NCPA - National Center for Policy Analysis

The Flawed Concept Of Tax Expenditures

April 30, 2001

The concept of tax expenditures was created by Stanley Surrey, assistant secretary of the Treasury for tax policy throughout all of the Kennedy and Johnson administrations. Surrey was very liberal and concerned that the high tax rates of that era -- which went up to 70 percent -- were seldom actually paid because of "loopholes" in the law. He wanted to abolish these provisions and force people to pay taxes at the high rates they ought to be paying.

He worked to stigmatize what he viewed as loopholes and publicize them, in the hope that this would lead Congress to abolish them. Only in late 1968 was he able to get the Treasury Department to publish a list of tax expenditures and propose legislation to restrict them.

Unfortunately, the Nixon Administration went along with Surrey's idea and signed into law the Tax Reform Act of 1969, which sharply raised taxes and contributed mightily to the economic malaise of the 1970s. For example, this legislation scaled back the exclusion for capital gains. This led to a sharp cutback in capital investment, especially in risky areas such as high technology, which slowed economic growth.

Later, Congress codified tax expenditures in the Budget Act of 1974.

The notion of tax expenditures is fundamentally flawed, because the decision to list one provision and not another essentially is arbitrary. The Treasury Department and Congress's Joint Committee on Taxation cannot agree on what is and is not a tax expenditure. Also, the list changes from year to year (see figure).

In his budget, President Bush denies the very legitimacy of tax expenditures. Perhaps most importantly, the budget introduces for the first time the concept of "negative tax expenditures" -- provisions that raise taxes above that of a normal tax system. These include provisions that are not adjusted for inflation, such as depreciation allowances.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, April 30, 2001.


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