The so-called Department of Government Efficiency, led by Elon Musk and Vivek Ramaswamy, will be tasked with cutting government spending. There’s been lots of talk of eliminating federal agencies and reducing the size of the federal workforce to do that.
Adam Chodorow, a tax professor at ASU’s Sandra Day O’Connor College of Law, says if the incoming Trump administration really wants to cut spending, they should be looking to the tax code. Chodorow joined The Show to discuss why they should look to the tax code.
Full conversation
MARK BRODIE: Adam, why the tax code?
ADAM CHODOROW: Well, the point is actually that there's a lot of spending in the tax code, approximately $1.7 trillion of spending that's disguised as deductions, exclusions and tax credits. And so if, if we're serious about cutting spending, that's one of the places that they should be looking.
BRODIE: How much could they actually cut from the tax code without actually, you know, eliminating, you know, the equivalent of eliminating agencies, which is, you know, some of what some of what the advocates are talking about here?
CHODOROW: Well, as I said, there's about $1.7 trillion worth of spending, and I'm not suggesting that they cut all of it out of the code. But we spend hundreds of billions of dollars a year on things like the exclusion for employer provided insurance, for retirement savings, exclusions, the home mortgage deduction, all of that is a form of spending that we should look at if we're serious about cutting spending.
BRODIE: And as you and I have discussed in the past, a lot of that money is used to try to incentivize or disincentivize particular behavior, right? Be it whether you have health care or own a home or something like that. So if you were to go in there and eliminate some of those exemptions or deductions, how might that impact how people behave?
CHODOROW: Well, it could have a big impact or none at all, right? It depends on how much people actually depend on these subsidies or the spending to, to sort of influence their decisions. So for instance, people are going to buy houses, whether the government subsidizes them or not. So there's some real question about whether the home mortgage deduction is really necessary to create these incentives for people to buy houses. I don't think it's going to change a whole lot of behavior.
BRODIE: Could one not make the argument though that absent the subsidy, there are, yes, people continue to buy homes, but maybe not as many people and maybe not the same kinds of people or people with the same income levels as do now.
CHODOROW: Well, that's actually one of the most interesting things about that specific spending. By structuring the housing subsidy as a mortgage deduction, you're giving it to people who are buying homes. After the 2017 tax cuts. It's only going to the 10% of people who don't take the standard deduction, and those tend to be folks at the very highest end of the income bracket. And so what we're really doing there is we are subsidizing some of the wealthiest Americans when they buy their homes.
And, and, and one of the points is that by disguising spending as tax deductions, we're actually creating subsidies that would never be approved ever, if they were proposed as direct subsidies.
BRODIE: So it sounds like maybe you're suggesting targeting particular exemptions, deductions, not all of them, but some of them that maybe aren't doing what people think they're doing or not doing things that if they were a standalone bill, would get a lot of support.
CHODOROW: Right, that that's, that's exactly it. And, and when we think about sort of cutting spending, right, we could cut spending that supports the poor. And, you know, there are some real issues with that, or we could try to see whether there's spending that supports the wealthy, and a lot of the spending in the tax code supports the wealthy.
BRODIE: So what are some of the other deductions or exemptions in the tax code that you think maybe the Trump administration could look to cut that maybe wouldn't have a super significant impact.
CHODOROW: Well, so the exemption for employer provided health insurance is one of them, right? That's an exemption that only goes to those of us who are lucky enough to work for employers who provide health insurance. And again, that skews towards the wealthy.
The idea of a subsidy is that what we're trying to correct for is a market failure, right? People are going to buy what they think they need and they're going to make a cost benefit analysis. The government should only step in if for some reason the market doesn't produce the right level of behavior.
So what we need to figure out is where's the market failure that the subsidy is designed to address. And a lot of these subsidies aren't actually structured that way. And, and so they lead to subsidies that, as I said, we would never approve if they were suggested as direct subsidies.
BRODIE: Politically, how likely do you think it is that the tax code would be targeted? And I ask because in many cases, if you are trying to eliminate a tax cut or a tax exemption or deduction, it's framed as a tax hike.
CHODOROW: Right, politically, it's very, very difficult to get rid of spending in the code because when we take away a deduction, when we take away an exemption, people are sending more money to the government and that's what happens when you structure spending as a tax abatement.
But what I'm suggesting is that we're at this moment where we are talking about extending the Trump tax cuts. We have to pay for that somehow, so we have to look for spending cuts to offset the reduction in rates and other things that the Trump tax cuts did. And since we're already making changes to the tax code, maybe this is the moment where we can gather the political courage and strength to look at this kind of spending as opposed to some of the other things that have been discussed.
So for instance, about 40 years ago, Grover Norquist had people sign a tax pledge, and the tax pledge said, I promise not to raise rates, but also I promised not to eliminate deductions and credits. Well, those deductions and credits are often spending, and so not only did the pledge protect against higher tax rates, but it actually prevented cutting spending. And, so what I'm suggesting is that now that we're getting serious about cutting spending again, or at least we purport to be, this is an area we should really be looking seriously at.
BRODIE: Are you hearing conversation coming out of D.C. that people are saying, yeah, we, this is a good idea, we should be looking at this, not just eliminating the spending that everybody can sort of identify as spending.
CHODOROW: So far I've not been hearing a lot of it, right? So far the talk has mostly been about the DOGE Commission, the Department of Government Efficiency, and the talk has been about, you know, cutting agencies, getting rid of regulations. Elon Musk talked about, you know, $2 trillion of spending he was going to cut. He's more recently said $500 billion. And we're hearing discussions about well maybe we should look at Social Security, maybe we should look at Medicaid, Medicare, SNAP.
My suggestion, a lot of that spending is spending that benefits the poor, right? Benefits people who depend upon it and there's a lot of other spending that the poor don't depend upon and my suggestion is maybe we should look there instead.
