Reinvigorating Tax Expenditure Analysis and its International Dimension

Tax expenditure analysis (TEA) was rigorously criticized from its inception and continues to draw negative reviews. Notwithstanding this criticism, the Congressional Budget and Impoundment Control Act of 1974 requires the President\u27s annual budget submission to contain a list of tax expenditures, and Congress\u27s Joint Committee on Taxation has produced its own tax expenditure list each year since 1972. Although TEA has not restrained or reversed the growth of tax expenditures, TEA continues to play a major role in tax policy debates to the chagrin of its detractors. The persistence of TEA in a hostile environment suggests that it has meaningful substance. In Part III of this article, we argue that TEA is both a logical consequence of, and a device for implementing, the principle of ability-to-pay, the Schanz-Haig-Simons definition of income, and the tax policy principle of neutrality. In Part IV we comprehensively respond to the litany of criticisms that have been directed at TEA and argue that these objections are either wrong, deal with marginal matters or are outside the realm of practical policy concerns. We also expand on Professor Stanley Surrey\u27s point that the tax expenditure characterization does not make an income tax provision bad per se. Instead, affixing the tax expenditure label triggers a requirement that the provision in question must be recast and examined as a direct expenditure analogue and then must go through a cost/benefit analysis. Indeed, we regard TEA\u27s principal purpose and justification to be its role as a triggering mechanism for mandatory recasting and cost/benefit analysis. A tax provision that successfully endures this analytical approach gets a passing grade even though it bears the tax expenditure label. Of course, many, perhaps most, tax expenditures will receive failing marks when scrutinized in this fashion, but this is due to their inherent weaknesses and not because TEA amounts to a rule of automatic disqualification. One of Professor Surrey\u27s objectives in advocating TEA was to force recognition of both the revenue cost of individual tax expenditures and the aggregate revenue cost of all tax expenditures. Critics have contended that flaws in the revenue estimation process make TEA useless for this purpose. In Part IV, we argue that these criticisms are overbroad. In Part V, we provide a brief explanation of the cost/benefit evaluative method that we believe should be applied to tax expenditures. In Part VI, we examine three important features of the U.S. international income tax system, deferral, cross-crediting, and the export sales source rule. In our judgment, all of these features involve tax expenditures that receive failing marks under the recasting and cost/benefit analysis explained in Part V

Reinvigorating Tax Expenditure Analysis and its International Dimension

Tax expenditure analysis (TEA) was rigorously criticized from its inception and continues to draw negative reviews. Notwithstanding this criticism, the Congressional Budget and Impoundment Control Act of 1974 requires the President\u27s annual budget submission to contain a list of tax expenditures, and Congress\u27s Joint Committee on Taxation has produced its own tax expenditure list each year since 1972. Although TEA has not restrained or reversed the growth of tax expenditures, TEA continues to play a major role in tax policy debates to the chagrin of its detractors. The persistence of TEA in a hostile environment suggests that it has meaningful substance. In Part III of this article, we argue that TEA is both a logical consequence of, and a device for implementing, the principle of ability-to-pay, the Schanz-Haig-Simons definition of income, and the tax policy principle of neutrality. In Part IV we comprehensively respond to the litany of criticisms that have been directed at TEA and argue that these objections are either wrong, deal with marginal matters or are outside the realm of practical policy concerns. We also expand on Professor Stanley Surrey\u27s point that the tax expenditure characterization does not make an income tax provision bad per se. Instead, affixing the tax expenditure label triggers a requirement that the provision in question must be recast and examined as a direct expenditure analogue and then must go through a cost/benefit analysis. Indeed, we regard TEA\u27s principal purpose and justification to be its role as a triggering mechanism for mandatory recasting and cost/benefit analysis. A tax provision that successfully endures this analytical approach gets a passing grade even though it bears the tax expenditure label. Of course, many, perhaps most, tax expenditures will receive failing marks when scrutinized in this fashion, but this is due to their inherent weaknesses and not because TEA amounts to a rule of automatic disqualification. One of Professor Surrey\u27s objectives in advocating TEA was to force recognition of both the revenue cost of individual tax expenditures and the aggregate revenue cost of all tax expenditures. Critics have contended that flaws in the revenue estimation process make TEA useless for this purpose. In Part IV, we argue that these criticisms are overbroad. In Part V, we provide a brief explanation of the cost/benefit evaluative method that we believe should be applied to tax expenditures. In Part VI, we examine three important features of the U.S. international income tax system, deferral, cross-crediting, and the export sales source rule. In our judgment, all of these features involve tax expenditures that receive failing marks under the recasting and cost/benefit analysis explained in Part V

Can Tax Expenditure Analysis Be Divorced from a Normative Tax Base?: A Critique of the \u27New Paradigm\u27 and its Denouement

Tax expenditure analysis (TEA) requires a baseline for identifying tax provisions that provide subsidies or incentives instead of serving to define the tax base and to implement the tax. With respect to the federal income tax, the baseline historically has been the Schanz-Haig-Simons (SHS) definition of income with a few modifications. Critics have continuously and strongly attacked TEA by characterizing the SHS baseline as unprincipled, imprecise, and insufficiently related to our hybrid income/consumption tax system as it actually exists. Since the baseline is hopelessly defective, so the critics argue, TEA is fatally dysfunctional and the results of its application to the various subsidy and incentive provisions in the Internal Revenue Code can be disregarded. This line of attack can be countered by refuting the criticisms of the SHS baseline and we have undertaken to do so in an earlier piece. Nevertheless, even some TEA supporters have suggested that TEA’s effectiveness has been compromised by the intensity of the “baseline battle.” In this vein, a 2008 report of major importance by the Staff of the Joint Committee on Taxation of the U.S. Congress argued that even if the attacks on the TEA baseline were unwarranted, they had so seriously compromised TEA’s effectiveness that adoption of an alternative baseline was called for. The report stated that going forward, the Joint Committee Staff would neutralize the critics by abandoning the SHS baseline and promoting a version of TEA that, to some extent, had no normative baseline and that disregarded the SHS definition even in the area where a baseline was used. Then, early in 2010, the Staff totally reversed itself by abandoning its non-normative approach and reembracing the SHS baseline. Because the Joint Committee Staff is arguably the most important non-partisan governmental voice in U.S. tax reform debates, its rejection of the SHS baseline in favor of a supposedly neutral approach, followed by its 2010 return to SHS orthodoxy, is not merely a short-lived curiosity. Instead, this event is a manifestation of the practical and theoretical difficulties involved in the critically important, longstanding TEA baseline controversy and it merits close analysis to see what light it sheds on the correct resolution of that controversy. In this article, we examine the precursors to the 2008 work of the Joint Committee Staff and describe and evaluate the Staff’s 2008-2010 “new paradigm.” More importantly, we explain why that well-intentioned work was actually harmful to the defense of TEA and why the Staff’s 2010 re-embrace of the SHS baseline is a welcome development. We also argue that the attacks on the traditional SHS baseline of TEA are misguided and, therefore, that it was never necessary to abandon that baseline in order to defend the TEA construct