Debunking the Myths of So-Called "Tax Expenditures"


Posted by James Paul on Tuesday, July 12th, 2011, 2:48 PM PERMALINK

Sen. Hatch explains why “tax expenditures” are neither “spending” nor “loopholes”:

“Some in Washington have claimed that eliminating tax expenditures is the same as getting rid of wasteful spending or closing unwanted loopholes. The reality is somewhat different.  Middle-class families would hardly agree that incentives to save for college and retirement or to buy a home are loopholes.  Here’s a closer look at the myths of tax expenditures: 

MYTH: Tax Expenditures Are Spending

FACT: The federal government cannot spend money that it never touched and never possessed.  Tax expenditures let taxpayers keep more of their own money.  And only by the public consent is the government permitted to take some of it in taxation to pay for certain public goods. When tax hike proponents say we are giving businesses and individuals all this money in tax expenditures, they are incorrectly assuming that the government has that money to give in the first place, when in fact it does not.  To the contrary, the government never touches the money that a taxpayer keeps due to benefitting from a tax expenditure, whereas with spending, the government actually collects money from taxpayers and then spends it.

Another difference between tax expenditures and spending is that reducing or eliminating a tax expenditure without an offsetting tax cut to reach a revenue neutral level will cause the size of the federal government to grow, while reducing or eliminating spending causes the size of the federal government to shrink. 

MYTH: Tax Expenditures are Loopholes

FACT: This is deliberately inaccurate.  A loophole is something that Congress did not intend and would generally shut down, at least going forward, once it learned of the loophole.  Tax expenditures, by contrast, were generally placed by Congress into the tax code deliberately.  For example, the largest tax expenditure is the exclusion for employer-provided health insurance and benefits.  The second-largest: the home mortgage interest deduction.

Whether you agree with a particular tax expenditure or not, an honest debate requires recognition that tax expenditures were designed by Congress with economic or social goals in mind and are not inadvertent loopholes.”

What do you think about Sen. Hatch’s distinction between “tax expenditures” and government spending? When someone keeps their own money, is that the same thing as getting a welfare check from the government?

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