With lawmakers under pressure to find ways to reduce the deficit while avoiding the more painful spending cuts in the sequester, the Senate Budget Committee held a hearing to examine how to reduce the deficit by eliminating wasteful spending in the Tax Code.
Edward Kleinbard
Tuesday’s hearing scrutinized the trade-offs between increasing taxes on the wealthy and large corporations as opposed to cutting programs relied on by families, seniors, and communities nationwide.
University of Southern California law professor Edward D. Kleinbard testified on the need for tax reform. “The United States can afford to increase the total taxes it collects as a fraction of GDP,” he said. “Just a decade ago, the country ran budget surpluses and enjoyed both a robust economy and job growth, while tax collections exceeded 20 percent of GDP. This means directly tackling some of the deliberate congressional subsidy programs baked into the tax code, which is to say, tax expenditures.”
Kleinbard contended that the adverse budget deficit picture over the next decade is the result of forgone tax revenues. “As a result of the Great Recession, we lost about $2 trillion in revenue over the last few years, relative to our historic rate of tax collections as a percentage of GDP,” he said. “Looking ahead, the fiscal cliff tax deal will reduce future tax revenues by $4 trillion, relative to what CBO had projected under its 2012 baseline. Together, these past and future forgone revenues amount to a roughly $7 trillion contribution to our deficits from 2008 to 2023, including interest costs on increased borrowings. To a large extent, both sequestration and the budget caps of the 2011 Budget Control Act are efforts to recoup on the spending side monies that were forgone from the revenue side.”
Kleinbard argued that the most important tax expenditures to address in tax reform are personal itemized deductions, such as the deductions for home mortgage interest, charitable contributions and state and local taxes. “They are extraordinarily costly subsidies, about $250 billion per year in forgone tax revenues,” he said. “They are inefficient, in that they lead to major misallocations of economic resources, particularly with respect to housing. They are poorly targeted, in that the government subsidies go to individuals who would have behaved the same without the subsidies. And they are unfair, in that they are ‘upside down’ subsidies. They subsidize high-income Americans more than low-income ones.”
Kleinbard recommended replacing the personal itemized deductions and the standard deduction with 15 percent tax credits, estimating that would raise approximately $1.5 trillion in revenues over the next 10 years, without taking into account any transition relief.
“My suggestion would still preserve about one-half the aggregate current economic value of personal itemized deductions, but would do so in a way that adds to the progressivity of the Tax Code,” he added. “Nonetheless, the scale-back in the value of the personal itemized deductions should be phased in over several years.”
Kleinbard also called for scaling back the home mortgage deduction. “I fully recognize that the home mortgage interest deduction and other personal itemized deductions invariably are described as ‘sacred cows.’ But they are sacred cows that we can no longer afford to maintain,” he said. “Either we corral these sacred cows, or we allow them to stampede over us.”
Jared Bernstein, a senior fellow at the Center for Budget and Policy Priorities, testified that tax expenditures’ usefulness, or lack thereof, should be assessed using a three-part test.
“Members will not be surprised that it is far too easy to find many tax expenditures that are ‘trifectas’: they forego significant revenue, they induce inefficiencies, and they return most of their benefits to the wealthiest households, boosting after-tax inequality and failing on the fairness criterion,” he said.
Bernstein favors capping most deductions for taxpayers above a certain income level. “This solution scores highly on the three criteria,” he said. “President Obama has proposed to limit the value of itemized deductions and certain other tax expenditures to 28 cents on the dollar, which would raise about $500 billion in revenue, otherwise forgone, over the next decade. Regarding the fairness criterion, it reduces the ‘upside down’ problem, by partially closing the gap between the value of deductions claimed by those with the highest incomes relative to lower income tax units. And while the lower deduction amount reduces incentives at the margin, such incentives still exist, a feature which distinguishes this approach to reform tax expenditures to those which cap expenditures at a certain dollar amount or at a set percentage of income. Under those approaches, no marginal incentives exist above the cap.”
