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Here's how we can save $600 billion with tax reform

  • Jared Berstein says it's possible to save a trillion dollars (over 10 years) by shutting down a bunch of wasteful tax expenditures.
  • One way that could generate savings of well over $600 billion is to pare down the tax deduction for certain programs for those with salaries over $250,000.
  • Those high-end households were going to buy homes and save for retirement anyway — they don't need these deductions as an incentive.

We had a friendly, robust argument on with my long-time pals Michelle Caruso-Cabrera and Brian Sullivan on "Power Lunch" the other day. I promised to post some numbers to back up my claim, so here goes.

We were talking about tax reform, and I said that, based on demographics alone, we're going to need more revenue going forward, not less. Brian jumped in, with the fair point that why is it always more revenues that we need? Why not cut some wasteful spending?

I said I had a way to do both at the same time: cut wasteful tax expenditures, which I view as the same as cutting spending. Former Federal Reserve Chair Alan Greenspan used to call tax expenditures "spending through the tax code," so I think I'm on solid ground, but Michelle disagreed. So, let's look into this distinction and see if I can convince her.

A tax expenditure is a deduction or credit you can take against your tax liability for some type of spending the government wants to encourage. The mortgage interest deduction ($64 billion this year) is a good example, as is the fact that employers can deduct health spending on their workers as an expense of doing business (over $200 billion). There are hundreds of these in the tax code, costing the Treasury $1.4 trillion annually in lost revenues.

Now, consider two existing programs: child-care subsidies for low-income families, and a child-care tax credit that higher-income families with such expenses can claim. In the first case, the government pays for the subsidy, so it's a spending program. In the second case, you deduct the expense from your taxes, so it's a tax expenditure.

I don't see a difference. Putting aside whether these are worthy programs, cutting either would save money for the government in precisely the same way. Or take the mortgage-interest deduction. Sure, the government could send checks to people to reimburse them for the interest on their mortgages, and that would be a spending program. But allowing them to deduct the interest from their tax liability amounts to the same thing.

I told Michelle that I could save a trillion bucks (over 10 years) shutting down a bunch of wasteful tax expenditures, and I take you through how I'd do that here. But let me highlight one interesting way to go about this.

The challenge in closing down any tax expenditure is that, what I call a loophole, you call your treasured job-creation program. So, instead of trying to pick off one or another, how about just allowing those who take these deductions to do so at a lower rate? Instead of deducting 40 cents of the dollar (the top marginal income tax rate) for privileged spending, higher income taxpayers could take the deduction at 28 cents.

When you do it this way, you avoid picking winners and losers, and you stop wasting valuable resources subsidizing stuff like home buying and retirement saving that high-end households will do anyway. Applied to incomes of $250,000 or more, this cap would generate savings of well over $600 billion over the ten-year budget window.

I'd say that's no different than a spending cut.

Commentary by Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. Bernstein was the chief economist and economic advisor to Vice President Joe Biden and a member of President Obama's economic team. He is also the author of "The Reconnection Agenda: Reuniting Growth and Prosperity." Follow him on Twitter @econjared.

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