Policy Issues • Tax Policy
Tax Expenditures
Tax expenditures are provisions in the tax code that reduce revenue for a specific purpose, often similar to a spending program. They can take the form of exclusions, deductions, credits, preferential rates, or deferrals.
Common Types
- Exclusions: income that is not included in taxable income.
- Deductions: amounts subtracted from income before tax is calculated.
- Credits: amounts subtracted directly from tax liability.
- Preferential rates: lower rates applied to certain income types.
- Deferrals: provisions that delay when tax is paid.
Why They Are Tracked
Tax expenditures are tracked to improve transparency and to help evaluate how the tax code supports policy goals. Tracking provides a way to compare the size and impact of tax-based support to direct spending approaches.
Evaluation Considerations
- Who benefits and by how much?
- Does the provision achieve the intended policy objective?
- What is the cost in foregone revenue?
- How complex is the provision to administer and comply with?
- Are there unintended incentives or loopholes?
How Tax Expenditures Relate to Proposals
Revenue proposals may expand, modify, or remove tax expenditures. Clear documentation helps show how changes affect revenue and distributional outcomes.