It is reasonable to estimate that U.S. subsidies cost over $1,500 billion per year: that is $1.5 trillion.
America’s maze of subsidies is vast and complex. It is difficult to pin down with precision how much tax money (and other public costs) could be saved—and how much the market would be improved—by abolishing the subsidies and other favors that taxpayers confer on dozens of politically favored types of consumption and investment.
But $1.5 trillion is a plausible conservative estimate.
Good Subsidies v. Bad Subsidies
Some subsidies make sense. Taxing everyone to (1) protect and enhance the public's safety, health, resources and infrastructure (where fees are not feasible); (2) guarantee economic security and equal opportunity; and (3) create an effective market (where fees are not feasible)--and then "giving" these protections and guarantees to all Americans even if a particular taxpayer's tax dollars amount to less then the value of the benefits received--is not only defensible, but essential.
Such broad subsidies are necessary to build the stage on which safe, healthy, mostly working, never poor, insured, educated Americans freely write the private scripts of our own lives. They provide us--especially as reformed according to the design for goverment spelled here--with a solid public foundation on top of which we, the people, privately and freely decide on our religions (or none), who to marry (or not), whether to have children, where to live, what careers to pursue, what businesses to form, and how to make our communities thrive. Continue reading ->
What these broad subsidies do not do is tell anybody what script to write, what part to play, or what costume to wear. They give Americans the essential tools we need to act; but they do not steer, nudge, or induce us to act in any particular way. They ensure we have the resources to buy, sell, and invest; but do not lure us to buy or sell anything in particular, or to make or drop any specific type of investment.
The subsidies that harm--thus: the ones that should be eliminated--are those that interfere with the normal operation of the American market by explicitly channeling resources towards very specific, politically preferred, forms of consumption and investment. We should abolish them, all of them, as soon as possible
Tax Expenditure Subsidies
The single biggest source of subsidies consists of the tax breaks--formally known as "tax expenditures"--that permeate the federal income tax structure.
In 2013, the Congressional Office (CBO) identified more than 200 tax expenditures in the individual and corporate income tax systems. For fiscal year 2013, CBO estimated that 10 tax expenditures alone accounted for roughly two-thirds of the total budgetary effects of all tax expenditures. "Together, those 10 tax expenditures are estimated to total more than $900 billion, or 5.7 percent of gross domestic product (GDP), in fiscal year 2013." Read More >
One need not be a math whiz to calculate that, if 10 tax expenditures accounting for roughly two-thirds of the total budgetary effect had a cost of more than $900 billion, then the full cost of all 200 tax expenditures would be approximately $1,350 billion...that is, nearly $1.4 trillion. Today's cost, since tax expenditures have grown in recent years, is likely to exceed $1.5 trillion.
How big is $1.4 trillion compared to other government spending? The answer is: very big. For 2013, the federal Office of Management and Budget estimated that total federal "direct" spending was $3,455 billion...that is, $3.5 trillion. Read More -> Federal revenues were $2.775 billion...that is, $2.8 trillion. Read More -> In short, federal tax expenditures in 2013 equaled approximately half of all federal revenue.
Another way to grasp the magnitude of the $1.4 trillion in subsidies that the U.S. delivered in 2013 through the federal income tax system, alone, is to compare those tax expenditures with the U.S.'s Gross Domestic Product (GDP), which in 2013 was approximately $16.7 trillion. Read More -> The amount that America spent in 2013 on subsidies through the federal income tax system alone (thus ignoring local and state tax expenditures, as well as direct subsidies) exceeded the entire Gross Domestic Product (GDP) that year for all but 12 of the 190+ nations in the world. Read More ->
Some of these subsidies are of the good kind. They provide broad support for economic security, like the federal Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), rather than manipulate Americans' purchasing and investment decisions in ways that distort the market.
Moreover, OMB cautions that repealing tax expenditure subsidies will not necessarily free up federal revenue by exactly the same amount. Read More ->
Nonetheless, it is reasonable to conclude that $1 trillion and more in lower taxes could be provided to the vast majority of individual American taxpayers--and to many corporations--as part of creating a much fairer, simpler, and less burdensome federal tax system that eliminates the current tangle of subsidies for specific types of consumption and investment.
One dimension of increased fairness would be the elimination of subsidies that disproportionately benefit the rich. That is, you get a bigger tax break the richer you are. The 2013 CBO report on tax expenditures made clear what tax experts have long known: "The 10 major tax expenditures considered here are distributed unevenly across the income scale. In calendar year 2013, more than half of the combined benefits of those tax expenditures will accrue to households with income in the highest quintile (or one-fifth) of the population (with 17 percent going to households in the top 1 percent of the population)." In ordinary language: the richer you are, the more government subsidies help you. Read More ->
The benefit to most Americans from eliminating $1 trillion plus in tax-based subsidies goes beyond lower taxes. The benefit goes beyond tax fairness. Ending this massive tax-based disruption of the American market will make the market itself more efficient, thus more productive. All of us will gain from such a rise in market productivity. It is probably impossible to predict exactly how much the market's productivity will increase. But unless economic theory is hooey, it will happen.
