that special favor from Congress -- and then to show their gratitude once they receive it.
Mr. Howard's book is not meant for the reader with a casual interest in his subject. But those willing to tough out some dry passages will find it stimulates all sorts of radical thoughts -- some of them perhaps more radical than the author intended.
Originally published in The Wall Street Journal