A balanced budget--the first in 30 years--is a stunning achievement. But in its crusade to eliminate the federal deficit, Washington has dramatically changed how it spends and how it taxes. With Congress reluctant to increase spending, politicians are turning to the tax code to further their agendas--whether boosting child care or rewarding investors.
The cost of targeted tax breaks--tax credits and deductions aimed at specific constituencies--has increased more than 40% over the past decade to $535 billion a year. That's almost as rapid as the well-publicized growth of Medicare and Social Security spending. Tax loopholes now cost the Treasury almost as much as the government spends on all non-entitlement programs combined.
It's a dangerous game that makes an already complex tax code even more complicated. Worse, it hides all sorts of subsidies. If Washington wants to encourage certain practices, it should do so by spending, rather than through back-door tax breaks.
DUELING BREAKS. President Clinton's fiscal 1999 budget perpetuates the trend. His plan would add 30 new breaks to the 150 now in the code. The dollars are modest--about $24 billion over five years. But history shows that once enacted, such loopholes almost never go away and just get bigger. Just think about what has happened to the deduction for mortgage interest. A decade ago, it cost the Treasury about $20 billion. This year, the deduction has grown to more than $53 billion. Most new spending, by contrast, must be approved by Congress each year. Says former Congressional Budget Office Director Rudolph G. Penner: "We're seeing the face of the new middle-class entitlements."
Clinton, however, is only carrying on a tradition that the gop has observed for years. In fact, Republicans and Democrats will spend much of this year wrangling over dueling tax breaks. The President, for instance, wants incentives to expand day care; Republicans would rather reward stay-at-home moms. Clinton is pushing tax incentives for public schools; the gop wants new tax breaks to boost private education.
Sometimes, new loopholes even fight existing breaks. To encourage clean energy usage, Clinton would provide more than $5 billion in tax breaks for everything from windmills to high-efficiency autos. Yet the law already gives away $1.5 billion to boost production of the very fossil fuels Clinton wants to curb.
Worse, Clinton's proposals would create all sorts of arbitrary choices. He would provide a new credit for high-efficiency heat pumps and air conditioners, but not furnaces. Why not? Administration officials can't say.
Recently, the focus of tax subsidies has been shifting from corporate welfare to social engineering. Before the Tax Reform Act of 1986, about 27% of special tax benefits went to companies. Today, it's only about 11%. Says House Majority Leader Richard K. Armey (R-Tex.), who would ditch all tax breaks for a flat tax: "The code is being used to reward you for what they want you to do."
These tax tactics are no surprise considering what has been happening to spending: While retiree benefits have ballooned, other programs have shriveled. In 1969, 18% of the budget went to Social Security and Medicare. In fiscal '99, those programs will cost twice that. Total spending for senior citizens, interest on the debt, and national defense will eat up a staggering 85% of the budget.
With only 15% left for everything else, from aid to poor families with kids to export subsidies, pols turn to the tax code. Take welfare policy. In 1989, direct spending on such programs as welfare, food stamps, and housing subsidies accounted for more than 95% of all government aid to the poor. Today, as traditional welfare ends, nearly a third of all benefits for the needy come from the $28 billion earned-income credit--which cost barely $2 billion a decade ago.
Most new tax breaks are aimed at the middle class--and they're just a bald effort to win votes. But these goodies aren't free. Just like spending, somebody has to pay for them. That's why tax rates have been creeping up. If Washington really wants to help taxpayers, it ought to cut rates and let them decide what to do with the money.