Economics

Where Trump Should Look to Cut Costs

The most wasteful spending is in the tax code.

Should the government subsidize this?

Photographer: Gabriel Bouys/Getty Images

Have you ever tried the Kondo approach to decluttering? The main idea is that you decide what to keep, rather than what to get rid of. If something is bringing you joy or actually needed, it stays. If not, it goes.

This is the approach that the president’s administration and Congress should be taking to federal spending every year. Unfortunately, that's not happening -- including under Donald Trump’s much-touted reorganization of the government.

Congress is a big part of the problem. Legislators are supposed to pass appropriations bills that set specific funding levels for federal agencies -- a process crucial to ensuring that the agencies are adapting their budgets to the country’s needs. Yet year after year they fail to do so in a timely manner.

Even without Congress, though, the Office of Management and Budget, which answers to the president, can take steps to ensure that federal agencies are working as efficiently as possible. Just last week, OMB Director Mick Mulvaney sent a memo suggesting that agencies take “immediate actions” to reduce their workforces and achieve cost savings. Although the instructions are motivated by a desire for more drastic cuts than is typical, an annual performance and cost-effectiveness review with agencies is business as usual for OMB.  

Unfortunately, the Trump administration is focusing its cost-cutting on the one small area that already gets the most regular scrutiny: non-defense discretionary spending on programs ranging from environmental protection to funding for science and the arts. That’s not where the waste is.

Our most wasteful spending is in the tax code. Special credits, deductions, and other provisions reduce total tax liabilities by about $1.2 trillion every year. That’s more than the government’s total discretionary budget, including defense. For every dollar that a clean tax code would raise, nearly a quarter goes to reducing someone’s tax bill because of some special thing they decided to do, such as buying health insurance through an employer, borrowing money for a house or purchasing certain U.S. savings bonds. In comparison, only 10 cents of that dollar would go to non-defense discretionary spending.

Some people claim that such “tax expenditures” aren’t really spending, because no money is passing through government hands. Yet when the government decides to give a tax break to me and not to you, it is making a policy choice. If we have the same income and I borrow more money than you to live in a larger house, why should I pay less tax than you? Useful as homeownership might be, research shows that the subsidy doesn’t do much for society. And like most tax expenditures, it primarily benefits the wealthy, encouraging them to buy bigger homes and finance them with debt.

If Republicans got rid of all tax expenditures, they would have an extra trillion dollars that could be used to reduce rates overall. Granted, that would be extreme: Some things are best subsidized or penalized through the tax code. The earned income tax credit, for example, is a very effective way to support the working poor. Breaks for spending on college and graduate school also make sense. There are social benefits from more educated citizens -- including the fact that they pay more in taxes due to their higher earnings.

The issue with tax expenditures is that we never review them. Do we really want tax-free retirement accounts that disproportionately benefit the well-off (recall Mitt Romney’s tax-free retirement account of more than $20 million)? Or unlimited subsidies for employer-provided health insurance that encourage wasteful health spending? The Congressional Budget Office has found plenty of tax expenditures that could be repealed to help stabilize our fiscal situation.

Non-defense discretionary spending has been stable or shrinking as a percentage of gross domestic product, while tax expenditures and mandatory spending on programs like Medicare, social security and agricultural subsidies keep growing. It’s the latter that desperately need review. We need to hold each up and ask: Does it bring us joy as a society? Does it meet a need in a way that makes us better off? Is it redistributing income or helping to build our future?

Millennials in particular, and the generation coming after them, must demand such a reassessment. Would they prefer more help with their student loans over a mortgage interest deduction? Or paid leave over the ability to amass hundreds of thousands of dollars in tax-free retirement accounts? It’s time to think about what government should be doing for us today and truly reorganize.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Betsey A Stevenson at betseys@umich.edu

    To contact the editor responsible for this story:
    Mark Whitehouse at mwhitehouse1@bloomberg.net

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