tax is probably better thought of as a hybrid of a broad-based income tax and a consumption-based tax. Some types of savings and investment (such as for education) are treated more generously than they would be under a pure income tax, while other types (such as interest on ordinary savings) are fully taxed, as they would be under a pure income tax. Some (such as savings and investment for retirement) are treated as they would be under a pure consumption tax, much more generously than under an income tax. And the rest are treated somewhere in between. These inconsistencies in taxation allow taxpayers to reduce their tax burden by shuffling assets from fully taxed to tax-favored accounts (such as for education or retirement), an activity that reduces taxes collected without significantly increasing total saving or investment.
The complexity of the tax code has steadily worsened over time in part because policy makers have increasingly used it to try to achieve social goals and to aid particular sectors of the economy through narrow reductions in tax liability. For example, the deduction for the interest on home mortgages and other housing-related deductions seek to increase home ownership, and deductions for tuition and other education-related deductions seek to make college more affordable. Such tax provisions intended to benefit specific groups of taxpayers are known as “tax expenditures.” The number of these tax expenditures (see Chapter 1) doubled from 67 in 1974 to 146 by 2004 (Government Accountability Office, 2005:4). A new study increases that count to 158, for 2008 (Minarik, 2010).
The number and range of tax expenditures lose large amounts of revenue. Tax expenditures for activities other than business account for roughly 6 percent of GDP (Burman et al., 2008a). For comparison, the individual income tax raises about 8 percent of GDP. These figures suggest that eliminating tax expenditures and broadening the tax base would allow tax rates to be cut nearly in half (Burman et al., 2008a:13). However, the elimination of tax expenditures for specific purposes might lead to demands for greater direct spending for those purposes.5
Most experts contend that if the tax code had fewer special provisions, especially those for tax expenditures and lower rates, it would be more conducive to growth and would consume less time and energy of taxpayers to comply with (or avoid).
The current federal income tax is a long way from the simple and neutral system that almost all tax experts—and many taxpayers—favor. They support moving to a tax system that raises needed revenue simply, minimizes both paperwork and economic distortions, and provides a socially desired degree of progressivity. Yet policy makers have been reluctant