Congress appears to have gotten religion when it comes to spending.
Last week, the Senate voted overwhelmingly for an amendment to end the $6 billion annual subsidy for ethanol. Though some commentators have been heralding Thursday’s vote as the beginning of the end for special interest handouts, most doubt whether the underlying bill will pass the Senate, much less the House. Even if it did cross both hurdles, the White House has vowed not to fully repeal the subsidy.
Whatever the outcome of this particular measure, we need to be clear on what precisely is meant by the terms lawmakers and spin doctors are bandying about in the broader tax debate.
A “subsidy” commonly refers to tax dollar funneled to specific sectors of the economy to produce a good or service not viable in the market alone. However, the term also encompasses tax incentives, which don’t involve any expenditure of tax dollars (ie. tax deductions for mortgages, charitable contributions, research and development, etc.). Far from niche handouts, these kinds of broad tax deductions aim to keep our tax code from discouraging social goods, innovation, and domestic economic growth.
The same principle extends to the foreign tax credit know as “dual capacity” which keeps U.S.-based companies from being taxed twice on overseas earnings.
As Congress and the Administration move to reduce excessive federal spending and look for increased revenue without increasing taxes, it is important that they use a scalpel and not a meat-ax. The best—but also most difficult—way to deal with subsidies is complete tax reform. Individual Americans and U.S. business shouldn’t have to spend so much time and money to work with specialists to complete their tax returns. (A 2005 Government Accountability Office report found the efficiency cost of our tax system to be as much as $600 billion annually.)
Proposals for a flat tax or two tax rates using a system that would involve a tax form the size of a post-card or a single page have a lot of appeal. Not surprisingly, they face difficult obstacles from vested interests. In the meantime, Congress should get rid of programs that give tax dollars to profit seeking companies while scrapping tax credits intended to promote politically-driven outcomes that aren’t commercially viable (ie. credits for electric cars and ethanol). Getting rid of these selective subsidies would raise government revenue without raising taxes.