The Quiet Revolution in Tax-Based Spending and Regulation

• In Event: Tax Complexity and Tax Design

Abstract

The literature on tax expenditures and tax-based regulation is long overdue for an update, based on three assumptions that are largely obsolete.

The first is that there are significant, immovable constraints on how tax expenditures can be designed. Instead, all of the long-standing tenets of how tax expenditures inherently differ from direct spending—uncapped, paid annually, non-automatic, upside-down, rarely reconsidered legislatively, less subject to judicial challenge, failing to incorporate non-tax expertise—have increasingly unraveled. This blurring began long ago with the advent of refundable credits and the occasional capped, allocated credits. But it has accelerated dramatically over the past 15 years with enactment of the ACA, CARES, ARP, and IRA.

The second is that tax law does not create regulatory schemes to advance societal objectives—apart from raising revenue and redistributing. In reality, tax law and the IRS have taken an increasingly central role in regulating large segments of the economy through tax penalties, excise taxes, and tax expenditures.

The third that there is a meaningful legislative and political choice between tax-based and non-tax-based spending and regulation.

This article traces the rise of a new generation of tax expenditures and regulations, describing how tax programs have evolved in dramatic ways that make them able to advance policy objectives in more nimble, equitable, informed, and nuanced ways. Rather than ignoring or resisting this transition, it calls on researchers and policymakers to consider recent lessons for how to leverage the tax system to better design, implement, and increase take-up of tax-based programs.

Author

• Lily Batchelder, NYU School of Law