Tax Expenditures: Overview and Analysis (CRS Report for Congress)
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| Release Date |
April 30, 2015 |
| Report Number |
R44012 |
| Report Type |
Report |
| Authors |
Donald J. Marples, Specialist in Public Finance |
| Source Agency |
Congressional Research Service |
Summary:
Tax expendituresârevenue losses associated with targeted provisions that move the income tax away from a "theoretical normal" tax systemâare a long-standing feature of the U.S. tax code. In some ways, tax expenditures resemble direct spending programs. They both have similar budgetary effects and provide incentives that alter the allocation of resources. Hence, tax expenditures, like direct spending, are one of the ways that the federal government plays a role in shaping the economy.
Tax expenditures, however, do not regularly receive the same level of scrutiny as direct spending programs. Also, unlike direct spending programs, the revenue loss associated with most tax expenditures is only limited by eligibilityâmuch like mandatory spending programs. A consequence of the limited oversight placed on tax expenditures is that activities may be supported by tax expenditures that have insufficient political support for funding through a direct spending program.
During the last 40 years, the level of tax expenditures has varied both as a function of taxes collected and as a share of the economy. One possible explanation for this variability is that tax reform historically reduces the scope of tax expenditures, which otherwise grow. Growth in tax expenditures has exceeded that of discretionary spending, but not mandatory spending, over the same time period.
The revenue loss from tax expenditures is concentrated among a limited number of provisions, with 66% of the revenue loss attributed to the top 10 tax expenditures against the individual income tax. In addition, the benefits of tax expenditures against the individual income tax are concentrated among upper-income taxpayers. A recent Congressional Budget Office (CBO) analysis of selected tax expenditures found that 51% of the benefits went to the top 20% of taxpayers.
Tax expenditures are a common target when base-broadening tax reform is pursuedâlike with the Tax Reform Act of 1986 (P.L. 99-514). This may be the result of tax expenditures being defined as being outside the normal tax codeâmaking them a clear source for base-broadening. However, there are impediments to base broadening by eliminating or reducing tax expenditures, as some may serve important purposes, others are important for distributional reasons, and many are technically difficult to change or are broadly used by the public and quite popular.
