INTRODUCTION I. TAX EXPENDITURES AND PUBLIC PERCEPTIONS IN CONTEXT A. The Existing Tax Literature B. Recent Political Science Literature C. Research in Behavioral Economics and Political Framing D. Our Contribution to the Existing Literature 1. The Representativeness of Our Sample 2. Distinguishing Our Questions and Implications II. EMPIRICAL STRATEGY A. Using Google Consumer Surveys B. Our Survey Questions III. RESULTS IV. DISCUSSION A. Open Questions and Directions for Future Research 1. Why Would a Framing Effect Exist? 2. Can Rational Voters Prefer Tax Expenditures? B. Implications 1. Economic and Welfare Implications 2. Implications for Trends in Tax Law 3. The Perverse Effects of Existing Tax Expenditure Budgets 4. Implications for Tax Complexity CONCLUSION APPENDIX INTRODUCTION
A stubborn question in tax law and policy is why some spending programs are organized through the tax code rather than as direct outlays. Both methods are common. For example, Social Security payments are issued directly into the recipients' accounts. (1) In contrast, the Earned Income Tax Credit (EITC), as its name suggests, takes the form of a credit against the recipient's income tax: eligible beneficiaries simply owe less or are entitled to a refund when they file their taxes. (2) Social Security payments are made by the Social Security Administration. (3) The EITC, like all federal tax expenditures, is handled centrally at the IRS. (4)
For some tax experts, the widespread use of "tax expenditures"--policy spending through the tax code that departs from taxing "accepted concepts of net income" (5)--is concerning. The great tax scholar Stanley Surrey argued famously that one of several problems with tax expenditures is that they are a disguised form of spending, spending that is poorly managed by Congress and almost completely overlooked by the American people. Most tax expenditures, wrote Surrey, "seem almost to live a life of their own, undisturbed and unexamined," and with "[n]o agency [that] really studies or controls them." (6) Surrey concluded unhappily that this "is no way to run a tax system." (7)
In the decades since Surrey's writing on the subject, questions about the role and value of tax expenditures have become only more relevant. While the Tax Reform Act of 1986 eliminated many tax expenditures in the Internal Revenue Code, total tax expenditures have since grown and are now more than eight percent of GDP--$1.4 trillion in 2014. (8) In the aggregate, individual income tax expenditures are now larger than either defense spending or Medicare spending. (9) Yet despite the fact that academic studies of tax salience and behavioral taxation have become increasingly popular, basic questions about the public perception of tax expenditures remain largely unanswered. In particular, many of Surrey's original concerns have avoided rigorous testing: is the true cost of a tax expenditure really hidden or diminished by virtue of being part of the tax code? Is it true that the public sees spending through the tax code as different?
These questions are urgent for an additional reason. In some ways, Surrey got his wish. Tax expenditures are subject to more oversight than ever. "Tax expenditure budgeting," an annual process by which the federal and state governments account for their spending through the tax code, has become the American norm. Federal law requires the United States Treasury to produce an annual tax expenditure budget, (10) and most states have adopted similar processes.11 These procedures would no doubt please Surrey, but the continued growth of tax expenditures would not. Indeed, that growth presents a paradox: spending through the tax code has continued to rise faster than government spending has as a whole, despite repeated efforts to publicize and rein in the costs of tax expenditures.
Our Note helps to explain this apparent paradox. We offer evidence on how the American public thinks about tax expenditures as opposed to spending programs organized outside the tax code. We obtain this evidence through a survey experiment that tests how support for (and perceptions of) public spending policies vary not based on the substance or expense of a policy, but simply on whether a policy is described as a tax expenditure or direct outlay. We use Google Consumer Surveys (GCS) to ask panels (which aim to be demographically representative of the United States Internet-using population) for their views on a variety of policy options, including hypothetical subsidies for the housing market and the disabled. (12) We keep the substance and total cost of the policies functionally identical. We then ask one group for its views on a policy that is described as a direct expenditure, and the other for its views on a policy that is described as a tax break.
