The sheer volume of credits, deductions and exemptions has both Democrats and Republicans calling for tax laws to be overhauled. House Republicans want to eliminate breaks to pay for lower overall rates, reducing the top tax rate from 35 percent to 25 percent. Republicans oppose raising taxes, but they argue that a more efficient tax code would increase economic activity, generating additional tax revenue.
President Barack Obama said last week he wants to do away with tax breaks to lower the rates and to reduce government borrowing.
[Congressman Joe] Walsh replied that the best way to raise revenues is to grow the economy. "You get taxes and regulations off the backs of businesses so that revenues can increase," he insisted.
Amanpour continued to press him, expressing skepticism that Congress can really balance the budget just by cutting social programs. Walsh insisted that tax cuts consistently help the economy grow and therefore raise revenues for the government.
"In the 80s, federal revenues went up," said Walsh. "We didn't cut spending. Revenues went up in the 80s. Every time we've cut taxes, revenues have gone up. The economy has grown."
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Walsh isn't the first lawmaker to make this argument. Last year, Senate Minority Leader Mitch McConnell (R-Ky.) made a similar comment about the Bush tax cuts.
"There's no evidence whatsoever that the Bush tax cuts actually diminished revenue," he asserted. "They increased revenue, because of the vibrancy of these tax cuts in the economy."
But even conservative economists have cast doubt on this claim.
"Federal revenue is lower today than it would have been without the tax cuts. There's really no dispute among economists about that," said Alan D. Viard, a former White House economist under George W. Bush, in a 2006 Washington Post article.
Robert Carroll, deputy assistant Treasury secretary for tax analysis, also said that no one in the administration believes tax cuts created a surge in revenue. "As a matter of principle, we do not think tax cuts pay for themselves," Carroll said.
Bruce Bartlett, a Reagan economist who became a strong critic of the Bush administration's policies, used data from the Office of Management and Budget in a blog post last year to illustrate how "the Bush tax cuts reduced revenue rather significantly."
Tax expenditures are, quite simply, spending programs implemented through the tax code. These programs give people and businesses special tax credits, deductions, exclusions, exemptions, deferrals, and preferential rates in support of various government policies. Some of these programs help people save for retirement, buy a home, or pay for college; others encourage companies to invest in green energy technologies or build nuclear power plants; they even subsidize corporations that drill for oil or purchase real estate; and much more.
The government uses both tax expenditures and direct spending to support its policies. Direct spending is when the government takes taxpayer dollars and gives them to others to spend for a specific purpose. The government uses tax expenditures to accomplish the same goals as direct spending, but it transfers money by lowering taxes for an individual or company instead of giving them the money.
Consider this example to see the similarities between direct spending and tax expenditures: The government wants to create a program that provides $10,000 to every individual who weatherizes his or her home. The government can deliver the subsidy in one of three ways: (1) cut a check for $10,000, (2) create a tax expenditure like a refundable credit worth $10,000, or (3) use a combination of direct spending and tax expenditures. In all three cases the individual who weatherizes his or her home receives $10,000 from the government.
What makes tax expenditures different from other forms of government spending?
The government uses tax expenditures and direct spending for the same purposes, but tax expenditures receive different treatment in two key ways. Most tax expenditures are not subject to the same annual appropriations process as other forms of spending. This means they are less likely to be scrutinized.
Second, tax expenditures appear to be tax cuts instead of spending because they transfer funds to businesses and individuals through tax subsidies. It is therefore generally easier to win votes for tax expenditures than direct spending. And members of Congress often pursue their priorities through tax expenditures as a result, even if direct spending would be more effective and cost less.
Sperling: Obama's message is bipartisan tax reform that lowers ratesVisit msnbc.com for Breaking News, World News, and News about the Economy