America Is Europe
We Americans cherish our myths. One myth is that there is more social mobility in the United States than in Europe. That's false. Another myth is that the government is smaller here than in Europe. That's largely false, too.
The U.S. does not have a significantly smaller welfare state than the European nations. We're just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.
For example, in Europe, governments offer health care directly. In the U.S., we give employers a gigantic tax exemption to do the same thing. European governments offer public childcare. In the U.S., we have child tax credits. In Europe, governments subsidize favored industries. We do the same thing by providing special tax deductions and exemptions for everybody from ethanol producers to Nascar track owners.
These tax expenditures are hidden but huge. Budget experts Donald Marron and Eric Toder added up all the spending-like tax preferences and found that, in 2007, they amounted to $600 billion. If you had included those preferences as government spending, then the federal government would have actually been one-fifth larger than it appeared.
The Organization for Economic Cooperation and Development recently calculated how much each affluent country spends on social programs. When you include both direct spending and tax expenditures, the U.S. has one of the biggest welfare states in the world. We rank behind Sweden and ahead of Italy, Austria, the Netherlands, Denmark, Finland and Canada. Social spending in the U.S. is far above the organization's average.
You might say that a tax break isn't the same as a spending program. You would be wrong.
David Bradford, a Princeton economist, has the best illustration of how the system works. Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion "weapons supply tax credit." The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!
This is essentially what's been happening in sphere after sphere. Government controls more and more of the economy. It just does it by getting people to do what it wants by manipulating the tax code. Politicians get to take credit for addressing problem after problem, but none of their efforts show up as unpopular spending.
Many of these individual tax expenditures are good for the country, like the charitable deduction and the earned income tax credit. But, as the economist Bruce Bartlett demonstrates in his impeccably fair-minded book, "The Benefit and the Burden," the cumulative effect of these tax breaks is terrible. Like overgrown weeds, the tangle of tax breaks distorts behavior, clogs the economy and deprives the government of revenue.
And because they are hidden, many of the tax expenditures go to those who need them least, the well connected and established over the vulnerable and the entrepreneurial.
The good news is that change might finally be coming. The Obama administration has always theoretically supported a simpler tax code even while operationally it has often muddied it up. Nonetheless, this week, Treasury Secretary Timothy Geithner unveiled a modest but sensible plan to simplify the corporate tax code. The plan is not perfect. The Obama technocrats love tinkering and complexity. But Geithner's plan moves us a small step in the right direction and provides a sensible foundation for the big tax negotiations to come.
Mitt Romney has a bigger proposal, which reduces individual rates across the board and closes some loopholes. It's more comprehensive than the Geithner approach, but it suffers from two weaknesses. First, it's politics as usual. Romney is specific about the candy — lower tax rates — but vague about the vegetables — what loopholes would have to be closed to pay for them.
Moreover, it's unimaginative. Republicans are perpetually trying to do what Ronald Reagan did. But top tax rates today aren't as onerous as they were in 1980, so lowering them won't produce as many benefits. Imagine if Reagan ran for office promising to recreate the glory days of Thomas Dewey and you get a sense of how much G.O.P. thinking is stuck in the past.
Still, let's take our good news where we can get it. Attention is shifting to tax expenditures and not just direct spending. It's becoming clear how gargantuan, opaque and inefficient the U.S. government has become. Maybe before long our political leaders will actually summon the political will to take on the special interests that defend these tax breaks.
This should be the top priority: A tax reform effort that simplifies government frees the economy and focuses social support on those who actually need it. A left-right tax reform alliance to do that would break the political logjam as well as the economic one.