By asking similar panels for their views on such questions, we are able to study the way in which a policy's framing affects public support and public perceptions, and we are able to isolate this framing effect in an empirically rigorous manner. In particular, this method allows us to test the hypothesis that citizens are more likely to support "hidden" spending that occurs through the tax code, rather than "direct" spending that occurs through another policy mechanism, such as payment via cash or check. And this method allows us to test whether tax expenditures simply appear less expensive than direct outlays.
Our results are strongly consistent with both hypotheses. Americans are more likely to support policies when they are described as tax expenditures, and they are more likely to view tax expenditures as cheaper than direct outlays. In our baseline comparisons, respondents were ten percentage points more likely to support our hypothetical, economically equivalent policies when we framed them as tax breaks rather than as direct outlays. These results held true across a variety of policy areas, and they held true when we varied the amount of information that we offered about how tax expenditures work. Respondents were also more likely to say that a program added "a lot" to the deficit if it was described as a direct outlay instead of a tax expenditure, even though the programs were listed with the same explicit cost.
These results make several contributions to the existing literature. First, we apply a better methodology to a wider range of contexts than did past studies to help answer significant outstanding questions in the political science, economics, and tax-law literatures. Second, we test the robustness of the idea that "spending through the tax code" produces a framing effect by varying the amount of information we provide to our survey respondents; this question speaks to the issue of why citizens are so inclined to favor tax expenditures. Finally, we connect our results to key debates in the economics and political science literatures, and we discuss the implications for economic welfare, modern tax law, and democratic decision making about public spending.
The rest of this Note is divided into five Parts. (13) Part I positions our contribution in the relevant literature on tax expenditures and the behavioraleconomics approach to taxation. Part II describes our methodology in more detail. Part III offers a fuller description of our results. Part IV discusses limitations and implications. Part V concludes.
TAX EXPENDITURES AND PUBLIC PERCEPTIONS IN CONTEXT
The Existing Tax Literature
In the tax-law literature, the general distinction between spending inside and outside the tax code is typically associated with the work of Stanley Surrey, who reportedly coined the term "tax expenditure." (14) Surrey is well-known for emphasizing that "[t]he federal income tax system consists really of two parts," one which "comprises the structural provisions necessary to implement the income tax," and another that "comprises a system of tax expenditures under which Governmental financial assistance programs are carried out through special tax provisions rather than through direct Government expenditures." (15)
Surrey had many criticisms of the tax-expenditure system: he thought it confused Congress, (16) muddled the administration of social programs, (17) and made the tax code more complicated. (18) But a particularly notable theme of Surrey's work is that tax expenditures are "hidden." (19) Despite the fact that tax expenditures are now identified and budgeted like other expenditures--a long-time time goal of Surrey's (20)--the hidden nature of tax expenditures is a theme that still runs through contemporary literature on taxation and public policy. In his book The Hidden Welfare State, for example, the political scientist Christopher Howard writes that "tax expenditures with social welfare objectives are largely invisible to citizens, policy makers, and academics who study U.S. social policy." (21)
The premise that tax expenditures are or would be treated differently from direct outlays is, in some sense, counterintuitive from the perspective of public finance. Most scholars of public finance would consider tax expenditures to be "conceptually equivalent" to direct outlays. (22) Indeed, tax expenditures can always be described in a manner that makes them seem identical to direct spending--one in which (as Howard puts it) "taxpayers write a check to the government for their full tax liability, and the government issues them a check to cover those activities exempted from taxation." (23) As consumers of government benefits, taxpayers should value a dollar of cash just as much as a dollar of tax relief. As taxpayers who fund government programs and vote for elected officials, they should view a dollar of government spending as equivalent to a dollar of forgone tax revenue. (24) Considered at this level of abstraction, public support for a spending program should not depend on whether that spending goes through the tax code.
But do real-life taxpayers actually treat a dollar of direct spending...