Hidden Welfare for the Rich and Corporations Costs U.S. Hundreds of Billions a Year

"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 report "The Hidden Entitlements."

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. And 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 taxpayer meeting the eligibility requirements, with no limit on their total cost.

"We can't pretend that tax loopholes for the affluent and corporations don't hurt the rest of us," said CTJ director Robert S. McIntyre. "To balance the budget we must start rooting out some of the expensive corporate and high-income welfare programs in the tax code."

"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."

The report details 128 "tax expenditures"--87 in the business, investment and savings category plus 41 in the personal category.

In total, these programs are estimated to cost $456 billion in fiscal 1995 and $2.5 trillion over the next five years under current law.

By 1999, the $565 billion annual cost of these tax-based programs will equal the cost of all "discretionary" federal spending. Under tax legislation just passed by the House, tax subsidies will soon exceed total discretionary spending.

Among the hidden entitlements that the study particularly targets as both unfair and bad economics are business and investment tax subsidies costing $730 billion over the next five years.

These "corporate and high-income welfare programs" include:
• Multinational tax breaks, costing at least $57 billion over five years.
• Capital gains tax loopholes, costing $165 billion over five years (not counting the GOP's huge proposed increases in capital gains tax entitlements).
• Tax breaks for mergers and acquisitions.
• Business meals and entertainment write-offs ($29 billion over five years).
• Accelerated depreciation, with an estimated cost of $162 billion over the next five years (not counting the colossal expansion of these corporate tax subsidies included in the House Republicans' "Contract With America").
• Tax benefits for insurance companies and their products ($88 billion in 5 years).
• Oil, gas and energy tax breaks ($19 billion over five years).
• Tax breaks for timber, agriculture and minerals ($7 billion over five years).
• Tax breaks for banks and other financial institutions ($5 billion over five years).
• Tax subsidies for state and local bonds, especially the subsidies for non-public purpose bonds. The latter will cost $38 billion over the next five years.

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.

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.

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."

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 Congress is applying to direct spending programs.

"Taking $2.5 trillion off of the table at the outset of the debate would distort 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 end of the century.

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