Imagine a program where the government sent an annual check to homeowners with mortgages. The bigger the mortgage, the bigger the check. Checks for rich people would be bigger than checks for the middle class. Also: Checks for people with mortgages on vacation homes!
It's hard to imagine a program like that getting much support in Congress these days. But, through the mortgage-interest tax deduction, the government does something like this every year.
As we write in our New York Times Magazine column this week, it's easy to find ridiculous little loopholes in the tax code. Like, say, the fact that you can deduct some of the fees you have to pay to buy good tickets to many college football games.
But in a way, the most striking loopholes are the ones that are so big they don't even seem like loopholes. Like the tax breaks for putting money into a 401(k). Or the mortgage-interest tax deduction.
Wonks call these loopholes "tax expenditures," or "spending through the tax code." That's because they have the same effect on government revenues as a spending program of the equivalent size.
Tax expenditures will cost the government somewhere around $1 trillion this year. That's more than the government will spend on Medicare or defense. The graphic at the top of the post lists just a few tax expenditures; this report (PDF) from the Congressional Joint Committee on Taxation has a much longer list.
If economists ran the tax code, there would be far fewer of these loopholes. Taxes might be higher or lower than they are now. But either way, the tax code would be simpler.
The government could still choose to pay people for taking out mortgages or contributing to their retirement plans. But those payments would be direct payments, not spending through the tax code.
That way, people would spend less time trying to minimize their taxes by exploiting all the loopholes, and less money paying accountants and tax lawyers. And they'd spend more time producing useful goods and services, and more money buying stuff they want to buy.