Meanwhile Ezra Klein picks up on a promising recent study("Marron and Toder") addressing a threshold question: just what counts as a tax expenditure? Per Ezra, we are to distinguish between "“spending substitutes” and “tax policy design.” Per Klein:
The tax policy expenditures “represent broad choices in tax policy design but are not associated with any clear spending objective,” according to the study. Marron and Toder cite the treatment of qualified retirement saving plans, which, for good or ill, nudges the tax code toward taxing consumption rather than savings.
Other expenditures, however, are simply government spending programs by another name. The mortgage-interest deduction, for instance, is a spending substitute: it seeks to “subsidize identifiable activities” — homeownership in this case — and could easily be designed as a spending program in which the government sends homeowners an annual check.I probably haven't given the matter enough thought but I am not at all sure that this works. For example, Maron and Toder think of the mortgage interest deduction as a "tax expenditure" because it subsidizes home ownership. Well maybe, but as many have observed, the thing about the mortgage interest deduction (and its ilk) is that it is so weirdly selective in dispensing its bounty. There is simply no reason to believe that we ever could (or should) embrace a "housing subsidy expenditure" program that deliberately skewed all its benefits to the rich and well connected. Here's Travis Waldron making the same point on steroids.
The topic so far has been the question of when a deduction is really a tax. You might well frame the question the other way around: when is a tax really not a tax? Many (=I) have made the point that Scandinavians appear to regard their tax system as a kind of buying club, where they band together to join the market for goods and services they would buy anyway--only perhaps with more market power, able to achieve economies of scale. In the US we talk about how we could do more of that if we put some serious backbone into government-sponsored health care; apparently it is not our concern. Local governments also: people struggle to get into fancy suburbs where they will have the privilege to pay high "taxes" for the services they desire. In the same vein, Californians have learned lately to their cost that when the government stops paying for something, you may have to pay for it yourself--without the solace of a deduction for the payment of a "tax."