Massive tax deal undermines hopes for tax reform

Politicians promise tax reform. If we make the system fairer, they say, we will also be able to cut taxes.

Politicians oppose tax reform. They enthusiastically create breaks for special interests, though few for average taxpayers.

In short, there’s a huge gap between promise and performance, and it will probably grow even larger, thanks to this year’s tax handouts.

The national debt, regularly attacked as being too large, obviously results from deficits when spending exceeds revenues. Many Republicans see the solution in cutting spending, not raising taxes, and Democrats increasingly go along.

Government spending takes two forms. Usually, money is appropriated for specific programs. Current policy says that such spending should not be allowed to outstrip revenues. The recently passed budget bill finds money in some unusual places, but it balances income and expense.

The other form of spending is a bit more complicated. To promote certain programs or industries, Congress creates special exemptions from taxes, allowing those who are favored to keep their money and use it for approved purposes.

Are these tax expenditures covered by revenues as in the budget bill? No, their cost is financed by new government debt, pushing up the total owed. So much for the claim that Congress is working to cut the federal debt.

These exemptions are called “tax expenditures.” They are much larger than mere “loopholes.”

Because the same ones are renewed periodically, their advocates say they really don’t impose new costs on other taxpayers. They overlook the costs carried forward every year following the introduction of tax breaks and the impact of the new breaks added each time.

Congressional dealmakers will produce this month a massive “tax extenders” bill. The title may make it seem like the bill continues some taxes, but it extends tax breaks that have become a part of tax policy. This bill could authorize tax expenditures of possibly as much as $800 billion.

Some of the tax breaks can only be accomplished by using tax expenditures. Perhaps the leading example is the Earned Income Tax Credit, intended to help low- and moderate-income workers makes ends meet.

But many are aimed at reducing the tax burden on specific business sectors. Some of this activity may deserve government encouragement. The cost of that help could become part of the federal budget, ensuring there were revenues, not more debt, to cover the spending.

Congress doesn’t want to use the budget to support some favored enterprises. Such support could cause a tax increase. That move is politically unacceptable, because the aid to the private sector might face the public spotlight of a congressional review.

Tax expenditures are stealth spending that largely escape public scrutiny. See if this year’s bill gets more than a sentence in the evening news.

This annual tax extenders bill has been negotiated by a small group in Congress and has provided a field day for lobbyists. If they bring home a tax cut for their clients, they can more than justify their fees for the year.

Why do the lobbyists have so much clout with the lawmakers? They and their clients are among the largest contributors to political campaigns. If you traced the dollars circulating in political contributions, lobbying expense and tax breaks, they would all flow back to the taxpayers who pick up the tab on government debt service to cover the benefits.

House Speaker Paul Ryan says he wants tax reform, but he’s unlikely to get it. Because members of Congress depend on the political contributions of those seeking preferences, tax reform depends on campaign finance reform.

Real tax reform would amount to a political earthquake. But some of today’s beneficiaries don’t want equal treatment for all, even if their taxes were lower. They like their preferred positions. And lobbyists could lose much of their business if they weren’t needed to bring home tax breaks.

There is a simple answer to the problem created by most tax expenditures. If those breaks in the tax extenders bill and hosts of others were eliminated, the government could raise the same revenues with lower rates. Taxes could be simplified with fewer and lower tax brackets.

The U.S. has some experience with this approach, which was at the center of the 1986 tax reform law. But it took little time for new tax expenditures to be created and the public debt to climb.

Even as the tax extenders bill passes, the political talk of tax reform will continue. Among the many empty promises in politics, the promise of tax reform may be the most meaningless.