What is a Tax Expenditure?

posted Jan 25, 2012, 3:58 AM by Bill Duncan   [ updated Jan 27, 2012, 3:37 PM ]
Advocates make the argument that the Education Tax Credit program is really just private money.  They say that taxes not received as a result of deductions or tax credits are really not spending.  This is a twisted case to make, but they try, using some very subtle logic.

Tax expenditures are defined in the Congressional Budget Act of 1974 as “revenue
losses attributable to provisions of the Federal tax laws which allow a special exclusion,
exemption, or deduction from gross income or which provide a special credit, a
preferential rate of tax, or a deferral of tax liability.”


"This study examines a feature of the budget process called the tax expenditure budget.
The tax expenditure concept relies heavily on a normative notion that shielding certain
taxpayer income from taxation deprives government of its rightful revenues. This view is
inconsistent with the proposition that income belongs to the taxpayers and that tax liability
is determined through the democratic process, not through arbitrary, bureaucratic
assumptions. Furthermore, the methodology of the tax expenditure budget is problematic
as its expansive tax base treats the multiple taxation of saving as the norm. By using an
expansive view of income as the underlying assumption of the tax expenditure concept,
this viewpoint institutionalizes a particular bias into the decision-making process."

The conservative position that deductions and credits are not tax expenditures is presented starting on P4.  Anyone who can follow it gets a gold star.  It is so contorted that the reader is on outer space by the end.  And it defies common sense.


From Wikipedia
 

What are tax expenditures?

Tax expenditures are, quite simply, spending programs implemented through the tax code. These programs give people and businesses special tax credits, deductions, exclusions, exemptions, deferrals, and preferential rates in support of various government policies. Some of these programs help people save for retirement, buy a home, or pay for college; others encourage companies to invest in green energy technologies or build nuclear power plants; they even subsidize corporations that drill for oil or purchase real estate; and much more.

The government uses both tax expenditures and direct spending to support its policies. Direct spending is when the government takes taxpayer dollars and gives them to others to spend for a specific purpose. The government uses tax expenditures to accomplish the same goals as direct spending, but it transfers money by lowering taxes for an individual or company instead of giving them the money.

Consider this example to see the similarities between direct spending and tax expenditures: The government wants to create a program that provides $10,000 to every individual who weatherizes his or her home. The government can deliver the subsidy in one of three ways: (1) cut a check for $10,000, (2) create a tax expenditure like a refundable credit worth $10,000, or (3) use a combination of direct spending and tax expenditures. In all three cases the individual who weatherizes his or her home receives $10,000 from the government.

What makes tax expenditures different from other forms of government spending?

The government uses tax expenditures and direct spending for the same purposes, but tax expenditures receive different treatment in two key ways. Most tax expenditures are not subject to the same annual appropriations process as other forms of spending. This means they are less likely to be scrutinized.

Second, tax expenditures appear to be tax cuts instead of spending because they transfer funds to businesses and individuals through tax subsidies. It is therefore generally easier to win votes for tax expenditures than direct spending. And members of Congress often pursue their priorities through tax expenditures as a result, even if direct spending would be more effective and cost less.

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