However, Bernstein acknowledged that such a cap would miss other tax expenditures that he considers to be “ripe for reform,” including carried interest, like‐kind exchanges, and tax deferrals by multinational corporations on profits earned by foreign subsidiaries.
“Tax expenditure reform offers an excellent option to reduce wasteful spending through the tax system, while helping to meet our fiscal challenges in ways that will simultaneously improve our deficit outlook, increase economic efficiency, and add much‐needed fairness back into the code,” he said.
Sen. Patty Murray, D-Wash., who chairs the Senate Budget Committee, sees good reason to eliminate some tax expenditures as a way to achieve tax reform.
“Now, there’s no question that we do need to look at government programs carefully, so that we can make fair, responsible cuts that put families and our economy first,” she said. “But a big source of spending, and one that deserves to be just as closely examined, is expenditures in our Tax Code. While we don’t often think of tax expenditures as a form of spending, they require us to make the same kinds of tradeoffs that other forms of government spending would, and lots of them. There’s no good reason, for example, that taxpayers currently subsidize millionaires more, when they purchase a second home, or a yacht, than they do middle-class families purchasing their first home. And why should a hedge fund manager pay a lower tax rate on his income than a soldier, police officer or a teacher?”
Russell Roberts, a research fellow at the Hoover Institution, contended that it was also important to reduce wasteful spending in addition to eliminating wasteful tax expenditures. “I am wildly enthusiastic about eliminating wasteful spending in the Tax Code,” he said. “Our tax system should be more transparent, simpler, and fair. We should get rid of special exemptions for the rich, for people with children, for farmers, home owners, and all the other ways that the Tax Code panders to special interests. But how we finance government—the structure of the tax system and the mix between taxes and borrowing—is rarely as important as whether government spends money wisely. It’s not just that we spend more than we take in. We spend too much and much of it we spend poorly. Raising taxes doesn’t solve that problem—it turns it into the status quo.”
27 Comments
why don't we stop using the tax code to change people's social status. we have poured trillions of dollars trying to end poverty and what has it accomplished, more poverty today than fifty years ago.
when are the morons who run the country going to realise that the only way to combat poverty is through EDUCATION. giving the poor eic and child tax credit doesn't accomplish a thing. it encourages perople to stay poor.
what we need to give the poor a shot by having FREE EDUCATION THROUGH A BACHELOR'S DEGREE i have a number of clients who can't afford a good college education. and, some of those technical schools are RIPPING the poor off. promising jobs when they know there are none but then having the government collect what they billed to the POOR SUCKERS WHO SIGNED UP TO IMPROVE THEMSELVES.
WAKE UP AMERICA THE POLITICIANS ARE RUINING THIS COUNTRY. TAKE ACTION AND PASS LEGISLATION TO HAVE A BALANCED BUDGET AND TERM LIMITS FOR CONGRESSPEOPLE AND SENATORS
Posted by: stockpundit | March 11, 2013 6:14 AM
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Sometimes I am wondering if I am still in America or in some socialist country. Those ideas of the law professor is another step towards socialism. The capitalistic ideas and hard work made America what it is. We do not want the socialism of Europe. Stop programs that make people lazy. Why someone has to work when it makes more from social benefits.???
Posted by: geomar | March 8, 2013 9:59 PM
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EIC must come out of the tax code. With the start of the tax season the first people in the door are the people looking for the money that the government "owes" them. Refund shoppers abound. I have had people tell me that they shouldn't have worked those extra hours since that meant they would get a lower EIC. I have had people with green cards tell me that I must make their refunds higher. All refundable credits should be eliminated. When EIC was first instituted it was only to reduce the tax liablilty to 0. The education credit was orginally meant to reduce tax liablity, the child tax credit was meant to reduce tax liability...now they are all refunable. And with it comes more fraud. Can't wait to see what is going to happen when the Affordable Care credit goes into effect.
And during the tax season EVERYONE needs to pay something....even if only a few dollars. When someone doesn't have an investment in a situation it has very little value.
Posted by: talkingpoint | March 8, 2013 9:18 PM
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There are many areas that need to be reformed.
EITC is a big area of fraud besides being a handout.
