Spending by Any Other Name Smells as Sweet: Tax Expenditures
In the complexity that is our tax system, there’s a special group of tax law provisions that significantly change how the regular tax rates affect individual and corporate taxpayers. Known as tax expenditures, they are changes to the regular rate structure that often have social or economic goals.
Most tax expenditures function as mandatory open-ended spending programs that grow indefinitely. This use of potential revenues—and the higher tax rates required on a smaller tax base--are not weighed against other budget priorities. They are are also less transparent than mandatory spending, since it is harder to “follow the money” or even estimate their costs. And that lack of transparency allows tax expenditures to be far more regressive than people realize. Although many may seem like “middle-class tax breaks,” they tend to benefit higher-income taxpayers more than any spending program (including Social Security). They also can be wasteful. Tax expenditures which are designed to encourage behavior (such as homeownership) tend to require a lot of “wasted money,” since they are often very broad. Specifically, they mostly “pay” people to do what they would have done anyway.
Tax expenditure provisions have become increasingly popular to lawmakers. They are designed to encourage or reward economic behavior or provide benefits to citizens, rather than funding spending programs through the annual appropriations process. For example, according to the Joint Committee on Taxation, the February 2009 stimulus bills created 15 new tax expenditures designed to stimulate homeownership, subsidize health insurance coverage for the unemployed, and the “Making Work Pay” tax credit. Below is a list of the top tax expenditures, according to JCT:
|Deduction of mortgage interest on owner-occupied homes||$573|
|Exclusion of employer contributions for health care, health insurance premiums||$568|
|Exclusion of pension contribution and earnings||$533|
|Reduced rates of tax on dividends and long-term capital gains||$419|
|Exclusion of Medicare benefits||$317|
|Earned income credit||$261|
|Deduction of state and local taxes||$250|
|Deduction for charitable contributions||$184|
|Child tax credit||$160|
|Exclusion of capital gains at death||$159|