The Federal Budget Battle Continues

Copies of the administrations 2012 Budget proposal at the Senate Budget Committee on February14, 2011 in Washington, DC.

Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, Reihan SalamNational Review contributor who writes "The Agenda", the National Review's domestic policy blog, talked about the budget battles in Congress from a right-of-center point of view.

The President and House Committee Chairman, Rep. Paul Ryan (R), continue to battle over how to reduce the deficit and their federal budget plans. But Reihan Salam said he's hopeful about the path they're on and sees the potential for compromise. 

There has even been some agreement between the President and Rep. Ryan — on cleaning up tax expenditures.

How do tax expenditures work?

According to Salam, the federal government engages in a lot of social policy through the tax code by giving incentives and deductions called tax expenditures, but this is problematic and it's doing the opposite of what we need it to do, he said.

We lose a lot of revenue by telling people, hey, if you're buying a house and spending money on mortgage interest, that's going to be tax free up to X amount. We say the same thing for employer sponsored health insurance coverage and a lot of other things. The problem is these tax expenditures are a really bad way of making government policy.

If you say that we're going to give a huge tax break to employer sponsored coverage, it has a number of ill effects. One of them is that if you don't get health coverage through your job, guess what? You don't get the subsidy. Or if you pay higher taxes because you have a higher income, well you get a bigger tax break than someone who makes less money which creates this very ironic situation where we're effectively channeling more of this government money to people who don't need it than to people who do.

The 'agreement' between Obama and Ryan

Salam argued, that though there is some consensus between Ryan and Obama in their desire to save money by cleaning up these expenditures, there's still a subtle difference in their arguments. Obama has said he wants to curve tax expenditures for the top two percent, but according to Salam, this step isn't big enough.

The thing is that there are a ton of households who are making between about $100,000 and $250,000 a year who benefit tremendously from these tax expenditures and if you don't curb the tax expenditures for those guys, you're not going to make the progress you need to make.

I think that what Paul Ryan is saying, and what the President has suggested at different points, is that [tax expenditures] are disproportionately used by higher income Americans but the thing is that in terms of the U.S., the median household income is a little bit above $50,000, so while in a place in New York City, it seems like a guy who's making $150,000 who owns a condo, you're squarely in the middle class and that might be true, but in terms of the country you're pretty affluent so when you're using that tax break, you're using something that is benefiting a more affluent household over a less affluent household...

It's all about the tax code

Salam said, Rep. Paul is arguing for a more even playing field in the tax code. And this is why:

The tax code right now is treating households making the same amount of money really really differently depending on other characteristics. So, let's say you are, like me, a renter. A renter and and a homeowner at about the same level of income are treated very different because the renter is taking a big hit where as the homeowner is getting this big tax subsidy through the tax code. So, in that sense New Yorkers in particular get a really raw deal from the way the tax code works...

So, what is the most efficient way to raise tax revenue?

Tax expenditures are really opaque. People don't fully understand them and they really have a very unfair impact...So, we're spending a hundred billion dollars every year on the mortgage interest tax deduction that lest we forget, doesn't give renters a dime and the Bush tax cuts for high earners...that a lot of folks on the left-of-center side were attacking, that cost $700 billion over ten years so you actually get much more revenue by getting rid of that one tax expenditure, let alone a lot of other less justifiable tax expenditures, than you would from raising those marginal tax rates...There's a lot of consensus among economist that tax expenditures are just bad any way you slice it.

What's ahead?

As for the bipartisan "Gang of Six," who are charged with creating a deficit reduction compromise, Salam said he's hopeful. The group is a good representation of conservative and liberal sides of the coin, he said. And it's not the only thing Salam finds encouraging.

People have focused on how far apart the President and Paul Ryan are, but we suddenly are leaving this realm of shadow boxing and kabuki theater of debating the budget and talking about the real things we'd have to do, the real visions for getting us off this high debt path.