The collection process needs to be reformed and take the handcuffs off the IRS to collect money that is owned to the government.
What about tax reform concerning Corporate Income earned oversee.
I can live with eliminating mortgage deduction on second home for people with income over $250,000.
The President is required to present a budget by Feb 1. If no budget by Feb 1, no pay until the Budget presented.
Stop electing the same people over and over again who look out for lobbyist, not taxpayers.
Posted by: jar2745 | March 8, 2013 7:54 PM
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For the life of me I don't understand why the IRS is in the welfare business. Let's get rid of EIC and the refundable child tax credit. Use the child tax credit only to reduce tax to 0 and forfeit the rest. Make it apply to any child still in Secondary school. Everyone needs to participate in supporting the government services they are "entitled" to. It would be nice to have a tax system that was designed to discourage cheating.
Posted by: sunshinetax | March 8, 2013 2:31 PM
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Good grief, turn this decision over to honest tax preparers and we can fix the problem immediately!! Get rid of earned income credit and do it now! Child tax credit is ok but it should not be a refundable credit and it should not end until a child graduates high school and none of them graduate at 17. I do not do many tax returns with earned income credit (I did when I worked for someone else) but the ones that I do is usually as a favor to parents of dead beat children,they think their grandkids will get the benefits, Tell me why a person with 4 kids (only claims 3)can make 14,000 to 15,000 per year and between the federal and state can get refunds close to 10K. With the food stamps, day care, and housing she gets from welfare during the year where is the incentive to work. The sad thing is her kids will not get this money, casino, drugs or alcohol does. When people come here from other countries, ie: vietnamese and mexicans they are taught right off how much money they need to make to get the maximum EIC credit and child tax credit and they will work no more than that!!! Cutting any other tax deductions will only affect the people that work hard to pay their way and lead a decent life, such as Church contributions and home mortgage interest. Cut EIC and clean up Child Tax Credit and you will stop 90% of fraud.
Posted by: oktaxlady | March 8, 2013 1:28 PM
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Gentlemen and Ladies:
The subject of EIC came up 3 times. I agree it should be subject to tighter controls. It's a give-away program.
Secondly, thresholds for the rich limit dependency deductions and the same for itemized deductions already.
Disallow the 2nd home mortgage deduction. What's wrong with that?
I agree start at the top. Cut the fat out of the budget. How about making government workers pay more into their retirement account. Most other municipalities are doing that to save money.
GIVE SENIORS ON SOCIAL SECURITY A BREAK. GO BACK TO THE 50% LEVEL BEFORE IT WAS RAISED TO 85%.
Posted by: rlkohler1 | March 8, 2013 11:27 AM
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Some of my clients are very anxious to get their EIC so they can go to Vegas. Others are known drug users with children who are truly deprived and will continue to be so while their parents get high courtesy of the American taxpayer. Extra EIC payments are being shelled out to people who are claiming someone elses fourth or fifth child and sharing the ill-gotten gain with the child's parent who doesn't need them on their tax return. The IRS can require tax preparers to ask all kinds of additional questions but those who do this are proficient liars and we have no reason to doubt the information they give us. We have sent away several this year because we KNEW they were lying, but they just went elsewhere and got the job done. Nobody among the powers that be has the guts to address the EIC problem for fear they will be perceived as uncaring persecutors of the poor. We already have organizations that provide multitudes of free services for people who need them. The billions lost to the EIC are quietly flushed down the toilet while attention is given to limiting benefits of Social Security recipients who have paid their way all their lives and do not deserve to worry about this in their old age. It's absolutely appalling.
Posted by: anitamartinez | March 8, 2013 11:06 AM
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This might not be a popular comment, but I think that adding child support to "Earned Income" for purposes of the EIC would drastically reduce the amount paid out under this credit.
Posted by: mbwhite | March 8, 2013 10:59 AM
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Here's a thought for eliminating wasteful spending. If Congress voted on the tax bill when they were supposed to, the IRS wouldn't have to spend 100's of thousands to millions of dollars to revamp the forms, reprint the forms, and retrain their staff, all at last minute. Every year, the IRS tells Congress when they need the bill passed so that they don't have to do the same job twice and every year Congress decides to take a vacation instead of getting their job done.
