A New Look at Tax Expenditures: Viewing Tax Expenditure (at all levels) as Spending

Katja Kleine, U.S. Domestic Campaigns Consultant
June 11, 2013

The United States has a long history of using the tax code to raise revenue. Taxes fund the services government provides, including national defense, education, and poverty reduction. The tax code is also used to incentivize or deter certain behaviors. For example “sin taxes” are taxes on goods or services that do not necessarily improve society as a whole, such as the consumption of alcohol. We place taxes on those goods to deter people from using them or using them too much. Conversely, we also have tax expenditures, which are used to incentivize a certain purchase or action. For example, the home mortgage interest deduction was created to encourage Americans to purchase houses, because a societal benefit was assumed for homeownership.

As RESULTS volunteers, we often defend and support some of the most vital tax expenditures in our federal system, the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). Both of these credits help hardworking low-income families maintain a livable annual income and offset the regressive payroll taxes. The EITC especially, incentivizes workforce participation by supplementing low wages. But, too often we focus on these specific expenditures without seeing them in context and comparison to other expenditures in the tax code.

Luckily, a new report by the Congressional Budget Office (CBO) helps to connect the dots. It highlights the ten most costly tax expenditures in the United States, which fall under four categories: Exclusions from Taxable Income, Itemized Deductions, Preferential Rates on Capital Gains and Dividends, and Tax Credits. Because tax expenditures either require a taxpayer to pay less in taxes or provide some sort of refund, all of these 10 expenditures decrease the amount of revenue that the federal government has to spend. In fact, the CBO estimates that these ten tax expenditures will cost the federal government over $900 billion in FY 2013. Since these expenditures make up over 5 percent of our GDP, it is important to understand where they are going.

Shares of Selected Major Tax Expenditures by Income Group, 2013

As you can see from this graph in the report:

  • Over half will go to the top fifth
  • 17 percent will go to the top 1 percent of Americans
  • Only 8 percent will go to the lowest fifth

Too often, the EITC and CTC are targeted because they are refundable; there is a physical cash transfer that is happening between the government and the working family. Whereas most deductions or exclusions from taxable income reduce the amount of taxes a household owes. This report shows that those arguments are unfounded. The CBO highlights that most of the tax expenditures are distributed unevenly, with credits being the only category that favors the lowest fifth. We need to change the attitude about how all tax expenditures are viewed whether or not there is a physical cash transfer. If we view all tax expenditure as social spending to incentivize good behavior (in the case of the EITC and CTC, working and raising children), we weaken one of the major attacks against the EITC and CTC.

TAKE ACTION: Urge Congress to protect and make permanent the expansions to the EITC and the CTC.