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Tax Foundation Studies US Tax Expenditure Reform

by Scott Hamilton, Tax-News.com, Washington

03 August 2016


The Tax Foundation (TF) has decided, in an updated review, that "not all tax expenditures are equally worthy of elimination," although that would be "a popular way to pay for tax reform" in the United States.

Describing a tax expenditure as "a departure from the normal tax code that lowers a taxpayer's burden, such as an exemption, a deduction, or a credit," TF calculated that their total cost from 2016-2025 will be USD17 trillion. The great majority (USD15.1 trillion) are to be found in the individual tax code.

Rather than a blanket approach to their elimination, TF recommended that "lawmakers interested in reforming this area of the tax code should examine each expenditure individually [and that] classifying expenditures is critical in determining which are worth keeping."

TF suggested that, as the primary purpose of the Internal Revenue Service should be to raise revenue, tax expenditures designed entirely to subsidize specific industries "deserve outright elimination."

On the other hand, it said that tax expenditures "designed with broader social policy priorities in mind, [such as] the child tax credit, are quite obviously spending provisions reflecting a legitimate governing priority. However, the way in which it provides for these priorities should be up for debate."

It noted, for example, the largest individual tax preference (at a ten-year cost of USD2.7 trillion) is the exclusion of employer contributions to insurance premiums that "reflects a tax preference for those taxpayers with employer-provided health insurance. … It is also the clearest example of Congress prioritizing some economic activities over others. Health is no doubt important, but the use of the tax code to bundle employment together with health insurance is worthy of skepticism."

In like manner, TF decided that, rather than the deductibility of mortgage interest on owner-occupied housing (USD948bn), which is the largest individual tax deduction and the third-largest individual tax expenditure, there should be "some type of comprehensive treatment of interest rather than a specific one for owner-occupied housing alone."

The TF therefore concluded that "it is important to ask, for each expenditure, whether it serves a reasonable purpose and whether it accomplishes that purpose in a reasonable way. 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."

TAGS: tax | corporation tax | tax credits | United States | tax breaks | revenue statistics | tax reform | individual income tax | Tax

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