Edward Kleinbard, Chief of Staff of the Joint Committee on Taxation, announced yesterday at the Chicago-Kent College of Law Federal Tax Institute that, in response to criticism, the Joint Tax Committee will be Rethinking Tax Expenditures:
In the forty years since Surrey introduced the term to U.S. tax policy discourse, policymakers have relied on tax expenditure analysis to judge the policy implications of individual tax proposals, to gauge the overall health of the Federal income tax system, and to measure the aggregate governmental resources devoted to particular policies. …
In a forthcoming pamphlet we will introduce a new approach to classifying tax provisions as tax expenditures. Our revised paradigm attempts in particular to respond to what we believe to be the most important consensus objections to the current articulation of tax expenditure analysis. First, in many cases, it is not possible to identify in a neutral manner the terms of the “normal” tax to which present law should be compared. Second, many observers believe that the “normal” tax has been fashioned not simply to serve as the baseline from which to identify tax expenditures but also to advocate the adoption of that “normal” tax into law, by presenting it as an aspirational but achievable tax system that is superior to the current Internal Revenue Code.
To address these concerns, the revised classification of tax expenditures divides the universe of such provisions into two main categories: tax expenditures in a narrow sense (as explained below), which we label “Tax Subsidies,” and a new category that we have termed “Tax-Induced Structural Distortions.” The two categories together cover much the same ground as does the current definition of tax expenditures, and in some cases extends the application of the concept further. The revised approach does so, however, without relying on a hypothetical “normal” tax to determine what constitutes a tax expenditure, and without holding up that “normal” tax as an implicit criticism of present law. The result should be a more principled and neutral approach to the issues. …
In our forthcoming pamphlet, we will outline the development of tax expenditure analysis, describe how that doctrine is used today, summarize commentators’ principal objections to how tax expenditure analysis is currently implemented, and respond to those criticisms by proposing in detail a new paradigm for categorizing provisions of the Internal Revenue Code as tax expenditures. I have summarized the gist of this new paradigm for you today. Finally, our forthcoming pamphlet will review some of the issues associated with quantifying tax expenditures under our revised definitions.
We envision our forthcoming pamphlet as the first of several on this topic that we intend to publish in the coming months. The next pamphlet will be our annual list of tax expenditures, reclassified along the lines described in this document, but limited to those items that we describe herein as Tax Subsidies. That pamphlet also will discuss in more detail some of the specific reasoning that led us to classify a particular tax subsidy in one subcategory or another.
The subsequent document will present a preliminary discussion of Tax-Induced Structural Distortions. That pamphlet will not recommend any particular solutions, but instead will attempt to identify critical economic inefficiencies embedded in the current tax system, and then to describe the range of possible solutions (as well as their attendant costs). Of necessity, both the list of Tax-Induced Structural Distortions that we set out, and our analyses of them, will be preliminary in nature, and we envision substantially revising this pamphlet in particular in years to come. Subsequent pamphlets will explore important ancillary themes, like the expansion of tax expenditure analysis to excise taxes.
While we hope that our efforts to reduce the relevance of the idiosyncratic “normal” tax are viewed as responsive to the most serious criticisms of current tax expenditure practice, we acknowledge that no effort along the lines of a tax expenditure analysis can ever be entirely value-free. The unavoidable problem is that, by definition, tax expenditure analysis requires comparing actual rules to some hypothetical, whether that hypothetical is entirely exogenous to existing law, as in the case of the “normal” tax, or is inferred from circumstantial evidence and presented as a general rule in the law today, as advocated in our revised approach.
In this regard, we recognize that our specific implementation of tax expenditure analysis is firmly wedded to the view that the current Internal Revenue Code is at heart an income tax, because we employ that perspective when we attempt to identify what are the Code’s general rules, and what the exceptions thereto. We believe that this approach is consistent with the language and history of the Code, as well as with the understanding of policymakers today. It of course is possible that subsequent policymakers may embrace a consumption tax as the fundamental starting point for a future Internal Revenue Code, at which point we would need to revisit many of the conclusions reached in the series of documents that we envision publishing over the next several months.
We welcome comments and suggestions on this project.
