Tax Expenditures

The Meaning of Tax Expenditures

In its classic formulation, the tax expenditure concept focuses on revenues not collected by government due to laws that permit businesses and individuals to reduce their tax liabilities. The most common understanding of this concept is that it identifies and measures tax revenues forgone to government as a result of express or implied policy choices by elected officials. One of the most widely discussed definitions of tax expenditures is included in the 1974 Congressional Budget and Impoundment Control Act. This landmark act defines tax expenditures as special exclusions, exemptions, and deductions from gross income along with special credits, preferential tax rates, and deferrals of tax liability. Tax expenditure analysis helps us to better understand the range of methods used by modern government to support policy priorities, shape business and individual economic behavior, and respond to political interests. Lester Salamon argues that tax expenditures are one of the commonly used tools of public policy delivery in modern government; they merit scholarly investigation along with other important policy tools such as grants-in-aid, loan guarantees, and regulations.

The underlying premise of the tax expenditures concept is the need to broaden how we traditionally think about government revenues and spending. Although subjects such as spending authority, budget outlays, and direct program administration are important, they are only part of the picture of what modern government does. While modern governments fund agencies, programs, and services through revenue sources, such as income, sales, and value-added taxes, they also may decrease their overall revenue intake through instruments such as income tax exemptions, deductions, and credits. On the spending side, not only do governments spend [Page 726]directly through tools such as intergovernmental grants and direct transfers to individuals, but they spend also by pursuing policy and political priorities through the tax code, specifically by permitting tax-payers—both businesses and individuals—to reduce their tax liabilities. The latter point is particularly critical to tax expenditures, since it implies that governments also may pursue policy goals by forgoing some revenues that otherwise might be used to fund direct spending on agencies and programs.

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