The Perverse Distributional Consequences Of Tax Breaks Are a Feature To Some On The Right

Progressives have developed "tax expenditures" as a term to communicate with the public about the proliferation of loopholes in the tax code. A certain strain of libertarian has decided to object to this verbiage in pursuit of the goal of minimizing federal revenue. Since the ultimate level of revenue is determined by the level of spending rather than by the structure of the tax code, I don't think this will achieve anything for them. But the point either way is that if your concern for "small government" is about the idea that public policy is distorting the operation of the market economy rather than tax-fetishism, then tax loopholes are distorting in exactly the same way as direct spending would be. A large direct government expenditure on housing would shunt an artificially large share of social resources into the housing sector, and a giant tax break for housing has the same impact.

The main difference, as CAP's Seth Hanlon explains, is that doing it with a tax break gives most of the benefits to rich people:

Consider the mortgage interest deduction, which is by far the largest government housing program. Its estimated cost of $98.6 billion in the upcoming fiscal year is more than twice as much as the discretionary budget for the Department of Housing and Urban Development. If a family in the 15 percent tax bracket claims the deduction (assuming it itemizes its expenses, which is unlikely), the government essentially matches 15 cents for every dollar in mortgage interest paid. Families in the highest 35 percent tax bracket get the largest benefit: 35 cents for every dollar in mortgage interest.

Of course, taxpayers in higher tax brackets tend to have bigger homes and bigger mortgages, and therefore more deductible interest. And so wealthy taxpayers with larger homes get the greatest benefit from the deduction:

Now of course in principle that government could frame a program of direct expenditures on housing such that the richer people and people with fancier houses get more help than people with average incomes and average houses. But in practice that would never happen, since it would be insane. Doing it through the tax code gives you all the pernicious (or perhaps you think it's beneficial) economic distortions, and also structures the benefit in an upside down way. So, again, if your worry about big government is that you think smaller government will promote human well-being then you ought to be very worried about tax loopholes, whether or not you want to call them "tax expenditures."

That said, we have seen an upsurge in rightwingers expressing a different concern. Representative Paul Ryan is a fan of Ayn Rand and Harvard economist and former Bush Council of Economic Advisers Chairman Greg Mankiw has explained that progressive taxation is immoral even though it promotes higher levels of human welfare. Under the circumstances, you might think the economic distortion of tax loopholes isn't a big deal and their upside down nature is a feature rather than a bug. After all, according to this view improving the welfare of humanity as a whole is small potatoes compared to undoing status quo policy's unconscionably immoral treatment of rich people.