Rethinking Tax Expenditures and Fiscal Language
New York University School of Law
Tax Law Review, Vol. 57, No. 2, 2004
Tax expenditure analysis is like a hardy plant with shallow roots that spreads widely, resisting the occasional effort to extirpate it, and yet has little if any effect on the soils in which it sprouts. At least sixteen countries release tax expenditure data pertaining to various taxes. However, public acceptance of tax expenditure analysis has been compromised by concern that it requires undue consensus as to the proper reference tax base, or else that it implies regarding all money as the government's. A more valid concern is that its treatment of certain tax rules as really spending mistakenly presupposes that the distinction between taxes and spending is economically meaningful to begin with.
The prevalence of objections, including mistaken ones, to tax expenditure analysis is in part attributable to Stanley Surrey's over-reaching when he initially proposed it with respect to the United States income tax. A measure that he presented as merely a neutral budgetary tool was widely and accurately recognized as also a tool for promoting his particular policy aims with regard to tax reform and progressivity. Fiscal language inevitably has a dual character, as a weapon of political combat in addition to a tool of purportedly objective description, and proponents on both sides of fiscal language debates rarely sort out the two functions very scrupulously.
While also exploring fiscal language issues more generally, the article attempts to put tax expenditure analysis on a more fundamental basis, by relating it to Richard Musgrave's famous distinction between the allocation and distribution branches of government. Tax expenditures are most usefully defined as provisions in the tax rules that seem to reflect the operations of the allocation branch rather than the distribution branch. It is important to distinguish, however (as tax expenditure analysis heretofore has not) between (1) tax rules that seem clearly allocative rather than distributional, such as weapons appropriations that are accomplished through tax credits, (2) tax rules whose distributional merits are reasonably debatable, such as medical deductions, and (3) tax rules that seem to reflect the administrative needs of the distribution branch rather than the direct aims of distribution policy. In addition, it is reasonable, as the Treasury Department proposed in 2003, to estimate negative as well as positive tax expenditures (i.e., penalties as well as subsidies), and to prepare estimates from a consumption tax as well as an income tax perspective.
JEL Classification: H20, H24, H25
Date posted: July 30, 2004