Local and state tax subsidies, many of which piggy-back on federal tax expenditures, should likewise be eliminated. This, too, will promote simpler, fairer, and lower taxes for typical taxpayers, as well as stimulate a more productive economy.
Direct Spending Subsidies
One reason why politicians like to bury subsidies in the tax system is to hide them from public scrutiny. Direct spending subsidies, by contrast, are easier to pinpoint and thus make better targets as part of the budget process.
Nonetheless, American government continues to provide substantial direct subsidies--to agriculture, energy, housing, and other pet political sectors and firms.
Agriculture: For example, the U.S. Department of Agriculture (USDA) Farm Subsidy Database indicates that USDA subsidies for farms in the United States totaled $322.7 billion from 1995 through 2014, with $13.8 billion in hand-outs for 2014 alone. Read More ->
Three corporations--Farmers Rice Coop, Producers Rice Mill Inc., and Riceland Foods Inc.--respectively got USDA subsidies totaling $146 million, $314 million, and $554 million. Read More ->
Energy: American government provides even bigger subsidies for energy. According to the International Monetary Fund (IMF), in 2013 the U.S. provided a total of $606 billion in energy subsidies--$349 billion for petroleum, $178 billion for coal, and $78 billion for natural gas. Only China doled our more, although since it's population is gigantic the Chinese subsidy per-capita ($1,355) was lower than ours ($1,913). Read More ->
There is no excuse for these subsidies. Not only do they squeeze out better expenditures, and impede sound tax cuts. They also mess up the market, dragging down its productivity. We should ferret them out, and abolish them.
A final category of subsidies consists of the tax dollars that American government--especially at the local level--uses to subsidize a variety of utilities: water, sewer, roads, and transit. American government should discard all such subsidies for utilities, instead requiring the users of the utilities to pay in proportion to the extent and cost of their use.
The tax subsidy for roads is least appreciated. We accept without thinking the principle that the users of electricity, gas, and telecommunication services should pay the full cost of what they use. We generally accept the principle that the users of water and sewer services should pay user fees that cover the full cost of those services.
The same policy should apply to roads. There is no reason, given today's technology, why the users of the road system--including local, regional, state, and interstate roads--should not pay for 100% of the cost of building, maintaining, lighting, sweeping, plowing, and policing the road they drive on. Read More -> Advances in technology make it possible to charge a basic per-mile fee, and then adjust that fee upward to reflect the:
- Weight of the vehicle (bigger trucks do more damage to the road);
- Type of road (multi-lane highways, with special on/off ramps to limit access, cost more per mile); and
- Degree of congestion (thus encouraging driving during off-peak hours, which avoids the need to widen roads or build new roads simply to accommodate peak demand).
The proposals advanced here to greatly increase the income of low-income and middle-income Americans--an increase in disposable income that will augmented, for all groups of Americans, by ending property tax subsidies for roads--addresses the only real substantive concern about making roads a utility whose users bear the cost, i.e., can people afford the user fees? With much more money in hand, American drivers will have enough to pay for the roads they use.
Treating our roads as a regulated utility will also make it much easier (since tax dollars are not involved) to generate the revenue needed to fix and maintain our deteriorating roads. Elected officials will no longer be torn between holding down taxes vs. scrounging up enough money for road repair. Instead, state Public Utility Commissions--applying the same standards they apply to other utilities--would be responsible for ensuring that road utilities are in excellent working order, approving road utility budgets, and signing off (or revising) rate structures.
Treating roads as a regulated utility will additionally have positive environmental benefits. Drivers--once obliged to pay "as they go" for the costs of their driving and to pay higher fees during rush hours--will choose to drive less, avoid rush hours, and use less crowded local roads when they must take to the roads during rush hour.
The resulting property tax cut would also be huge. In 2013, local governments spent nearly $65 billion on roads, plus billions more on road-related policing. This entire property tax burden should come to an end once the road system, in lieu of burdening property owners, derives its revenue (like any other utility) from its users. Continue reading ->
In short, the tax subsidy for roads is harmful all around. It traps road in a cycle of disrepair and deferred maintenance. It encourages overuse, which exacerbates congestion and pollution, which stimulate freeway expansion...which encourages overuse, which exacerbates congestion and pollution...and the vicious cycle continues. Finally, the reliance on property taxes to pay for roads raises property taxes to high levels.
We will have better-maintained roads, less congestion and pollution, almost no freeway expansion, and dramatically lower property taxes, if we convert roads to a utility whose users bore their cost.