Tax Loopholes from A to Z: The Comprehensive Compendium

Study Spotlights Hidden Tax Welfare for the Rich and Corporations

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Entitlement programs hidden in the tax code are expected to cost the federal government $3.7 trillion over the next seven years. The $455 billion cost of these programs in fiscal 1996 alone is triple the current budget deficit. A new report shows that the lion's share of these "hidden entitlements" goes to the affluent and corporations.

"A Congress that is eager to challenge low-income welfare entitlements ought to be at least as tough--if not tougher--on welfare entitlements for the well-heeled and politically powerful if it truly wants to bring the budget deficit under control," said Robert S. McIntyre, director of Citizens for Tax Justice, which produced the 1996 edition of the report, The Hidden Entitlements.

Table: Spending vs. Tax Expenditures

Tax-based Entitlements Set to Dominate Federal Budget

CTJ's new report provides seven-year figures on the cost of tax entitlements--to coincide with current efforts to balance the federal budget over the next seven years.

According to the study, tax entitlements currently cost the federal government two-and-a-half times as much as all means-tested direct entitlement programs such as welfare and Medicaid. These tax entitlements will soon cost more than what the federal government spends on defense, roads, environmental protection and all other "discretionary" programs combined.

These hidden tax entitlements, also known as tax expenditures, are reductions in taxes awarded to people and companies that engage in congressionally-favored activities. Such benefits are paid to any company or person meeting the eligibility requirements, with no limit on their total cost.

"We can't pretend that tax loopholes for corporations and the affluent don't affect the rest of us," said McIntyre. "To make sense of the budget and our tax system, we must root out some of the expensive corporate and high-income welfare programs in the tax code."

Economic Unsoundness

"These tax subsidies aren't just hugely expensive," McIntyre added. "Many of them don't work. For example, industrial investment actually fell in the early eighties after giant new corporate loopholes were enacted, but then rose sharply after many of the loopholes were eliminated in 1986."

"The special interests love their tax breaks because they know full well they could never survive the scrutiny that applies to the regular budget," McIntyre said. "Many of these programs are targeted to industries with lots of political clout. Others are designed to give their biggest subsidies to people with the highest incomes. And by sending the wrong signals to businesses, investors and consumers, many of them cost jobs and impede economic growth."

Detailed Cost Estimates

The report details 122 "tax expenditures"--85 in the business, investment and savings category plus 37 in the personal category.

In total, these programs are estimated to cost $455 billion in fiscal 1996 and $3.7 trillion over the next seven years under current law.
By 2000, the $557 billion annual cost of these tax-based programs is expected to exceed the cost of all "discretionary" federal spending.

Among the hidden entitlements that the study particularly targets as generally both unfair and bad economics are business and investment tax subsidies costing $1.3 trillion over the next seven years. These "corporate and high-income welfare programs" include:

Multinational tax breaks, costing at least $95 billion over seven years.
Capital gains tax loopholes, costing $258 billion over seven years (not counting the congressional GOP's huge proposed increases in capital gains tax entitlements).
Tax breaks for mergers and acquisitions.
Business meals and entertainment write-offs ($44 billion over seven years).
Accelerated depreciation, with an estimated cost of $259 billion over the next seven years (not counting the colossal expansion of these corporate tax subsidies that was included in the House Republicans' "Contract With America").
Tax benefits for insurance companies and their products ($204 billion in 7 years).
Oil, gas and energy tax breaks ($21 billion over seven years).
Tax breaks for timber, agriculture and minerals ($10 billion over seven years).
Tax breaks for banks and other financial institutions ($7 billion over seven years).
Tax subsidies for state and local bonds, especially the subsidies for non-public purpose bonds. The latter will cost $92 billion over the next seven years.

Well-Off Are Big Winners Under Hidden Entitlement Programs

Many tax entitlements are narrowly targeted to the wealthy. For example, 97% of the benefits from the current special lower tax rate on capital gains income goes to those with incomes exceeding $200,000. Likewise, almost three-quarters of the private benefits from tax-free interest goes to those with incomes exceeding $200,000.

In contrast, most families get little or nothing from the tax entitlement system, because they neither earn tax-favored kinds of income, nor itemize deductions.

"Budgeting is about making choices," McIntyre noted. "If Congress decides to spend $44 billion to subsidize fancy dinners and playoff tickets for business executives, that's $44 billion that is unavailable to pay for school lunches or foodstamps. If $95 billion is budgeted to help multinational corporations avoid taxes, that's $95 billion that can't be used to improve education or improve law enforcement."

Historical Perspective

The report praises the bipartisan 1986 Tax Reform Act, which cut the cost of tax entitlements almost in half--"before reform, the tax code had literally become more loophole than tax," McIntyre said. But even after the 1986 reforms, tax entitlements are still far higher than they were prior to the Nixon administration, which began the loophole craze that culminated in the loophole-ridden 1981 tax act.

Current Congressional Budget Proposals Would Expand, Not Curb "Corporate Welfare" Tax Entitlements

Despite rhetoric about "shared sacrifice," the budget plan passed by Congress last fall (and vetoed by the President) did not attempt to reduce "corporate welfare" tax subsidies. Although it did propose a few corporate loophole-closing measures, overall the plan offered $20 billion a year in net new tax entitlements targeted to upper-income people and corporations. (The original "Contract With America" tax plan passed by the House in the spring of 1995 included much larger new high-income tax subsidies.)

To its credit, the budget proposal submitted by the Clinton administration in February of this year calls for closing some high-income and corporate loopholes, saving about $12 billion annually by fiscal 2000.

"Flat Tax" and National Sales Tax Are Not the Solution

The study also cautions against flat-rate consumption taxes. "Voters should not be fooled by the special interests' version of tax reform--or deform," McIntyre said, referring to the so-called "flat taxes" endorsed by many corporate-backed lobbies. "Abandoning graduated tax rates in favor of a single flat rate has nothing whatsoever to do with tax simplification or closing loopholes. It's simply a way to increase taxes sharply on most families to pay for huge tax reductions for the wealthy."

"In fact," McIntyre added, "the leading flat-rate tax plans--as proposed by House Majority Leader Richard Armey (R-Tex.) and Ways and Means Chairman Bill Archer (R-Tex.)--actually would expand rather than close the most egregious upper-income loopholes. Armey, for example, would provide a 100% exclusion for interest, dividends and capital gains, and both plans would consolidate the current corporate tax subsidies into one all-encompassing loophole: complete repeal of the corporate income tax."

Conclusion

In releasing the report, CTJ said that it was not calling for abolition of every tax deduction and credit, noting that some of them serve legitimate tax-equity purposes. But CTJ did call for a review of tax entitlements as rigorous as lawmakers are applying to direct spending programs.

"Taking $3.7 trillion off of the table hopelessly distorts the decisions that will be required to achieve our shared economic and fiscal goals," McIntyre concluded, referring to the cost of tax entitlements between now and the year 2002.

Two Pages of Summary Tables from The Hidden Entitlements Are Attached

Citizens for Tax Justice is a nonpartisan Washington-based research and advocacy group.

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