Martin Feldstein on Tax Expenditures
A good use of one of your 20 free articles on NYTimes.com this month might be reading my old Harvard economics professor Martin Feldstein's op-ed, which appears under the headline, "Raise Taxes, but Not Tax Rates." He writes:
The op-ed is a variation on Professor Feldstein's National Bureau of Economic Research paper, blogged here when it came out back in October 2010. His conclusion in the op-ed is, "Federal revenue must be raised to deal with our very serious fiscal problems. But it would be far better to do so by capping tax expenditures than by raising marginal tax rates."
I've said here and still believe that the federal government has a spending problem, not a revenue problem; the deficit could be solved immediately by bringing federal outlays back to what they were at the end of the Clinton administration, which doesn't seem all that long ago. But I agree with Professor Feldstein that some of the "tax expenditures" he mentions is just federal spending masquerading as tax breaks. And I think some of what he suggests is a likely path for a compromise deficit reduction solution in Washington, if only because both parties want more revenue, the Republicans don't want to raise rates, and it's useful for the Democrats who want to raise revenue to have a Republican-branded economist like Professor Feldstein — a former Reagan aide — to take some of the heat for raising revenue. Professor Feldstein certainly seems tenacious on the point — his Times op-ed today follows not only the NBER paper but also a Washington Post op-ed in November that is eerily similar to the Times one today.
Feldstein in the Washington Post, in November: "tax expenditures increase the deficit by hundreds of billions of dollars a year, more than the total cost of all non-defense programs other than Social Security and Medicare."
Feldstein in the New York Times, today: "Tax expenditures collectively increase the budget deficit by more than all other nondefense spending combined, other than Social Security and Medicare."
Feldstein in the Washington Post, in November: "The tax expenditures subject to the cap in our calculations reflect deductions for mortgage interest, state and local income and property taxes, and charitable contributions; credits for dependent care, children and certain education costs; and the exclusion of employer payments for health insurance. ... (Note that the tax expenditures we analyzed did not include the deduction for individual retirement account contributions or any of the other tax rules designed to encourage saving. Nor did we include the earned-income tax credit, which acts largely as a tax rate reduction.)"
Feldstein in the New York Times: today: "The tax expenditures that we cap in our analysis include all itemized deductions, the health insurance exclusion and the child tax credit. We do not limit the tax expenditures associated with saving and investment like the individual retirement account deduction, the interest accumulating in I.R.A. accounts, and the reduced rate on capital gains."
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