If I worked the same way that Congress works, I'd be out of a job and homeless.
Maybe Congress needs to start looking at the wasteful spending they create, by their refusal to get their job done, before they start targeting those of us who are working our butts off to pay their salaries.
Posted by: clmakin | March 8, 2013 10:55 AM
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There is a lot of waste in the tax code but the one dear to my heart is EIC. It should be canned. Too much "legal" manipulation of income to get it. Too much fraud. What a crazy way to implement a welfare program.
Posted by: curtiscline | March 8, 2013 10:50 AM
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It is too bad Congress does not start with hedge-fund managers paying 15%, tax shelters paying ZERO. Why? Because that is the source of campaign contributions..These financial degenerates get a free ride in America because they know how to abuse the economic power they have. Too bad Congress committees only talk to academics or millionaires instead of people who really suffer from the laws passed by these guys between vacations to talk to their campaign contributors
Posted by: Janosik | March 7, 2013 4:23 PM
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Simple solution to the EIC, just raise the minimum wage to a livable wage. Stop subsidizing business by the Government paying a part of their employees wages. That's the real problem.
Oh, okay, "Let them eat cake!"
Posted by: tego@verizon.net | March 7, 2013 1:02 PM
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What happened to live within your means? What happened to budgeting and monitoring and staying in budget like every household in America? Why do we continue spend, borrow and print money? Does anyone with the recent death of Chavez see any similarities with his "nationalize everything......energy, banks, companies and give it to the poor voters to buy votes? Perhaps the air in Washington has effected the author's thinking.
Posted by: Fadler11239 | March 7, 2013 12:55 PM
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What Congress needs to do is review all deductions and tax credits. They need to determine if their purpose is still necessary or encourages a strategic need. If they don't just get rid of it. Before putting caps on personal deductions and tax credits, they need to look at where a person lives/works. $250,000 buys a lot more in Oklahoma than Manhattan. If they base their decisions on this, then more people will be supportive of caps. Of course what congress will do is cut based on appearance and not substance because if it looks like they are cutting fat, people will think they are doing their jobs.
Posted by: jonjohnoc | March 7, 2013 12:44 PM
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"Let's get this straight: for them to assume that lower taxes are tax expenditures means they start with the assumption that all the income in the country belongs to the government. it is only by their generosity that taxpayers get to keep anything they make."
let me get this straight while we're at it here!
the editor of this propaganda piece actually foisted this byline on a readership and apparently assumed a group of professional accountants/tax types wouldn't cry out?
Michael Cohn is driving the narrative with his byline and i'm driving my eyeballs to a place that reports reality and not an upside down ass backwards disengenuous con piece.
it's apparent, we walk amongst throngs of zombie sheep who are herded along by the "media" sound bites.
Posted by: raoul | March 7, 2013 12:16 PM
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I don't see any suggestions about going after waste and fraud, and in the federal bureaucracy cutting out duplication and the unncessary. Try running it like a business, the first thing a business person does is trim expenses and spending.
Posted by: GreenMain | March 7, 2013 11:49 AM
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I'll bet that Mr. Kleinbard, being a professor at USC, was a football player who got hit once too often. Where is the fairness, Mr. Kleinbard? Check the spending side of the equation? Not one word about entitlement limits. Go back to your blackboard and take another academic look at this. Why in the world would Accounting Today publish this without comment by those he was testifying to? Where's the balance?
Posted by: jslade | March 7, 2013 10:38 AM
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Eight comments and not one that mentioned that all revenue bills start in the House. Complete waste of time. And since the Speaker has little or no control over the House, this is just another waste of space reporting on it.
Posted by: topbeancounter | March 7, 2013 10:23 AM
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As an enrolled agent and tax preparer I agree that EIC is a gigantic waste of government spending, in that, the upper limits are too high and it is used as a vote buyer and not as a way to assist people who truly neeed help.
