Tax Credits = Government Spending
Bruce Bartlett explains why tax expenditures are just government spending in disguise. They have the same effect on the deficit as spending and should be treated as such.
To see just how similar a refundable tax credit is to direct spending, imagine that instead of having the Defense Department pay $1 billion to Lockheed Martin for some spare parts for the Air Force, it instead gave it a $1 billion refundable tax credit that was tradable. If Lockheed Martin didn’t have at least a $1 billion federal tax liability, it could simply sell the unused portion to another company that did. Either way the company gets paid $1 billion and $1 billion worth of resources are extracted from the private sector for government’s use.
There’s not a tax expert on the left or the right who doesn’t recognize the illegitimacy, inefficiency and ineffectiveness of many tax expenditures. There is a desperate need to clean up the Tax Code, as Ronald Reagan and a Democratic Congress did in 1986. Unfortunately, Republicans now take the view that eliminating any tax expenditure constitutes a tax increase, and they oppose it because they oppose all tax increases for any reason.
If one wants to defend government promotion of a particular activity (or something like a military purchase), it should be defended on its own merits and in a cost/benefit analysis not some vague notion of wanting to have lower taxes or more tax breaks. The case for low marginal taxes and for promoting desirable behavior through the tax code are two different arguments. Until we can understand that we’ll continue to have a convoluted and inefficient tax code – and probably higher deficits too.