NCPA - National Center for Policy Analysis

Congressional Budget Office Report: Flawed

June 13, 2013

The Congressional Budget Office (CBO) released a report on the distribution of tax expenditures that some are wrongly using to push for additional tax increases. This was inevitable because the report takes the wrong approach to the issue, says Curtis S. Dubay, a senior policy analyst at the Heritage Foundation.

The CBO misnames "tax expenditures." Congress has explicitly inserted these provisions (routinely called "loopholes") into the tax code. Some are designed to measure income properly, some to achieve a progressive tax system, and some to lower taxes. They are better referred to as "tax preferences" to stress the fact that they are intended to achieve certain goals. Nevertheless, the CBO calls these provisions "tax expenditures" (which implies that there is a meaningful relationship between actual spending and tax reduction) and explicitly compares tax preferences to spending in its report. There is a huge moral and economic difference between the government taxing income away from citizens and then spending it, and allowing income earners to keep their money by reducing taxes through tax preferences.

The finding in the CBO report that some are using to make the case for new tax hikes is that high-income taxpayers receive the most benefit from the tax preferences the CBO considered in its analysis.

  • An in-depth CBO report was not necessary to reach that conclusion, because it is wholly unsurprising. Of course tax preferences benefit high-income taxpayers more, because high-income taxpayers pay the lion's share of the tax burden.
  • It is also self-evident because it is primarily upper-middle-income taxpayers who itemize their deductions.
  • Naturally, policies that reduce taxes lower the tax bills of those taxpayers who otherwise pay the most tax.

The CBO determines what qualifies as a tax preference by comparing the current tax code to what it believes a true income tax would look like. The problem with this method is that it is subjective. There is no textbook definition of an income tax. This means that the CBO leaves out policies that others would consider legitimate tax preferences.

There is broad agreement that the country needs fundamental tax reform. However, by distorting the debate, this CBO report will hamper their efforts. Liberals will use it to argue for tax increases on the rich by eliminating their tax preferences without including pro-growth and revenue-neutral changes to the tax code. CBO analysis should be an asset, not a liability, when it comes to freeing the economy from the burdensome tax code.

Source: Curtis S. Dubay, "CBO Report on 'Tax Expenditures' Has It Wrong," Heritage Foundation, June 4, 2013.


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