In addition it is a significant source of fraud on the tax system and tax paying citizens. If it is deemed that this is a necessary program, limits should definitely be lowered and there should be a preapproval issued by a government agency, such as food stamp or WIC program. Anyone who truly needs assistance should certainly be receiving aid from one of these agencies. Tax preparers should not be qualifying EIC receipients beecause they are not investigators and have no incentive to detect or expose fraudulently behavior.
Posted by: braines2 | March 7, 2013 9:19 AM
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Amen WisconsinCPA. Mr Kleinbard argues unfairness.
Really, Mr Kleinbard?
How FAIR is it that HALF of America pays ZERO net income tax? How FAIR is it to tax some people at 39.6% [plus state and local taxes], you phase out their deductions and credits because they are too successful and then add on some AMT for good measure.
In your "Rich Man Whining" article you argue that everyone pays. Well paying into SS is not the same as an income tax. You get a benefit at the end of the day - so its a twisted, forced retirement plan. Income taxes on the other hand have no incremental benefit to the individual paying more and more.
You have a warped view of reality...something along the lines of: From each according to his ability, to each according to his need
Posted by: CincyCPA | March 7, 2013 8:14 AM
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Did I notice (of course I did!) that the individual that is testifying on economics is a professor of LAW not a professor of Economics. And I also noticed that his "evidence" for his proposal or suggestion that taxis can be raised was a very short time frame with no reference to the economic and tax conditions of the periods preceding or following that rate of collections compared to the GDP. And did I notice that he referred to something called "tax expenditures" (which falsely assumes that your hard earned money is not yours until the government in it's benevolence allows your to keep it and make limited decisions on how your use it)? AND am I wondering whyanyone would even listen to a buffoon like this? Why yes I am!
This entire presentation was nothing mare than a political statement trying to tell lawmakers that it is OK to take mare money out of a weakening economy. WITHOUT the "testifier" having any background in economics or business. The fact is that if you or I have to take more money ant of our spendable resources, our already diminishing life styles will have to be reduced even farther.
Posted by: SullivanAcctg | March 7, 2013 8:14 AM
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Let's get this straight: for them to assume that lower taxes are tax expenditures means they start with the assumption that all the income in the country belongs to the government. it is only by their generosity that taxpayers get to keep anything they make.
This upside down thinking means that those of us who work and serve our clients and customers should be happy with the portion of our income we get to keep. and if we just happen to be "wealthy" we should be even happier to get to keep less so that those who are not providing valuable services get to keep more.
and i suppose they don't realize that wages paid to employees are deductions. so, if they start to limit deductions, the obvious next step is to pay employees less.
Can we make Economics 101 a prerequisite for creating tax laws?
Heaven help us and may we all be thankful for a deadlocked Congress. Think what would be happening otherwise and shudder.
Posted by: pbwmiller | March 7, 2013 8:04 AM
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I agree. The earned income credit is a waste of government spending in the tax code. Home mortgage deductions are the only real deduction the middle class gets so many Americans will have to pay in more just to break even and the low income taxpayers will continue to get free money yet again from the government.
Posted by: h57s3 | March 7, 2013 7:58 AM
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Let's get this straight -- to classify lower taxes as tax expenditures means one has to start with the premise that the government is entitled to everything that taxpayers make. That leads to the paradigm that the income taxpayers keep is a gift from the government.
I don't know about you, but that seems completely like upside-down thinking.
Hold on to your wallets, all those who are mistakenly believing that your income is what you earn by working hard and providing valuable services to your clients and customers. You're just the beneficiaries of a Congress that's going to decide you don't need as much money because they need it more than you do.
Heaven help us because they're really serious about this.
Posted by: pbwmiller | March 7, 2013 7:57 AM
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These deductions help the middle class. Now they want to hit us agein. Typical. How about hitting Earned Income
Posted by: ztom | March 7, 2013 7:49 AM
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At what point, will congress realize they should look at eliminating the earned income tax credit? It is rampant with fraud and does little to encourage individuals to aspire to a better life. In fact, it discourages it.
Posted by: WisconsinCPA | March 7, 2013 7:47 AM
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