The mindset of many current Washington lawmakers and White House officials is that when you are allowed a tax deduction, that really means the government is spending its money to fund the deduction, instead of allowing you to keep more of your money by claiming the deduction.
The thinking reflected in President Obama’s budget and his economic team is best evidenced by the recent statement of Joshua Odintz, former legislative counsel in the Treasury Department’s Office of Tax Policy. He is now working for Obama’s National Commission on Fiscal Responsibility and Reform as the commission’s chief tax counsel. Obama created the commission to explore ways to “balance the budget.”
Odintz recently stated at a New York Bar Association conference “federal tax expenditures” must be carefully scrutinized because they “account for as much as one-third of all federal spending.”
To understand just how astonishing this remark is, let’s first understand what a “tax expenditure” is.
Deductions as ‘Expenditures’
I recently discussed this issue in an article predicting the Obama administration will not provide taxpayer relief by eliminating the alternative minimum tax, which was created 40 years ago to apply to a handful of wealthy individuals but now imposes higher taxes on millions of citizens. In that article, I explained the idea of a tax expenditure as follows:
“Tax expenditure” is a phrase tax theologians use to describe a tax deduction. You see, in the mind of the typical tax theologian, the concept of a tax deduction is not a mechanism that allows you to keep more of your own money.
On the contrary. A “tax expenditure” is what happens when the government spends its money by allowing you to take advantage of a deduction. Think of it this way (since that’s how tax theologians think of it): all money is “government money.” When the government allows you to keep some of its money by reducing your tax hit through a deduction, the government has actually incurred an “expense.” This expense is known as a “tax expenditure.” The more “tax expenditures” there are in the law, the less money the government gets.
That’s why politicians often make the statement, “we can’t afford X tax cut.” It’s as if they are spending their own money to do you a favor.
A Step Farther
Odintz takes the idea one step farther by suggesting “tax expenditures” amount to direct federal spending in the form of line items in the annual budget. Line item budget expenditures include defense, interest on the debt, the judiciary, Social Security, and the like. There is no budget item for “mortgage interest deductions” or “charitable contributions.”
Odintz’s statement illustrates just how dangerous is the thinking of those in control in Washington today. It is no exaggeration to say they believe all the money in the economy is theirs—period. Allowing you to keep any of the amount you earn is purely a matter of grace on their part.
Tax Hikes in Disguise
Understand what Odintz is saying: He believes eliminating your tax deductions is a way of “cutting” federal spending. Thus for the current band of social planners to entertain the idea of cutting spending, they really mean to eliminate deductions.
By the way, that has the same effect as raising taxes.
Even many so-called conservative Republicans entrenched in Washington believe this nonsense. For example, former Wyoming Republican Senator Alan Simpson, currently serving as co-chairman of Obama’s debt reduction commission, addressed the issue of “tax expenditures” in a recent appearance. He agreed “tax expenditures should be scrutinized” by the commission and Congress and said it’s “unfair to call the rolling back of tax expenditures tax hikes.”
Why? He did not say.
Health Care in Crosshairs
What tax deductions might be on the chopping block? The “expensive” ones, of course. After all, if you’re going to be effective at cutting “spending,” you must cut the largest expenditures, right?
The tax deduction for employers’ contributions to employee health care plans is a big one. This “costs” the federal government about $144 billion each year. By Odintz’s reasoning this is not $144 billion of private money that employers are able to spend on their employees. No. This is $144 billion of unaffordable federal spending that must be cut from the budget.
If the employer deduction for contributions to employee health insurance plans is eliminated, what do you suppose will happen to employer-sponsored health insurance plans?
Other Deductions in Danger
Some of the other major deductions—I mean “expenditures”—are:
- $79 billion for the deduction on home mortgage interest,
- $57 billion for accelerated depreciation for businesses,
- $53 billion for the lower tax rate on capital gains, and
- 49 billion for the earned income tax credit.
And don’t forget the deductions for charitable contributions, state and local taxes, employee business expenses, etc. After all, these “costs” add up fast.
If Odintz and the other like-minded thinkers in Washington have their way, Obama’s commission will recommend balancing the budget by simply taking more of our money. The way they see things, it’s really not our money anyway. It already belongs to the government.
Dan Pilla ([email protected]) is the bestselling author of 11 books on taxes and dealing with the IRS, including The IRS Problem Solver and How to Get Tax Amnesty. He runs TaxHelpOnline.com and publishes the Pilla Talks Taxes electronic newsletter.