Menus Subscribe Search

Follow us


Giving Credit Where Credit Is Due

• February 07, 2011 • 10:00 AM

A professor of tax law argues that tax reform to reduce federal spending, budget deficits and the size of government may start with axing deductions and subsidies while adding credits.

President Barack Obama deserves credit for speaking frankly in his recent State of the Union address about the critical need to cut “spending” in all parts of the federal budget, not just in the non-defense discretionary spending that makes up a relatively small part of the federal budget. Obama also deserves credit for suggesting that we eliminate tax “loopholes” — also known as “tax expenditures” (targeted tax subsidies that benefit a narrow group of taxpayers, reduce tax revenue and drive up tax rates for other taxpayers).

However, the president missed an opportunity to call for the reform of many of the loopholes in the individual income tax, to make the tax system more efficient and fair, and to contain the rapid growth of tax expenditures, currently estimated to total over $1 trillion a year.

Tax expenditures frequently are the economic equivalent of a federal spending program. Generally, in an income tax system, legitimate business expenses (e.g., the cost of renting an office) are deductible, but personal living expenses (e.g. the cost of renting an apartment) are not deductible. Our tax code provides generally that personal expenses are not deductible, but allows individual taxpayers to take certain types of itemized deductions (e.g., the home mortgage interest deduction) if the taxpayer’s total itemized deductions exceed the “standard deduction” ($11,600 for married couples and $5,800 for individuals in 2011).

The itemized deductions allowed by the tax code thus generally are the functional equivalent of a loophole-free income tax code plus a federal spending program. For example, the home mortgage interest deduction is a federal housing subsidy that disproportionately benefits upper-income homeowners. Our tax code also provides tax subsidies in the form of “exclusions,” meaning that the excluded item is not treated as income and is not taxed. An example is the income tax exclusion for employer-sponsored health insurance (ESI), which drives up the cost of healthcare and disproportionately benefits taxpayers whose employers provide “Cadillac” health insurance plans.

Converting various tax deductions and exclusions into tax credits makes sense for two reasons: 1) to deliver targeted tax subsidies to the taxpayers who most need them; and 2) to contain the rapid projected growth of tax subsidies. Both personal deductions and exclusions reduce “taxable income,” the base against which the income tax rates are applied. The dollar benefit of deductions and exclusions depends on the taxpayer’s tax rate; the higher the tax rate, the greater the dollar benefit from the deduction or exclusion.

Tax subsidies delivered in the form of deductions and exclusions thus generally provide an “upside-down” subsidy that disproportionately benefits upper-income Americans. Also, taxpayers who take the standard deduction (the vast majority of Americans) receive no tax benefit from their itemized deductions.

Compare the effect of tax subsidies that are delivered in the form of credits that reduce the taxpayer’s tax owed for the year. A refundable $1,000 tax credit saves a taxpayer $1,000 of tax, regardless of the taxpayer’s tax rate. If we converted personal tax deductions and exclusions into credits, tax subsidies would benefit those who most need them.

Converting personal tax deductions and exclusions into tax credits also would allow Congress to begin to control the rapid growth in the cost of these tax expenditures. Tax deductions and exclusions generally are on autopilot and grow without regard to their cost in foregone revenue. For example, the cost of the tax exclusion for ESI is projected to grow disproportionately in the future, as health care costs increase dramatically with the retirement of the baby boomer generation. We could replace the current unlimited exclusion for ESI with an ESI tax credit and structure this conversion such that the vast majority of Americans would pay the same amount of tax or less tax.

The conversion of the exclusion into a credit also would provide an incentive to slow the rate of growth of healthcare spending, which is the most alarming and intractable element in the long-term fiscal outlook for our country.

Tax expenditure reform also is necessary to reduce wasteful and inefficient federal spending. Although federal law requires “performance review” of tax expenditures, this requirement has been ignored for many years. It is time to consider which tax expenditures should be eliminated, consolidated or reformed. Some tax expenditures should be completely eliminated because they are not effective spending programs. Well-intentioned, lofty sounding tax subsidies may have unintended consequences that are inconsistent with the stated goals of the tax spending program.

For example, tax subsidies for education ultimately might result in tuition increases instead of making college more affordable and accessible for the students the subsidies were supposed to help. Enacting tax subsidies to promote higher education sounds like a no-brainer, but whether such tax subsidies are good policy depends on the actual consequences — both intended and unintended — of the subsidies. In addition, overlapping, duplicative tax expenditures could be consolidated and simplified.

If you want to limit federal spending, reduce the size of the federal government and reduce federal budget deficits, you should be in favor of tax expenditure reform to eliminate loopholes, make the tax system more fair and efficient, and contain the unbridled future growth of spending through the tax code. The president and the Congress should initiate tax expenditure reform by converting most tax deductions and exclusions into tax credits.

Subscribe to Miller-McCune

Katherine Pratt
Katherine Pratt is a professor of tax law at Loyola Law School, Los Angeles.

A weekly roundup of the best of Pacific Standard and PSmag.com, delivered straight to your inbox.

Recent Posts

December 19 • 4:00 PM

How a Drug Policy Reform Organization Thinks of the Children

This valuable, newly updated resource for parents is based in the real world.


