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One of the first things Donald Trump did after winning the election was to appoint Elon Musk and Vivek Ramaswamy to lead the so-called Department of Government Efficiency, or DOGE, whose main goal is to reduce government spending. Technically, this commission exists outside of government and has no power to enact any cuts. Nonetheless, members of Congress have created a DOGE caucus and intend to create a formal subcommittee, suggesting that DOGE’s ideas will get meaningful consideration. Musk initially suggested that he would cut $2 trillion from the budget. More recently, he and Ramaswamy indicated they would start with a more modest $500 billion.
If Musk and Ramaswamy are serious about cutting government spending, they should start with the tax code. This sounds counterintuitive—taxes are where we raise money, not spend it—but in fact, we spend approximately $1.7 trillion each year through the tax code.
This spending—disguised as deductions, exemptions, and tax credits—tends to favor the wealthy in ways that would likely never be approved if proposed as direct subsidies, obscures the government’s size and impact, and impedes our ability to tackle government spending. Let me explain.
Our tax code contains two kinds of rules. The first, often referred to as “normative,” is designed to measure income. An example might be deductions for business expenses, which are necessary to determine how much money someone actually made. The second kind of rule is designed to reward or penalize taxpayer behavior. Examples include the deduction for retirement savings and the exclusion of employer-provided health insurance. It is this area of tax code that has become overgrown and ripe for pruning.
Let’s take an example. Imagine that the government wanted to subsidize housing. It could send homeowners a check. Or … it could give homeowners a deduction for the interest they spend on their mortgages, allowing them to simply pay less in taxes. The deduction isn’t necessary for measuring income, per se, and it doesn’t apply to everyone; renters get no deductions for their housing expenses. Instead, the deduction makes it a little cheaper to own a home. It looks like a tax cut. But this move to help homeowners is really government spending in disguise.
This kind of spending often benefits the wealthy. Because the housing subsidy is structured as a deduction that reduces a taxpayer’s income, it provides greater subsidies to those in higher tax brackets than those in lower brackets. If someone proposed a direct subsidy where rich people were given more money than poor people … well, let’s just say that the politics of that would be difficult.
Most important: Eliminating this kind of spending is really difficult. Getting rid of spending in the code looks like a tax increase. For instance, eliminating the home mortgage deduction would appear to (and actually) cause those who benefit from the subsidy to pay more in taxes.
An example of the difficulties caused by spending through the tax code can be seen in Grover Norquist’s Tax Pledge, which was all the rage 40 years ago. In addition to extracting a promise to oppose increases in tax rates, the pledge committed signers to opposing the elimination of deductions or tax credits unless they were matched dollar-for-dollar by a reduction in rates. Thus, to eliminate such spending, one had to reduce taxes, leaving the deficit unchanged.
While this spending is disguised, it is not fully hidden. The government actually publishes not one, but two tax expenditure budgets, one by the Treasury Department and the other by the Joint Committee on Taxation, listing all of the spending found in the tax code. At the margins, there is always room to quibble about whether a provision is normative or required to measure income correctly, or actually designed to affect taxpayer behavior. For instance, it is not clear whether the deduction for state and local taxes (SALT) is a subsidy or required to accurately determine a taxpayer’s income.
However, in most cases, it’s pretty clear.
We spend about $286 billion per year on exemptions for retirement savings, which are disproportionately tilted toward the wealthy; $242 billion on preferential rates for capital gains, which are also for the wealthy; and about $213 billion for employer-provided health care, which goes only to those lucky enough to have jobs that provide health insurance. The home mortgage deduction discussed above only costs $25 billion per year, thanks in part to the 2017 Trump tax cuts, which significantly expanded the standard deduction.
Not all tax expenditures favor the wealthy. We spend about $122 billion on the child tax credit and another $74 billion on the Earned Income Tax Credit, which supports the working poor. We even spend money to support ministerial housing, even if said ministers live in their own homes, but don’t get me started on that one.
Trump’s proposed Treasury secretary has made addressing the deficit a priority. Musk and Ramaswamy have indicated that they want to go after government spending. If they are serious, and not simply interested in cutting headcount, hamstringing agencies that issue those pesky regulations, and cutting programs that predominantly help the poor—such as Social Security, Medicare, Medicaid, and SNAP—they could do a lot worse than starting with the tax code. And they have a fabulous opportunity, given that Congress is already gearing up to pass a tax bill to address the expiring Trump tax cuts, and needs to find a way to pay for it. Who knows, they might even attract some Democratic votes. But something tells me Musk and Ramaswamy are only interested in cutting certain types of government spending—and this won’t be it.
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