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Tax expenditure analysis (TEA) requires a baseline for identifying tax provisions that provide subsidies or incentives instead of serving to define the tax base and to implement the tax. With respect to the federal income tax, the baseline historically has been the Schanz-Haig-Simons (SHS) definition of income with a few modifications. Critics have continuously and strongly attacked TEA by characterizing the SHS baseline as unprincipled, imprecise, and insufficiently related to our hybrid income/consumption tax system as it actually exists. Since the baseline is hopelessly defective, so the critics argue, TEA is fatally dysfunctional and the results of its application to the various subsidy and incentive provisions in the Internal Revenue Code can be disregarded. This line of attack can be countered by refuting the criticisms of the SHS baseline and we have undertaken to do so in an earlier piece. Nevertheless, even some TEA supporters have suggested that TEA’s effectiveness has been compromised by the intensity of the “baseline battle.” In this vein, a 2008 report of major importance by the Staff of the Joint Committee on Taxation of the U.S. Congress argued that even if the attacks on the TEA baseline were unwarranted, they had so seriously compromised TEA’s effectiveness that adoption of an alternative baseline was called for. The report stated that going forward, the Joint Committee Staff would neutralize the critics by abandoning the SHS baseline and promoting a version of TEA that, to some extent, had no normative baseline and that disregarded the SHS definition even in the area where a baseline was used. Then, early in 2010, the Staff totally reversed itself by abandoning its non-normative approach and reembracing the SHS baseline. Because the Joint Committee Staff is arguably the most important non-partisan governmental voice in U.S. tax reform debates, its rejection of the SHS baseline in favor of a supposedly neutral approach, followed by its 2010 return to SHS orthodoxy, is not merely a short-lived curiosity. Instead, this event is a manifestation of the practical and theoretical difficulties involved in the critically important, longstanding TEA baseline controversy and it merits close analysis to see what light it sheds on the correct resolution of that controversy. In this article, we examine the precursors to the 2008 work of the Joint Committee Staff and describe and evaluate the Staff’s 2008-2010 “new paradigm.” More importantly, we explain why that well-intentioned work was actually harmful to the defense of TEA and why the Staff’s 2010 re-embrace of the SHS baseline is a welcome development. We also argue that the attacks on the traditional SHS baseline of TEA are misguided and, therefore, that it was never necessary to abandon that baseline in order to defend the TEA construct.


30 Va. Tax Rev.

Publication Title

Virginia Tax Review