December 19 • 2:00 PM

Where Did the Ouija Board Come From?

It wasn’t just a toy.


December 19 • 12:00 PM

Social Scientists Can Do More to Eradicate Racial Oppression

Using our knowledge of social systems, all social scientists—black or white, race scholar or not—have an opportunity to challenge white privilege.


December 19 • 10:17 AM

How Scientists Contribute to Bad Science Reporting

By not taking university press officers and research press releases seriously, scientists are often complicit in the media falsehoods they so often deride.


December 19 • 10:00 AM

Pentecostalism in West Africa: A Boon or Barrier to Disease?

How has Ghana stayed Ebola-free despite being at high risk for infection? A look at their American-style Pentecostalism, a religion that threatens to do more harm than good.


December 19 • 8:00 AM

Don’t Text and Drive—Especially If You’re Old

A new study shows that texting while driving becomes even more dangerous with age.


December 19 • 6:12 AM

All That ‘Call of Duty’ With Your Friends Has Not Made You a More Violent Person

But all that solo Call of Duty has.


December 19 • 4:00 AM

Food for Thought: WIC Works

New research finds participation in the federal WIC program, which subsidizes healthy foods for young children, is linked with stronger cognitive development and higher test scores.


December 18 • 4:00 PM

How I Navigated Life as a Newly Sober Mom

Saying “no” to my kids was harder than saying “no” to alcohol. But for their sake and mine, I had to learn to put myself first sometimes.


December 18 • 2:00 PM

Women in Apocalyptic Fiction Shaving Their Armpits

Because our interest in realism apparently only goes so far.


December 18 • 12:00 PM

The Paradox of Choice, 10 Years Later

Paul Hiebert talks to psychologist Barry Schwartz about how modern trends—social media, FOMO, customer review sites—fit in with arguments he made a decade ago in his highly influential book, The Paradox of Choice: Why More Is Less.


December 18 • 10:00 AM

What It’s Like to Spend a Few Hours in the Church of Scientology

Wrestling with thetans, attempting to unlock a memory bank, and a personality test seemingly aimed at people with depression. This is Scientology’s “dissemination drill” for potential new members.


December 18 • 8:00 AM

Gendering #BlackLivesMatter: A Feminist Perspective

Black men are stereotyped as violent, while black women are rendered invisible. Here’s why the gendering of black lives matters.


December 18 • 7:06 AM

Apparently You Can Bring Your Religion to Work

New research says offices that encourage talk of religion actually make for happier workplaces.


December 18 • 6:00 AM

The Very Weak and Complicated Links Between Mental Illness and Gun Violence

Vanderbilt University’s Jonathan Metzl and Kenneth MacLeish address our anxieties and correct our assumptions.


December 18 • 4:00 AM

Should Movies Be Rated RD for Reckless Driving?

A new study finds a link between watching films featuring reckless driving and engaging in similar behavior years later.


December 17 • 4:00 PM

How to Run a Drug Dealing Network in Prison

People tend not to hear about the prison drug dealing operations that succeed. Substance.com asks a veteran of the game to explain his system.


December 17 • 2:00 PM

Gender Segregation of Toys Is on the Rise

Charting the use of “toys for boys” and “toys for girls” in American English.


December 17 • 12:41 PM

Why the College Football Playoff Is Terrible But Better Than Before

The sample size is still embarrassingly small, but at least there’s less room for the availability cascade.


December 17 • 11:06 AM

Canadian Kids Have a Serious Smoking Problem

Bootleg cigarette sales could be leading Canadian teens to more serious drugs, a recent study finds.


December 17 • 10:37 AM

A Public Lynching in Sproul Plaza

When photographs of lynching victims showed up on a hallowed site of democracy in action, a provocation was issued—but to whom, by whom, and why?


December 17 • 8:00 AM

What Was the Job?

This was the year the job broke, the year we accepted a re-interpretation of its fundamental bargain and bought in to the push to get us to all work for ourselves rather than each other.


December 17 • 6:00 AM

White Kids Will Be Kids

Even the “good” kids—bound for college, upwardly mobile—sometimes break the law. The difference? They don’t have much to fear. A professor of race and social movements reflects on her teenage years and faces some uncomfortable realities.



December 16 • 4:00 PM

How Fear of Occupy Wall Street Undermined the Red Cross’ Sandy Relief Effort

Red Cross responders say there was a ban on working with the widely praised Occupy Sandy relief group because it was seen as politically unpalatable.


Follow us


Don’t Text and Drive—Especially If You’re Old

A new study shows that texting while driving becomes even more dangerous with age.

Apparently You Can Bring Your Religion to Work

New research says offices that encourage talk of religion actually make for happier workplaces.

Canadian Kids Have a Serious Smoking Problem

Bootleg cigarette sales could be leading Canadian teens to more serious drugs, a recent study finds.

The Hidden Psychology of the Home Ref

That old myth of home field bias isn’t a myth at all; it’s a statistical fact.

The Big One

One in two United States senators and two in five House members who left office between 1998 and 2004 became lobbyists. November/December 2014

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.