May 30, 2013 11:13AM # CBO’s Tax Expenditure Report Uses Wrong Benchmark, Overstates Loopholes By [Daniel J. Mitchell](https://www.cato.org/people/daniel-mitchell) --- SHARE As a long-time advocate of tax reform, I’m not a fan of distortionary loopholes in the tax code. Ideally, we would junk the [74,000-page internal revenue code](http://danieljmitchell.wordpress.com/2011/05/23/a-very-depressing-picture-of-tax-complexity-and-political-corruption/) and replace it with a [simple and fair flat tax](http://danieljmitchell.wordpress.com/2010/03/29/the-flat-tax-good-for-america-bad-for-washington/) — meaning one low rate, no [double taxation](http://danieljmitchell.wordpress.com/2011/09/26/explaining-the-perverse-impact-of-double-taxation-with-a-chart/), and no favoritism.\* The [right kind of tax reform](http://danieljmitchell.wordpress.com/2012/08/11/a-primer-on-the-flat-tax-and-fundamental-tax-reform/) would generate more growth and also [reduce corruption in Washington](http://danieljmitchell.wordpress.com/2009/04/21/the-link-between-big-government-and-corruption/). Politicians no longer would have the ability to create special tax breaks for well-connected contributors. But we won’t get to the right destination if we have the wrong map, and this is why a [new report about “tax expenditures” from the Congressional Budget Office](http://www.cbo.gov/sites/default/files/cbofiles/attachments/43768_DistributionTaxExpenditures.pdf) is so disappointing. As you can see from this excerpted table, CBO makes the [same mistake as the Tax Policy Center](http://danieljmitchell.wordpress.com/2011/06/30/the-tax-expenditure-con-job/) and assumes that there should be double taxation of income that is saved and invested. As such, they list [IRAs and 401(k)s](http://danieljmitchell.wordpress.com/2013/05/06/if-the-government-doesnt-double-tax-your-retirement-savings-are-you-benefitting-from-an-entitlement/) as tax expenditures, even though those provisions merely enable people to avoid being double-taxed. Likewise, the CBO report assumes that there should be double taxation of [dividends](http://danieljmitchell.wordpress.com/2012/02/14/how-can-obama-look-at-these-two-charts-and-conclude-that-america-should-have-higher-double-taxation-of-dividends-and-capital-gains/) and [capital gains](http://danieljmitchell.wordpress.com/2010/05/03/the-capital-gains-tax-rate-should-be-zero/), so provisions to guard against such destructive policies also are listed as tax expenditures. ![CBO Tax Expenditure List](/sites/cato.org/files/styles/pubs_2x/public/download-remote-images/danieljmitchell.files.wordpress.com/27968178233/cbo-tax-expenditure-list.jpg?itok=jJMdkHYX) The CBO report says that tax expenditures will total about $12 trillion over the next 10 years, but about one-third of that amount (which I’ve marked with a red X) doesn’t belong on the list. By the way, at least the Tax Policy Center has an excuse for putting its thumb on the scale and issuing a [flawed estimate of tax expenditures](http://danieljmitchell.wordpress.com/2011/06/30/the-tax-expenditure-con-job/). It’s a project of the Brookings Institution and Urban Institute, both of which are on the left side of the political spectrum. So it’s hardly a surprise that they use a benchmark designed to promote punitive tax policy. But what’s CBO’s excuse? To be fair, at least CBO admitted in the report that there’s a different way of seeing the world. > …tax expenditures are measured relative to a comprehensive income tax system. If tax expenditures were evaluated relative to an alternative tax system—for instance, a comprehensive consumption tax, such as a national retail sales tax or a value-added tax—some of the 10 major tax expenditures analyzed here would not be considered tax expenditures. For example, because a consumption tax would exclude all savings and investment income from taxation, the exclusion of net pension contributions and earnings would be considered part of the normal tax system and not a tax expenditure. But admitting the existence of another approach doesn’t let CBO off the hook. At the very least, the bureaucracy should have produced a parallel set of estimates for tax expenditures assuming no double taxation. That’s basic competence and fairness. By the way, the Government Accountability Office is worse than CBO. When [GAO did a report on corporate tax expenditures](http://danieljmitchell.wordpress.com/2013/04/16/new-gao-study-mistakenly-focuses-on-make-believe-tax-expenditures/), that bureaucracy didn’t even acknowledge that there was an alternate way of looking at the data. \*Actually, the ideal approach would be to dramatically reduce the [burden of government spending](http://danieljmitchell.wordpress.com/2012/03/04/a-fiscal-policy-tutorial-everything-you-need-to-know-about-the-economics-of-government-spending/), shrinking the size and scope of the federal government back to what the Founding Fathers had in mind. Under that system, there presumably wouldn’t be a need for any broad-based tax. P.S. This new report is not even close to being the worst thing produced by CBO. The bureaucrats on several occasions have [asserted that higher taxes are good for growth](http://danieljmitchell.wordpress.com/2010/08/21/congressional-budget-office-says-we-can-maximize-long-run-economic-output-with-100-percent-tax-rates/), even to the point of implying that the growth-maximizing tax rate is 100 percent! And CBO is [slavishly devoted to Keynesian economics](http://danieljmitchell.wordpress.com/2010/03/13/keynesian-economics-and-the-wizard-of-oz/), notwithstanding several decades of evidence that you can’t make an economy richer by taking money out of one pocket and putting it in another pocket. Yet for inexplicable reasons, Republicans [failed to deal with CBO bias](http://danieljmitchell.wordpress.com/2010/09/30/overhauling-cbo-and-jct-is-the-real-test-of-gop-resolve-not-the-pledge-to-america/) back when they were in charge. ##### Related Tags [General](https://www.cato.org/general), [Government and Politics](https://www.cato.org/government-politics), [Tax and Budget Policy](https://www.cato.org/tax-budget-policy) [![Creative Commons License](/build/cato_2020/images/creative-commons.svg)](http://creativecommons.org/licenses/by-nc-sa/4.0/) This work is licensed under a [Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License](https://creativecommons.org/licenses/by-nc-sa/4.0/).