February 23, 2012
After becoming employed individuals, all of us must go through the arduous annual process of filing our federal income taxes. While the thought of sending part of our hard-earned income each year to Uncle Sam annoys many of us, we often relish the chance to utilize as many deductions as possible, thus lowering the amount of taxes we pay in the process. We gratefully deduct for our student debt, our charitable donations, and our state taxes, amongst myriad other breaks. Yet, what if all of these deductions and loopholes in the tax code are actually harmful to our democracy? What if all of these breaks that seem so beneficial actually increase both inequality and government deficits?
For starters, the aforementioned breaks and deductions are better understood as “tax expenditures,” since they cost public money. The fact that these tax expenditures have been ignored in past American austerity packages is illogical. This issue is particularly pertinent in American economics because, although tax expenditures only represented 4.2 percent of GDP in 1976, as of 2008, these costs constitute 7.4 percent of GDP. To put this in to perspective, Social Security was 4.3 percent of national GDP in 2008, and Medicare and Medicaid constituted 4.1 percent of GDP.
Suzanne Mettler, a professor at Cornell University, has grouped social tax expenditures under an umbrella known as the “submerged state.” Differing from direct payments and services because of the indirect channels through which they benefit citizens, this policy group is usually obscured from the public purview. This lack of transparency represents the first problem with the submerged state. That is to say, ordinary citizens in the U.S. do not have a firm understanding of these processes and how they affect their wellbeing.
Lacking transparency, these policies fly under the national political radar and enjoy the good fortune of having little controversy surround them. The main reason that public knowledge is so low is that political and opinion leaders fail to talk openly and honestly about this issue. This lack of discussion leads to a lack of media coverage, allowing these tax expenditures to be misused simply because those who should benefit from them do not know about their existence.
This lack of debate is also due to huge lobbying forces in industries ranging from real estate to health care to nonprofit foundations applying large amount of pressure to implement more expenditures. This invisibility creates a passive public that is blissfully unaware of where their tax dollars are going or how to dictate where they should go.
The second major problem of the these expenditures is that they do not benefit their intended recipients: the poor and middle classes. Instead, the greater resources a person has, the more they are rewarded, because tax expenditures reward activities that usually cost more to participate in, like buying luxurious houses or signing expensive mortgage agreements. Therefore, tax expenditures serve to increase economic inequality by reducing governmental funds for those in need and instead diverting these funds to helping the richest afford even more luxurious objects. In addition, tax expenditures also increase the budget deficit as, although they do not directly cost the government anything, they represent a loss of potential revenue that could be used for other purposes.
It is important to note that not all of these tax expenditures benefit the upper reaches of the income ladder. Indeed, some genuine expenditures such as the Earned Income Tax Credit (EITC) and Bill Clinton’s Helping Outstanding Pupils Educationally (HOPE) tax credit exist to primarily aid the poor and middle classes. The issue is that the majority of these expenditures reward their deepest discounts to the richest and least needy candidates.
The solution to this problem is two-fold. First, public knowledge about tax expenditures needs to be significantly higher. This must be accomplished by increased coverage of tax expenditures by the media and politicians along with increased public scrutiny on where citizens’ tax dollars are going to. Second, tax expenditures that benefit those in upper income brackets must be scaled back or cut and subsequently replaced by those with genuine methods for improving the quality of life of average Americans. This seems like an optimistic proposal, but in truth, this should be a bipartisan issue. Fiscal hawks, under pressure from their constituents, will have to maintain their campaign promises to scale back government and reduce the budget deficit. Fiscal liberals will view the reduction of expenditures as an increase in government revenue, enabling an increase in deficit spending and providing a way out of the economic recession.