It’s that time of year again! With tax day upon us, many people might be wondering where all of their tax dollars are going. For most types of government spending, you can actually research this question. But there’s one type of spending that often goes overlooked by the public and legislators: tax expenditures. I’ve written about tax expenditures and why they’re important, but here’s the quick version: tax expenditures are taxes that weren’t paid to the government because of specialized exemptions for certain groups of people or corporations. Economists generally equate them with federal spending, but they are not subject to the same scrutiny or evaluation as other federal spending. We think that needs to change. In celebration of tax day, Sunlight presents part one of a quick introduction to the world of tax expenditure transparency, along with a super-fun (http://sunlightfoundation.com/projects/2011/taxday/) to top it all off!
Tax Expenditures Lack Transparency and Oversight
Chances are, you take advantage of some tax expenditures. If you have children, or pay interest on a mortgage, or fall below a certain income level, then you’ve probably taken advantage of the Child Tax Credit, the Mortgage Interest Deduction, or the Earned Income Tax Credit. If you have taken one of these credits or deductions, you paid an effective tax rate that was lower than the standard tax rate for everyone else with the same income as you. As a result, everybody else’s income tax rate has to be higher. Since I don’t have children or a mortgage, my tax rate is inflated to make up for the lost revenue from tax expenditures like the ones I just mentioned.
That is not to say that all tax expenditures are bad. We aren’t in a position to make judgments about specific tax expenditures. But we are in a position to say that government spending through the tax code is opaque and lacks oversight. Here are some ways in which tax expenditures are less transparent than other types of spending, like grants and contracts:
- Actual lost revenue is not measured – Only estimates for the lost revenue from tax expenditures are calculated. These estimates are produced by the Joint Committee on Taxation (JCT) and the Department of Treasury, not the IRS. The IRS could go back and measure the actual costs associated with tax expenditures using a sampling methodology, but they don’t.
- Discrepancies between estimates – The two bodies that make estimates (JCT and Treasury) often have widely varying estimates for the same tax expenditures. With both these bodies staying pretty tight lipped about how these estimates are made, it’s hard to know which one is more accurate. For example, Treasury estimates the Earned Income Tax Credit at $4.9 billion for 2010, but JCT estimates $56 billion.
- Inconsistent descriptions and classifications of tax expenditures – In addition to having a difference of opinion over what we actually spend on tax expenditures, JCT and Treasury also organize, classify and describe tax expenditures differently. Sometimes this makes it incredibly difficult to know if you’re comparing the right estimates across JCT and Treasury.
- Once enacted, tax expenditures are on autopilot – Just like Otto in Airplane!, most tax expenditures will just sit there, happy and contented forever. Once tax expenditures are enacted, most of them just stay on the books, year after year, without congressional oversight, or even an evaluation of their performance.
With tax expenditures being over 25% of our total spending, they should be under just as much scrutiny as grant and contract spending. Their relative obscurity is the reason they are politically popular vehicles for spending. The only way to keep legislators from using the tax code to enact their private spending agendas is to shine a nice big light on it.
Little Things Can Go A Long Way
There are some things that could happen right away to open up tax expenditures. If the Department of Treasury and the Joint Committee on taxation created a taxonomy, or agreed on a general schema, for reporting tax expenditure estimates, comparing them would be much easier for the average citizen who is not a tax expert or economist. Even just having a common identifier for each tax expenditure would go a long way. They could also release their tax expenditure estimates in a spreadsheet format, instead of a 200 page PDF. These steps require no money, only a little time and collaboration between the branches of government.
In the longer term, Congress could give the IRS a mandate for data collection. They could also institute statutory requirements for the systematic review of enacted tax expenditures and incorporate this review into the budgeting process. The executive branch could facilitate cooperation between the IRS and other federal agencies that disburse direct funding so that they can analyze the effectiveness of both types of spending on the same goals and publish their findings. There are a whole host of measures that could be taken to increase tax expenditure transparency, and we need them now more than ever.
Head over to our (http://sunlightfoundation.com/projects/2011/taxday/) to see how much you know about tax expenditures and have a happy tax day!