If you want to understand the wide gulf between Republicans and Democrats, it comes down to tax expenditures. Tax expenditures are what the common folk might call tax deductions. They are legal deductions that corporations and individuals use to reduce their tax load; seems fair. Well, those tax expenditures amount to $1.1 trillion a year! In some cases, tax expenditures are in the tax code because lobbyists made deals with politicians. In most cases, tax expenditures are in place because at a historical point in time Congress wanted to encourage a sector of the economy (e.g., drill for oil, build homes, buy trucks). The question Congress should now be asking is whether all of those expenditures are as important today, as they were 10 to 40 years ago when they were put in the tax code? The Simpson-Bowles Report answered that question: We do not need many of them anymore. However, Congress cannot ask that question.
They cannot ask the question because Grover Norquist, the founder of Americans for Tax Reform, doesn't like taxes. Every Republican has signed an "oath" with Norquist not to pass new taxes. If a Republican crosses that line, they bring on the Norquist Inquisition, which labels them an heretic and burns them at the polls. Norquist believes tax expenditures are negative taxes instead of a mechanism for government giving out money.
If Congress ran its giveaway programs the way industry did, then there would be no problem. Buy a computer. Send the government the label. Get back $50.00. This is not a tax expenditure. This is a giveaway. Grover Norquist would probably be OK stopping giveaways.
The interesting thing about tax expenditures is that they are inequitable. Yep, just plain unfair to Americans.
Why? Ask any Republican what sector of the economy creates jobs in the U.S.? They would say small business. They would be right. However, our tax code, because of tax expenditures, favors the largest corporations. The average income tax rate for all corporations in 2008 with assets less than $2.5 Billion is 30%. The average tax rate for corporations with assets over $2.5 Billion is 21%. A 50% difference. Hardly seems fair.
The same is true for individuals. In 2008 there were 2,054 tax filings with individual (or joint) income of over $1 million that paid no taxes. This amounted to about $7.8 billion of income with deductions of $8.3 billion. The deductions exceeded the income. You cannot be a reasoning person and not ask why? These tax expenditures were legal, but were they in the best interest of the American people? Grover Norquist thinks they are just fine.
The Republicans and the Democrats both want to solve the deficit. Neither wants to kill the economy. The Republicans just want to make a tough job tougher by taking tax expenditures off the table because Grover Norquist believes correcting tax expenditures would be raising taxes.
Former Senator Alan Simpson (R-WY) and the co-chair of the National Commission on Fiscal Responsibility and Reform established by President Obama stated it more colorfully at the recent Peter G. Peterson 2011 Fiscal Summit held in Washington, DC. Simpson said of Norquist:
What kind of a nut is this guy? ... some guy just wandering around the swamps taking a pledge from people when America was flush, and then pushing people like Orrin Hatch off the cliff as if he were a commie.
Thanks, Grover.