Fixing the federal budget through tax policies rather than program reductions

Hearing: The Need to Control Automatic Spending and Unauthorized Programs

U.S. House of Representatives, Committee on the Budget
June 9, 2016


The Honorable David M. Walker, Former Comptroller General of the United States

It is clear that our federal fiscal challenge is so great that, unlike after World War II, we will not be able to “grow our way out of the problem.” Our global economic market share, demographic patterns and government commitments are very different today than at the end of World War II. We clearly need to take steps to enhance economic growth, increase individual opportunity and improve our competitive posture. However, the math does not come close to working by relying on growth alone. It is also clear that we will not be able to reduce our federal public debt/GDP to a reasonable and sustainable level without addressing “mandatory” spending programs and engaging in comprehensive tax reform. In that regard, I would respectfully suggest that we need to address both direct and indirect mandatory spending, including tax preferences.

Stuart M. Butler, Ph.D., Senior Fellow in Economic Studies, The Brookings Institution

My testimony today focuses mainly on automatic spending, but let me begin with some remarks on the unauthorized programs.

Unauthorized Programs

Unauthorized programs and agencies are no small issue. As the CBO recently reported, the omnibus appropriations bill for FY 2016 appropriated over $300 billion to agencies and programs lacking authorization.

Authorizations are a very important part of the budget process. They create or redesign a federal agency or program, mapping out its activities and establishing federal obligations and expenditures. A major purpose of reauthorization is to conduct reviews and hearings and to refine the program or agencies’ activities based on that evaluation. With the climate in Congress undoubtedly making it more difficult for authorizing committees to move such legislation to the floor, the failure to review and reauthorize important agencies and programs underscores the growing failure of the budget process and the decline in the orderly functioning of Congress. It is embarrassing, to say the least, that many major agencies, such as the FBI and the State Department, have not been authorized for many years and must depend on the appropriations process for anything resembling a budget review.

On the face of it, the answer to this problem is quite simple – do not waive the rules.

Automatic Spending

The growth of automatic or mandatory spending within the federal budget is a similar but much larger problem. Like the growth of unauthorized programs, the rapidly growing proportion of federal spending for mandatory and other automatic spending escapes timely review. These programs also lack a real budget in the generally understood sense of a clear plan with specified spending and funding levels. This is a breakdown of responsible budgeting.

In conclusion Mr. Chairman, I believe the only way to achieve reasonable constraints on automatic spending is to do so within the context of an agreed long-term plan which becomes a default that is difficult – but not impossible – to alter over time. That procedure forces the discussion to take place in the context of the big picture that includes broad national objectives for the economy, broad fiscal goals, and decisions about the relative balance of protections needed for the elderly, the young, and working- age generations. That broad context, with the regular review and default feature of the proposal, provides sufficient political encouragement and protection over time for members to continue supporting the procedure.

Lily Batchelder, Professor of Law and Public Policy, NYU School of Law

My testimony makes three main points.

• Regardless of whether the goal in controlling automatic spending is reducing deficits or paying for important new investments, Congress should focus on cutting tax expenditures. Tax expenditures are simply a type of mandatory spending. With rare exceptions, tax expenditures continue automatically and anyone eligible can claim them, regardless of the budgetary impact. Tax expenditures are tremendously costly and are growing over time. Moreover, most are highly regressive and many are poorly structured. In contrast, almost all traditional mandatory spending programs are progressive and many are well designed.

• Deficit reduction will require compromise and tough policy choices. Budget process reform is not the answer, but rather bipartisan dialogue and compromise. In order to be bipartisan, deficit reduction will require both revenue increases and spending cuts, but it should be weighted towards revenues. Congress has made deep cuts in discretionary spending in recent years. In addition, the aging of the population, the retirement of the Baby Boom generation, and natural health care cost growth all mean we will need to spend more on traditional mandatory spending programs in the coming decades just to maintain our current commitments.

• Caps or limits, enforced by automatic across-the-board cuts, are a bad way to reduce traditional mandatory spending, and this is true of tax expenditures as well. Caps on traditional mandatory spending are pro-cyclical, automatically reducing spending at precisely the wrong time – during economic downturns. Caps on the annual cost of tax expenditures are unworkable. Such caps take a meat axe to complicated policy problems where a scalpel is needed. However, reforming multiple tax expenditures at the same time in a sensible way, such as limiting their value to 28 cents on the dollar, could be a promising approach.

Federal Government Spending, 2015

$1,442 billion   Tax expenditures
$889 billion   Medicare and Medicaid
$882 billion   Social Security
$583 billion   Non-defense discretionary
$582 billion   Defense discretionary

Share of Cost of Largest Tax Expenditures, 2013

8%  Lowest Quintile
10%  Second Quintile
13%  Third Quintile
18%  Fourth Quintile
51%  Top Quintile (17% for Top 1%)

Value of Tax Expenditures per Household, 2011

$635  Lowest Quintile
$2,333  Second Quintile
$2,897  Third Quintile
$4,559  Fourth Quintile
$24,045  Top Quintile
$154,856  Top 1%


As this Committee continues its important work on addressing our long-term budgetary challenges, I urge you to focus your attention on one type of automatic spending that is both enormously costly and too often overlooked: tax expenditures. The aging of the population, rising income disparities, and the natural growth of health care costs mean demands on federal resources are not going away. Cutting tax expenditures represents the fairest and most efficient way to address our nation’s fiscal needs. And within that category, I urge you to focus on cutting those tax expenditures that are the most regressive, the most distortionary, or the least beneficial for society as a whole.


Testimony of David Walker:

Testimony of Stuart Butler:

Testimony of Lily Batchelder



By Don McCanne, M.D.

Although this hearing was allegedly about programs for which spending is mandatory (such as Social Security and Medicare) and the failure of Congress to formally reauthorize public agencies and programs (such as the FBI and The State Department), it is really about the supposed need to cut spending in essential government programs. This process should be of concern to single payer supporters since, if we had a Medicare for All program, it would be on the chopping block as well.

Two of the witnesses represent the Republican majority. Former Comptroller David Walker has continued to harp on the fact that the growth in Medicare and in the interest payments on our national debt will bankrupt the nation, implying that spending must be reduced, including mandatory spending. Stuart Butler was formerly with The Heritage Foundation and was author of the opposition’s plan to the Clinton health care reform proposal - the plan that later became the basis for the Affordable Care Act. He too implies that budget deficits require that mandatory spending must also be subject to the budget process. Neither Walker nor Butler suggest new revenues (taxes) as a means of balancing the budget.

In sharp contrast, Lily Batchelder shows us that a change in tax policy can close the budget gap without the necessity of cutting mandatory spending for essential programs (and discretionary spending has already been cut to the bone). She would emphasize increasing revenues and doing that indirectly by reducing tax expenditures. Tax expenditures are the reduction in taxes paid as a result of deductions taken from taxable income. Those taxes avoided are disproportionately a benefit for the very wealthy and are paid by the rest of us, and they are massive - over $1.4 trillion in 2015!

Our politicians are wrong when they tell us that we have to cut Social Security, reduce Medicare payments by privatizing the program, and that we could never afford to pay for Medicare for All (even though we already spend on health care what the program would cost).

All we have to do is fix the tax code - the most important step being to reduce the tax expenditures disproportionately benefiting the very wealthy. Lily Batchelder explained that to Congress, but do you think they would ever listen?