$1.1 Trillion Per Year In Tax Breaks Could Be Eliminated - New GAO Study

The oil industry alone receives $7,610 in tax break per minute.  That's over over $4 billion per year.  [bit.ly/GVjKi4]


According to a new GAO study, broadening the tax base, which would include closing tax loop holes, could preserve over a trillion dollars per year in federal income revenues.  The additional revenue could reduce the deficit, lower the overall tax rates and reduce the urgency to cut essential domestic service programs.  One way to broaden the tax base is to reduce the tax expenditures that have been in the tax code since 1913 when the progressive income tax was enacted. If it were possible to repeal or substantially trim most special tax deductions, credits, exclusions, and special rates (also known as tax expenditures), the potential for lower rates or additional revenue would be significant. 

An understanding of four complex issues surrounding tax expenditures is necessary for an informed debate over broadening the tax base, according to the GAO report.

1. Tax expenditures affect the economic behavior of taxpayers (efficiency effects).
2. Changing tax expenditures changes the distribution of benefits and the distribution of after-tax income (equity effects)
3. Changes to tax expenditures could change the administrative burdens on taxpayers and the Internal Revenue Service (IRS). And:
4. Many tax expenditures are popular among taxpayers and voters and would be difficult to change.  

 Tax incentives alter the economic behavior of tax payers and businesses in ways that can harm or benefit certain economic sectors and promote or diminish certain social values.  Attempts to alter the current balance of interests as reflected in the present tax code would unleash fearsome battles among powerful special interest groups wanting to preserve current advantages or seeking to extract new advantages.  Broadening the tax base would necessarily involve a redistribution of equity, or wealth.  The country would need to be willing and fully prepared to engaged in a major and clamorous distributive justice debate, confident that the outcome will ultimately serve the best interests of most Americans over special interest groups while protecting the rights of minorities and individual citizens.  We have to be ready for this debate.  Given the poor state of what passes for public discourse these days it isn't clear that we are ready.  Nevertheless, here it comes!  

Below is a portion of the IBT article followed by links and the summary of the GAO report.  

INTERNATIONAL BUSINESS TIMES
Tax Breaks Reduce U.S. Government Revenue By $1.1 Trillion Annually: Report
By JEREMY B. WHITE: Subscribe to Jeremy's RSS feed

March 26, 2012 12:15 PM EDT

More than $1 trillion in tax breaks are embedded in the U.S. tax code, according to a new Congressional Research Service study.

Overhauling the tax code has become a bipartisan imperative, although Democrats and Republicans have disagreed on how. President Barack Obama has endorsed a plan to eliminate corporate subsidies and reduce the top tax rate to 28 percent, while Mitt Romney has proposed to slash the corporate tax rate while expanding the tax base.

• Overhauling the tax code has become a bipartisan imperative, although Democrats and Republicans have disagreed on how. President Barack Obama has endorsed a plan to eliminate corporate subsidies and reduce the top tax rate to 28 percent, while Mitt Romney has proposed to slash the corporate tax rate while expanding the tax base.

From a budgetary perspective, tax expenditures have the same result as outright spending programs. The CRS study found that the more than 200 separate expenditures in the tax code cost the government about $1.1 trillion in annual revenue. The largest 20 of them comprise about 90 percent of that total, and are worth about 74 percent of the total anticipated value of individual income taxes in 2014, or 7 percent of GDP.  

http://www.ibtimes.com/articles/319570/20120326/tax-code-breaks-expenditures-taxes-deficit-rates.htm

The Challenge of Individual Income Tax Reform: An Economic Analysis of Tax Base Broadening

http://www.washingtonpost.com/wp-srv/business/documents/crstaxreform.pdf

Summary 

Congressional interest in a major reform of the individual income tax that would broaden the base and use the additional tax revenues to lower rates and/or reduce the deficit has increased. The President’s Fiscal Commission, for example, proposed an individual income tax reform with three objectives: to broaden the base and lower the tax rate, to contribute to deficit reduction, and to maintain or increase the progressivity of the tax system. The Fiscal Commission proposed to broaden the tax base by eliminating or modifying most tax expenditures. One legislative proposal, S. 727, introduced by Senators Wyden, Begich, and Coats, would broaden the tax base by eliminating many tax expenditures and reduce tax rates.

One way to broaden the tax base is to eliminate or reduce tax expenditures, which have been in the tax code since the passage of the progressive income tax in 1913. An understanding of four complex issues surrounding tax expenditures is necessary for an informed debate over broadening the tax base. First, tax expenditures affect the economic behavior of taxpayers (efficiency effects). Second, changing tax expenditures will change the distribution of tax benefits, and the distribution of after-tax income (equity effects). Third, changes to tax expenditures could change the administrative burdens on taxpayers and the Internal Revenue Service (IRS). Lastly, many tax expenditures are popular among taxpayers and voters. Each one of these issues presents challenges to broadening the tax base, which could be difficult to overcome.

There are over 200 separate tax expenditures, which are projected to total over $1.1 trillion in FY2014. The revenue loss of all tax expenditures, however, is highly concentrated in a relatively small number—the largest 20 tax expenditures account for 90% of the total revenue loss of all tax expenditures. This amount is equivalent to 74% of the total FY2014 revenue from individual income taxes. If used for rate reduction alone, eliminating these tax expenditures could allow tax rates to be reduced by around 43%: for example, the top 39.6% tax rate could be reduced to approximately 23%.

When evaluating tax expenditures as potential base broadening provisions, it is useful to consider
the general kinds of behaviors they affect or the general objectives in determining the feasibility of eliminating or modifying specific tax expenditures. Consequently, tax expenditures are divided into seven major categories: saving, business investment, consumption, owner-occupied housing (which is a combination of an investment choice and a consumption choice), labor supply, government programs (which in many cases would have no behavioral effects but are simply income transfers), and a category termed structural (which provides benefits based on family circumstances rather than affecting behavior).

The analysis in this report suggests there are impediments to base broadening by eliminating or reducing tax expenditures, because they are viewed as serving an important purpose, are important for distributional reasons, are technically difficult to change, or are broadly used by the public and quite popular. Given the barriers to eliminating or reducing most tax expenditures, it may prove difficult to gain more than $100 billion to $150 billion in additional tax revenues through base broadening. This amount could have a significant effect on reducing the FY2014 budget deficit—reducing the projected $345 billion deficit by 30% to 43%. This additional tax revenue, however, is equivalent to about 6% to 9% of projected FY2014 individual income tax revenue, and, consequently, would not allow for significant reductions in tax rates (about a one or two percentage point reduction for each bracket).