Feldstein Discusses Tax Expenditures For Deficit Reduction

In an op-ed for the Wall Street Journal this Wednesday, Martin Feldstein discusses the pivotal role of tax expenditures in increasing the federal deficit and how they should be considered, perhaps even more than direct spending cuts, in reducing the deficit as well. Tax expenditures are the special tax breaks that indirectly subsidize spending on education, healthcare, and other programs and, accordingly, cause the government to lose substantial amounts of revenue—this year, about $1 trillion.

Feldstein notes that despite Obama’s call to freeze nondefense discretionary spending, he has also advocated substantial increases in some of the most politically popular tax expenditures on the books today, which could dramatically undermine if not negate entirely any plans for deficit reduction. To date, Feldstein notes, neither Democrats nor Republicans have given significant attention to the large revenue drain caused by tax expenditures—but, he argues, eliminating some of the biggest tax expenditures would increase revenues and economic efficiency, while not increasing marginal tax rates at all. Total tax expenditures today form 6.4 percent of GDP, and while they shouldn’t be completely cut, they could be significantly (as was done under Reagan in 1986 with a combined tax break). Feldstein states that cutting them 2 percent would reduce the national debt by 18 percent in 2020, or some $4 trillion.

Tax expenditures are indeed an oft-overlooked yet very promising method of effectively cutting spending that we all must consider, especially at a time when deficit reduction is a more pressing issue than ever before.