Tax Expenditures: A Buchanan–Wagner Critique

Economists James Buchanan and Richard Wagner’s Democracy in Deficit made a simple but unsettling claim: Modern democracies run chronic deficits not because voters are irrational, but because political institutions systematically hide the true cost of government. When the link between spending and taxation is obscured, democratic decision-making becomes biased toward expansion. That insight applies just as forcefully to today’s tax code.

Over the past decade, revenue forgone through tax expenditures—government spending delivered through the tax code in the form of deductions, credits, exclusions, and exemptions—has nearly doubled. Since 2000, the number of tax expenditures has grown from roughly 130 to 175. Yet this tax spending is rarely debated as spending programs, even though tax expenditures function exactly like direct spending programs. They allocate resources, favor specific groups, distort markets, and impose real fiscal costs, just without the visibility of appropriations.

In Buchanan and Wagner’s terms, spending hidden in the tax code is a perfect instrument of fiscal illusion.

The Hidden Spending State in the Tax Code

When Congress wants to subsidize housing, education, retirement saving, or energy, it increasingly does so through the tax code rather than through explicit outlays. The political advantage is obvious: Tax expenditures do not show up as “spending,” are often enacted without offsets, and can be sunset on paper while remaining permanent in practice.

The result is a shadow budget that grows automatically and almost never faces trade-offs. This is precisely the institutional failure Buchanan and Wagner warned about. Democratic politics does not naturally impose discipline; discipline must be built into the rules of the game.

Why Budget Windows Create Fiscal Illusion

The modern budget process invites manipulation. Provisions are sunsetted to reduce their apparent cost, and phase-ins push costs outside the budget window. Expiring policies are also routinely extended under the fiction that they reflect “current policy” rather than new legislation.

A serious rule could reverse these defaults. Temporary tax expenditures would be scored as permanent. Renewals and extensions would be treated as new policies, not baseline adjustments. If Congress wants credit for a temporary provision, it would have to actually let the provision expire.

This is exactly the kind of rule-based constraint Buchanan and Wagner had in mind: not micromanaging outcomes, but altering incentives so that political actors internalize costs they currently ignore.

The SALT Cap as a Case Study

Consider the recent expansion of the state and local tax (SALT) deduction cap to $40,000, scheduled to expire in 2029. No serious observer believes this expiration is binding. Based on long experience, the expectation is that Congress will extend or expand it.

Under current budget conventions, that extension will likely be treated as preserving “current policy,” requiring little or no offset. The fiscal cost will be real, but the trade-off will remain invisible.

Because the SALT expansion is temporary in name only, it could be treated as permanent for scoring purposes. When Congress attempts to extend it, that extension would count as a new tax expenditure, forcing Congress to acknowledge its long-run fiscal cost explicitly rather than burying it in baseline conventions.

Congress could still choose to extend SALT. But it would have to do so with full awareness of its long-run fiscal cost, rather than under the illusion that the policy is temporary or free.

Restoring Trade-Offs to the Tax Code

Buchanan and Wagner emphasized that fiscal discipline cannot rely on good intentions or better forecasts. It must come from institutional constraints that make costs visible and unavoidable. The tax code today does the opposite: It allows spending without budgeting, permanence without accountability, and expansion without choice.

My own preference—and the thrust of much of my work on tax expenditures—is for a far simpler tax system altogether: a broad tax base that does not penalize saving or investment, with few preferences beyond a personal deduction and limited provisions to avoid double taxation of saving. In a world like that, the problem of tax expenditures largely disappears.

But that is not the world Congress inhabits. A principle of constraint governing how tax expenditures are scored, extended, and debated is a second-best solution, better than nothing, designed to slow the quiet expansion of the hidden spending state when first-best solutions are politically unavailable.

If Congress must pay for new spending, it should also have to pay for new spending hidden in the tax code. The tragedy Buchanan and Wagner identified was not that democracies choose badly, but that they choose under distorted rules, and nowhere are those distortions more entrenched than in the tax code.

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