Obama's Right: Some Tax Breaks Have to Go

Republicans are wrong to consider any elimination of a tax expenditure as a tax hike. Many revenue expenditures should be treated as spending programs to be cut.

President Barack Obama’s speech on deficit reduction left a lot to be desired: his agenda offers too many goodies for his party’s base, an excess of unworkable class-warfare- “tax the rich” platitudes, and too few real spending cuts. All that said, the President is right about one major thing: the desirability of “reducing tax expenditures so that there is enough savings to both lower rates and lower the deficit.”

Republicans are wrong to consider any elimination of any tax expenditure as a tax hike. In fact, many tax expenditures—although not the most expensive ones—ought to be considered spending programs that true fiscal conservatives should investigate with the same careful eye they apply to other programs.

Crudely, it’s possible to divide tax expenditures into two categories: those that will benefit just everyone and those that are actually just special favors handed out via the tax code. Quite simply, eliminating a tax expenditure in the first category should be considered a tax hike while eliminating one in the second category shouldn’t.

The mortgage interest, state/local tax, and health care deductions should and could fairly be considered broad-based features of the tax code. Efforts to limit, cap or repeal them should, for those who support lower taxes, be paired with efforts to cut rates elsewhere. After all, everyone pays some state or local tax, everyone needs health care, and almost everyone buys a home at some point. Elimination of these revenue expenditures will have the same consequence, roughly, as raising marginal rates.

The great bulk of other revenue expenditures (which are much less fiscally significant than the big ones noted above), however, should fairly be treated as spending programs. Breaks handed out to people who buy new HVAC systems, produce ethanol, or drive hybrid cars are simply spending by another name. So are special benefits handed out to the working poor (the Earned Income Tax Credit) and blind people (an additional personal deduction).

These are simply ways of using the tax code to reward very particular groups or behaviors. They have no impact one way or another on taxes for the great majority of people; eliminating or limiting them can’t fairly be considered a tax hike at all. Getting rid of them will have consequences more similar to a spending cut: it will reallocate resources from the government-preferred purpose to a purpose determined by market forces.

This doesn’t mean, of course, that all narrow revenue expenditures are bad while the other broad ones are good. In fact, I’d argue that the Earned Income Tax Credit is the best and most effective social welfare program in the country while the size and scope of the mortgage interest deduction ought to be limited. Nonetheless, all revenue expenditures deserve a close look. And efforts to eliminate the narrower ones simply shouldn’t be considered tax hikes.

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