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One point no one seems to realize about the deficit commission report and tax revenues

Everyone (indeed, including me) has been discussing the deficit commission report as if the plan were to have an almost revenue-neutral tax reform, with rate cuts handing back the revenues raised from tax expenditure repeal except for net revenue-raising of an initial $80 billion per year.

A key point about tax expenditures, however, is that they're "spending" through the tax code. That is, you get replace them with literal spending provisions with little or no substantive policy change. And if you did so, the actual size and activities of government would be about the same as today, but both taxes and spending would be measured as much higher.

The classic illustration, which I've used more than a little in my writing on the subject, is the pretended "weapons supplier tax credit" from David Bradford's work, a fictional proposal in which taxes and spending are reduced by zeroing out appropriations programs for military hardware but using tax credits (a "tax cut") to do exactly the same things as before.

That said, what the deficit commission is doing when it proposes eliminating tax expenditures but giving back most of the revenue through lower rates is cutting both taxes and spending (in a conceptual sense, although I would rather talk in functional terms of "distribution policy" and "allocation policy") far more than it says, and on a revenue-neutral basis.

Not to say that's bad, just that we get pervasive mislabeling because people can't help thinking of tax expenditures as "lower taxes" rather than as the equivalent of higher taxes on income and higher "spending" for particular allocative purposes.

Full post as published by Start Making Sense on November 14, 2010 (boomark / email).