Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul.

The pressure to reduce the budget deficit and to pay for additional stimulus measures may force Congress to look at the revenue side of the budget. Republicans are adamant about not raising tax rates but appear less dogmatically opposed to restricting tax loopholes. In a speech last week, House Speaker John Boehner said he was open to the idea.

Today’s Economist

Perspectives from expert contributors.

Of course, one man’s tax loophole is another man’s essential adjustment to the tax code to ensure fairness and maintain a healthy economy. But clearly there is a limit to how many special tax provisions we can afford when facing deficits that everyone agrees are unsustainable.

Economists prefer the term “tax expenditures” to designate exceptions to a normal tax system, be they exclusions, deductions, credits or special rates (such as on dividends). While there is continuing debate among tax theorists over what a normal tax system is, it is also obvious that many tax preferences are hard to justify economically or socially.

For many years, no one knew just how many tax preferences there were. But in the 1960s, the Treasury began compiling a list of them systematically, along with estimates of the revenue loss. The Congressional Budget and Impoundment Control Act of 1974 required that this list be updated and published each year in the president’s budget.

On Friday, the Tax Policy Center, a private research group, published a study that went through all of the Treasury estimates of tax expenditures since 1985. They were broken down in various ways and aggregated, thus allowing some conclusions to be drawn. The table summarizes the results.

Tax Policy Center

As one can see, the Tax Reform Act of 1986 had a major impact on tax expenditures. Their aggregate size fell to 6 percent in 1988 from 8.7 percent of the gross domestic product in 1985. (The Tax Policy Center did not calculate totals for 1986 and 1987.) A similar tax reform today would raise about $400 billion in revenue a year that could be used to reduce tax rates substantially or to make a large dent in the deficit.

However, as the table shows, the 1986 reforms were not long-lived. After the top income tax rate was raised to 39.6 percent from 31 percent in 1993, the size of total tax expenditures began a steady rise.

There are two reasons for this. First, an increase in statutory tax rates automatically increases the revenue loss associated with tax preferences. If someone in the 31 percent tax bracket gets a $1 tax deduction or exclusion, he will save 31 cents in taxes. But if his tax bracket is increased to 39.6 percent, that same $1 deduction or exclusion reduces revenue by 39.6 cents.

In other words, higher tax rates automatically increase the size of many tax expenditures, while tax rate reductions automatically reduce them even if no other action is taken. Since the 1986 tax reform lowered the top rate to 28 percent from 50 percent, this alone had a major impact on the estimated revenue loss associate with tax expenditures.

The second factor that led to a rise in tax expenditures in the 1990s was that budget rules made it easier to enact tax cuts than spending increases. Both parties found tax credits to be an attractive way of pursuing their goals. Democrats liked the idea of expanding the earned income tax credit, while Republicans created a child credit.

Tax credits also have the virtue of giving all those who qualify the same dollar amount of tax saving regardless of their tax bracket. That is because unlike deductions and exclusions, which reduce taxable income, credits are subtracted directly from one’s tax liability.

Tax credits also made it easier to enact additional tax cuts. Since close to half of tax filers have no federal income tax liability, any tax rate cut will only benefit the upper 50 percent. But if a tax credit is made refundable, it will also benefit those with no income tax liability. They will get it in the form of a check and give some tax filers a negative tax liability.

Of relevance to today’s tax reform debate is that corporate tax expenditures have shrunk compared with those for individuals. In 1985, corporate tax expenditures amounted to 1.8 percent of G.D.P. and accounted for 21 percent of all tax expenditures. This year, they total just 0.7 percent of G.D.P. and account for less than 10 percent of all tax expenditures.

The reason this is significant is twofold. First, the 1986 reform consisted largely of closing corporate loopholes to finance tax rate cuts for individuals. Second, the tax reform with the broadest support today is a cut in the corporate tax rate. But if this is financed only by restricting corporate tax expenditures, then it will permit only a modest rate reduction.

Changes in the nature of tax expenditures since 1985 present a challenge for today’s tax reformers. The politics that made the 1986 act work cannot be duplicated, and it is unlikely that people will support restricting tax preferences for individuals to finance corporate rate cuts, the opposite of what was done in 1986.

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