Tax Expenditures

SOC Final Exam

What are tax expenditures?

Tax expenditures are losses in government revenue caused by special provisions in the tax code that reduce taxable income or tax liability. These include credits, deductions, exemptions, preferential rates, and deferrals

What are some informal terms for tax expenditures?

They are sometimes referred to as tax breaks or tax loopholes

What is the purpose of tax expenditures?

• To incentivize certain behaviors (e.g. homeownership, investment, employer-sponsored health insurance)

• To support specific sectors (e.g. agriculture, renewable energy)

What is the Tax Expenditure Budget, and why was it created?

The Tax Expenditure Budget, created in 1972, is a tool to track tax breaks and increase transparency by showing how tax code provisions operate like indirect government subsidies

What are some concerns about tax expenditures?

• May overestimate costs (since not all deductions would otherwise be taxed)

• Lack of clear criteria for which provisions are included

• Questions about policy priorities (e.g. why subsidize some behaviors over others)

What is a key benefit of tracking tax expenditures?

It helps reveal the true cost of the tax code and shows how much policy is shaped through taxation rather than direct spending

What are some examples of large tax expenditures?

• Reduced tax rates on dividends and long-term capital gains

  • Cost: $689.6 billion

  • Purpose: Encourages long-term investment

• Earned Income Tax Credit (EITC)

  • Refundable credit for low-income workers

  • Encourages work and offsets payroll taxes

  • Has bipartisan support and is also offered at the state level