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Idea of the Day: Tax Expenditures Are Equivalent to Government Spending

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Republican negotiators walked out of negotiations over the federal debt limit last week after Vice President Joe Biden and congressional Democrats suggested that a deal to raise the nation’s debt limit should include cuts and reforms to the following federal spending programs:

  • The Department of Transportation program that provides interest-free loans for purchasing corporate jets
  • The Department of Energy program that rewards oil companies for extracting oil in the United States and overseas through several different types of government rebates
  • The Department of Agriculture program that pays companies 45 cents for every gallon of corn ethanol they blend into gasoline
  • The Department of Commerce program that incentivizes people to become hedge fund managers by sending them an annual U.S. treasury check for 20 percent of the cut they take from managing investors’ portfolios
  • The Department of Housing and Urban Development program that matches people’s mortgage interest payments, which is targeted to provide the most help for people earning more than $379,150

Senate Republican Leader Mitch McConnell (R-KY) declared these programs “off the table.” He and his colleagues are insisting that spending cuts be limited to other federal programs, including Medicare and Medicaid.

Why are conservatives so opposed to cutting these wasteful programs? Well, part of the reason is that they aren’t actually administered by the above-referenced agencies, but rather by the Internal Revenue Service. And although they have the same effect as spending programs, they are actually special provisions of the tax code.

These types of special tax breaks, called “tax expenditures,” are functionally and economically equivalent to government spending. Economists often refer to tax expenditures as hidden federal spending programs, or “spending in disguise.” After all, whether the government gives a large oil company a special break that reduces its tax bill, or simply mails it a check, the effect is the same.

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This is part of a regular column: Idea of the Day

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