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What are Tax Expenditures?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 November 2016
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Tax expenditures are government spending programs that use the tax code instead of direct spending. They exist in the form of refundable credits, tax rebates, deductibles, and preferential tax rates. Tax expenditures are a somewhat controversial area in terms of politics; some politicians obfuscate the definition by referring to tax expenditures as tax cuts, when in fact they are a form of indirect government spending.

A significant point of many national government budgets, tax expenditures can be used to fund a variety of programs meant to help taxpayers. Credits for buying new homes and automobiles and implementing renewable energy can help governments encourage the economy and green industry by repaying taxpayers. Deductibles for college tuition and mortgage interest help people afford college and keep their homes.

Tax expenditures are sometimes cited as more effective at influencing taxpayer behavior than direct spending. For instance, if the government wanted to encourage the installation of solar panels, it could cut a check to every person that promised to buy solar panels for a home or business. Unfortunately, this would doubtless cause problems, as then a government department would need to check that a person had actually purchased the panels after the money had been issued. By using the tax code to create expenditures, a government could encourage solar panel use by offering a credit for panels purchased in the previous year, and be able to request simple documentation such as a receipt to prove the purchase.

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According to some studies, the largest source of tax expenditures in the United States is the exclusion of employer contributions to employee health care. This expenditure allows employees to cut contributions out of their total income, which may help lower their taxes. Employers are also sometimes permitted to write these expenses off their own taxes as a necessary business expense. In 2008, this tax expenditure cost approximately $131 billion US Dollars (USD).

The controversial nature of tax expenditures tends to revolve around the use and misuse of the concept in politics. Expenditures are sometimes framed as opposite to direct spending, when in fact they are another means to the same end. If the government has a choice between losing $1,000 USD in revenue by crediting solar panels, or by giving each person that uses solar panels $1,000 USD, either way the spent amount remains the same. Unfortunately, some political analysts suggest that expenditures can more easily be framed as tax cuts, which may be more likely to resonate with voters than increasing government spending.

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