Former Obama Adviser Bernstein: ‘I Just Solved the Sequester!’

Thursday, 28 Feb 2013 11:18 AM

By Michael Kling

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Jared Bernstein, a former Obama administration economist, says he has solved the sequester.

The solution is to rein in tax expenditures, he writes on his blog.

Politicians are at loggerheads because Republicans refuse to budge on any new revenues, and Democrats want spending cuts combined with revenue increases. That’s why they cannot agree on how to stop automatic spending cuts that are about to hobble the economy.

Economist Predicts 'Unthinkable' for 2013

“Tax expenditures are how we spend through the tax code,” Bernstein explains. “So when you repeal or reduce them, you do two things at once: you raise revenues and you cut spending. Something for everyone!”

For an example of tax expenditures, Bernstein cites child care. Many low- and moderate-income people receive child care subsidies through government spending, while people with higher incomes get child care subsidies through tax credits.

The programs for lower-income families are capped, serving only as many people as their funding allows. But subsidies through tax credits are open-ended — all eligible families who apply will get it.

The same goes for education. Government-sponsored Pell Grants help low- and moderate-income students pay for college, while 529 accounts provide tax breaks that are most generous for upper-income households.

“And when you sum them up, these tax expenditures are friggin’ large,” Bernstein explains, saying they would be the largest single spending item in the budget if classified as expenditures.

Instead of cutting every tax expenditure, we should determine which ones are wasteful by examining their foregone revenue, efficiency and fairness, he argues.

“Anyone with even a passing familiarity with the tax code won’t be at all surprised how easy it is to find candidates that fail big time on all three.”

Examples might be carried interest and the mortgage interest deduction, which could be transformed to a 15 percent credit.

“Better yet,” Bernstein writes, “you could just avoid the political morass of picking and choosing which tax expenditures to go after and simply cap deductions for high-income households at 28 percent.”

High-income earners get more in tax expenditures than the poor receive in direct government assistance, writes Howard Gleckman, a resident fellow at The Urban-Brookings Tax Policy Center, in a guest blog for The Christian Science Monitor.

Direct aid for the poor is criticized as welfare, while spending-like subsidies provoke much less outrage, he notes. “This is true even though many of these tax preferences are economically indistinguishable from direct spending and often add far more to the deficit.”

Video: Economist Predicts 'Unthinkable' for 2013

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