When policymakers look to trim fat from the federal government they too often ignore half the problem: the vast and complicated set of spending programs administered by the IRS. These programs are often referred to as tax expenditures, but this paper argues that they should be viewed just like any other type of government spending. In fiscal year 2011 we will spend over $1 trillion on tax expenditures. Despite their big price tag, these programs fly under the radar of media and popular opinion. As a result, they are more likely than direct outlays to be ineffective initiatives or giveaways to the politically powerful.
This paper explains what IRS-administered spending programs are, and summarizes the obstacles to subjecting them to the same scrutiny as other government spending. It then offers four recommendations for working these programs into the budget process: (1) requiring a bipartisan commission or a designated agency to create rules for identifying provisions that should be treated as “IRS-administered spending programs,” (2) directing CBO to display alternative projections of federal revenue and spending that count all IRS-administered spending programs as revenue raised and then spent, (3) requiring the IRS to inform taxpayers of the benefits they receive from such programs, and (4) allowing taxpayers to claim these benefits separately from remitting taxes due.
Finally, this paper offers a framework of questions and principles that policymakers should bear in mind in giving these programs the critical evaluation that they deserve. Specifically, policymakers should consider whether each IRS-administered spending program furthers any public goals and, if so, whether it is structured as effectively as possible to achieve its objectives. If a program seeks to encourage consumers to act in their own interest, policymakers should consider replacing or supplementing it with default rules and “nudges” that facilitate better decisions. If a program seeks to encourage consumers to make choices that benefit others, policymakers should target its subsidies on the choices that benefit others the most and the taxpayers who are most likely to respond. Responsiveness can often be increased by offering the same subsidy to everyone, framing the subsidy as a match, or delivering it earlier in time. More fundamentally, such subsidies should not depend on the claimant’s marginal tax rate or itemizing status. This implies that IRS-administered spending program that seek to influence or reward socially-desirable choices should almost always be delivered in the form of refundable credits, instead of non-refundable credits, deferral, deductions, or exclusions.
Source: New York University Law and Economics Working Papers
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