PART V. FEDERAL TAX EXPENDITURES The individual and corporate income taxes contain numerous provisions granting favorable tax treatment for income expended on certain activities, or earned in certain ways. These favorable tax provisions take the form of exclusions, credits, deductions, preferential tax rates, or deferrals of tax liability. In all cases, the purpose of the favorable tax treatment is to encourage taxpayers to undertake favored activities. Collectively, the revenue lost because of tax reductions owing to favorable tax treatment is known as tax expenditures. The concept of tax expenditures is based on the premise that tax reductions enacted to favor certain activities are analogous to direct governmental expenditures paid through spending programs for those activities. Like direct expenditures, tax expenditures for an activity have budgetary effects; unless offset by tax increases or spending cuts, they increase the Federal deficit. And like direct expenditures, tax expenditures result in increased disposable income for beneficiaries of the expenditure. According to this reasoning, tax expenditures are analogous to entitlement expenditure programs, under which expenditures are made without other specific legislative authorization or appropriation. Like spending under entitlement programs, tax expenditures are available to any individual or corporation that meets the statutory and regulatory criteria established for eligibility for program participation. Under this view, tax expenditures are entitlement programs administered by the Internal Revenue Service. Some observers challenge the entire theory of "tax expenditures." Under this dissenting view, the theory of tax expenditures is based on the flawed premise that the citizen's income is "owned" by the Government. These observers argue that the concept of tax expenditures arises only if one adopts this faulty premise and thus believes that any money not taken in taxes is "spent" by the Gov ernment. Supporters of the concept of tax expenditures respond that the term is not applied to all income not taken by the Government in taxes. Rather, it is only applied to specific exemptions and other tax provisions which benefit specific activities without regard to theoretical principles governing the definition of income. These specific incentives, they argue, are indistinguishable for economic and budgetary purposes from direct Government outlays for preferred activities. The following tax expenditure estimates were prepared by the staff of the Joint Committee on Taxation.1 (See: Joint Committee 1 The estimates were prepared in cooperation with the staff of the Office of Tax Analysis in the Treasury Department. on Taxation, "Estimates of Federal Tax Expenditures for Fiscal Years 1992-1996," (JCS-4-91) March 11, 1991, herein cited as March 11, 1991, tax expenditure report). In preparing its measurement of tax expenditures, the Joint Committee staff follows the definition of tax expenditures that appears in the Congressional Budget Act of 1974: "* those 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." (Congressional Budget and Impoundment Control Act of 1974, P.L. 93-344, section 3(a)3.) The legislative history of the Congressional Budget Act of 1974 indicates that tax expenditures are to be defined with reference to a normal income tax structure. According to the definition used by the staff of the Joint Committee on Taxation, the normal income tax structure of the individual income tax includes one personal exemption for each taxpayer, and one for each dependent; the standard deduction, which serves as a general minimum deduction for all taxpayers; the existing tax rate schedule; the limit on using passive losses to offset other income; and deductions for costs incurred in producing net income, e.g., investment expenses or the cost of the tools that a mechanic purchases for his job. (March 11, 1991, tax expenditure report, page 3). In addition to preparing estimates of Federal tax expenditures, the staff of the Joint Committee on Taxation has written an extensive discussion of the measurement of tax expenditures, problems in measurement, and measurement issues on which they differ with other estimators. This discussion also appears in the March 11, 1991, tax expenditure report. In addition, other tables included in the March 11, 1991, tax expenditure report provide distributional data for tax expenditures. Table 1 shows an estimate of Federal tax expenditures for fiscal years 1992 through 1996. The tax expenditures are grouped in this table in the same functional categories as outlays in the Federal budget. Estimates are shown separately for individuals and corporations. The addendum to table 1 shows the sum of tax expenditures for individuals and corporations for fiscal years 1992 through 1996. As can be seen in the addendum, tax expenditures total $374.9 billion for fiscal year 1992. |