One of the more dynamic figures on the current tax scene is Ed Kleinbard, a top-shelf New York tax lawyer who became Chief of Staff of the congressional Joint Tax Committee and then, in 2009, a full-time member of the USC tax faculty. Among the various topics he has addressed are international taxation, capital income taxation, and the taxation of financial services, all with a keen understanding of “what really happens” and (typically) constructive suggestions on how to make the system work better.
Perhaps the most theoretically salient aspect of Prof. Kleinbard’s scholarship is his characteristically irreverent approach to the problem of tax expenditures and tax reform. Like many historic assaults on traditional tax policy, it began with a speech, “Rethinking Tax Expenditures”, which Kleinbard delivered in 2008 and which was further developed in a subsequent lecture and a Joint Committee pamphlet. The essential point was that tax expenditure analysis, developed by Stanley Surrey and emphasizing the comparison of tax deductions, credits, etc. to direct spending measures, had to a large degree outlived its usefulness. The reasons for this included the difficulty, first noted by Boris Bittker in the 1960s, of defining a “normative” tax system from which deviations could be measured, and the wide variety of different provisions, ranging from business incentives to social welfare programs, that were covered by the tax expenditure label. In his speech and related publications, Kleinbard called for a more systematic typology of these provisions together with a more sophisticated analysis of the political forces that encouraged reliance on tax expenditures: a reliance which, the author noted, has proved largely resilient to traditional tax expenditure analysis and has, if anything, been encouraged by procedural reforms that make direct spending programs even more difficult.
What are the practical implications of these ideas? A partial explanation came in a 2011 article by Kleinbard, The Role of Tax Reform in Deficit Reduction, simultaneously published in Tax Notes and as a USC research paper. In this latter article, Kleinbard argues that not only the tax expenditure concept but the entire idea of tax reform has become outdated, caught up in “nostalgia” for the 1986 tax reform and its implicit tradeoff of lower rates for a reduction in tax incentives. According to Kleinbard, current fiscal realities do not permit us the luxury of revenue neutrality; instead, we need to raise revenue, which he proposes to do primarily by eliminating itemized deductions (mortgage interest, charitable contributions, state and local income taxes) which he regards as the least defensible (and among the most costly) tax expenditures. Although the arguments for targeting itemized deductions are traditional—their personal nature and the “upside down” nature of the subsidy that they provide—they reflect Kleinbard’s willingness to distinguish between different categories of tax expenditures rather than simply assuming that any reduction in such provisions is per se valid.
Later in the same article, Kleinbard—whose previous work has emphasized international taxation—also proposals an overhaul (albeit a revenue neutral one) of corporate taxes, together with a long-range structural reform of the income tax to adopt avowedly separate rules for taxation of labor and capital. These proposals are less tied to his tax expenditure theory, but equally bold and original in character.
Kleinbard’s work reflects a growing sense that existing conceptual categories are inadequate in the current political climate. The existing theories of tax expenditures and tax reform each assume a broad ideological consensus, in which reduced rates could be traded for reductions in unjustified tax breaks (i.e., tax expenditures) with a resultant increase in fairness, efficiency, and simplicity. In a world where that consensus no longer exists, there is an obvious need to update these categories. By taking sides in the ideological debate—by stating openly that “tax reform” must be taken to include tax increases and that some “tax expenditures” are more justified than others—Kleinbard sacrifices some impartiality but gains a more realistic outlook and, perhaps, potentially greater influence.
Particularly provocative is Kleinbard’s assault on the “tax nostalgia industry,” most notably that associated with the 1986 Tax Reform Act and its (now aging) protagonists. As one who worked (albeit in a lowly capacity) on the 1986 act, I must plead guilty to a certain desire to celebrate and, perhaps, reenact it. But times change, and the role of a legal scholar must be to stay ahead of them: something that Kleinbard, whether one agrees with him or not, is clearly doing.