A professor of economics at Harvard, Martin Feldstein, who served in the Reagan administration, has a new paper out from the National Bureau of Economic Research discussing how to reduce the federal debt. The whole paper, "Preventing a National Debt Explosion" is interesting, and there's a neat little discussion about the problems with a "millionaire's tax" — "In short, a ten percentage point millionaire surcharge would produce at most only $44 billion of extra revenue and would cause a deadweight loss of more than $47 billion or one dollar of pure waste for every extra dollar that is transferred from the millionaires to the Treasury." My favorite part, though, is the discussion of what Professor Feldstein calls "tax expenditures" — items like the home mortgage interest deduction, the subsidy for employer-provided health insurance, the child credit. Here is his discussion of the "political economy" of the issue:
Tax expenditures change the political economy of income taxation in three ways. First, the use of tax expenditures of various types eliminates the income tax liabilities of millions of households that would otherwise pay income tax (Internal Revenue Service, 2010). In 2007 (the latest year for which there are such IRS data) there were 46 million tax filers who paid no income tax and received a refund of any taxes withheld during the year. Those individuals file only because they are required to file or in order to receive cash refunds. When a tax credit is refundable, the taxpayer receives cash from the Treasury equal to the value of their "refundable" tax credits to the extent that those credits exceed the individual's pre-credit tax liability. Exempting these individuals from paying any income tax is likely to reduce their political resistance to increases in tax rates on the rest of the population. This would not be the same if the individuals paid income taxes and received cash benefits....
Third, the shift from outlays to tax expenditures distorts the description of the fiscal system. Tax revenue in 2009 was 14.8 percent of GDP and nondefense discretionary outlays were 4.1 percent of GDP. If the tax expenditures equal to 6.9 percent of GDP were more correctly classified as spending, the full size of the tax burden (before these tax expenditures) would be seen as 21.7 percent of GDP and the non-defense discretionary spending would be 11.0 percent of GDP. Raising both taxes and spending by equal amounts would not change the size of the deficit but it would show the much larger size of both taxes and spending than our current measurements indicate.
Professor Feldstein notes that many Republicans are reluctant to tackle these "tax expenditures" because they view eliminating them as tantamount to increasing taxes.