Determining what constitutes a tax expenditure has reverberating implications for tax policy because it is often popular to eliminate them to pay for tax reform.
“It is important to ask whether each corporate and individual expenditure serves a reasonable purpose and whether accomplishes its goal in a reasonable way,” said Tax Foundation Economist Alan Cole. “This trillion-dollar area of the tax code deserves examination and a degree of healthy skepticism, but it doesn’t deserve across-the-board elimination.”
The key findings include:
- The list of tax expenditures in a tax system depends heavily on what one considers the normal tax code to be.
- Some tax expenditures are attempts to change the U.S. tax system more broadly, often moving the tax code closer to systems employed by other OECD countries. These piecemeal efforts to change the U.S. tax code suggest that a broad reform to redefine the tax base would be welcome.
- The total cost of tax expenditures in 2015 is $1.339 trillion, with $131 billion in corporate expenditures and $1.208 trillion in individual expenditures.
- The largest individual tax expenditures tend to prioritize health, housing, and individual saving.
- The largest corporate tax expenditure is deferral, which moves the worldwide system of corporate taxation closer to the territorial system used by most other OECD nations.
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