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Monday, February 27, 2012

Tax Expenditures Don't Make America Europe

Via Calculated Risk, Dean Baker takes David Brooks to task for his claim that "America is Europe." Brooks tells us:
The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.
 These tax breaks, more technically called "tax expenditures," are indeed large (Brooks cites an estimate of $600 billion for 2007) and not transparent. But they have more problems than that. As the influential Citizens for Tax Justice report linked above points out, tax expenditures have further drawbacks:

1. They are essentially entitlements: If you qualify for the tax break, you get it. Following on this,
2. They are generally uncapped. It is possible to specify a maximum overall amount that can be taken through a tax expenditure (many states do this with various tax credit programs which are first come, first served, until the annual allocation runs out), but in most cases at the federal level an entity takes advantage of the tax provision when it files its taxes, so no capping is possible.
3. Unlike on-budget programs, tax expenditures rarely undergo annual review, though again in principle one could specify a sunset date to force periodic evaluation.
4. The benefits go mainly to corporations and the rich. This is even true of such "middle-class" tax expenditures such as the mortgage interest deduction, from which those in higher tax brackets and larger mortgage balances benefit the most.
5. Tax expenditures are not designed for efficient program management: why should we expect the IRS to run subsidy programs any more than we would have the Defense Department oversee Food Stamps?

Moreover, as Baker points out, there is a big difference between what we pay for social benefits and what we actually get. He highlights our grossly inefficient health care system and notes that " if we add in ...the deduction for employer provided health insurance.., the government in the United States commits a larger share of GDP for health care than almost anyone." Despite this, he adds, the U.S. does not match the European countries in terms of universal insurance (nor, for that matter, life expectancy).

The preference for non-transparency in the U.S. extends beyond the welfare state. As I showed in my book, Competing for Capital, in the European Union, subsidies to industry and services tend to be paid in the form of grants (on budget), whereas in the United States, tax expenditures are the overwhelming mechanism for such subsidies by state and local governments. Moreover, because tax expenditures do not show up in national accounts data (i.e., adding up to gross domestic product) while on-budget subsidies do, looking at "subsidies" as a percentage of GDP makes the U.S. look like less of a subsidizer than it is compared to Europe.

As a result, in the U.S. we have a patchwork system of expenditures and tax expenditures for social welfare and industrial development that is more costly and less effective than what we see in Europe. This system, if you can call it that, is also less transparent and contributes to U.S. inequality being virtually the worst in the OECD. Bottom line: America isn't Europe.

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