The Politics of Tax Expenditures and Tax Reform

A new CBO report on “tax expenditures”–the cost of the host of preferences, exclusions, deductions and credits that affect federal income taxes on individuals (corporate tax expenditures are another matter)–didn’t tell us much we didn’t already know, but aggregating this information is illuminating.

Tax expenditures cost a lot (the highlighted “top ten” items, which account for two-thirds of the total cost, together carry a current-year price tag of over $900 billion) and they are overwhelmingly regressive in impact, varying directly with income and especially benefitting the very wealthy. Over half the total benefit of the “top ten” expenditures accrue to the top income quintile, and 17% is harvested by the top 1%. The benefits that are most concentrated at the top of the income ladder are the exclusion from taxable income for pension contributions and earnings; deductions for state and local taxes, mortgage interest (usually thought of as a “middle class” tax expenditure) and charitable contributions; and the preferential treatment of capital gains.

The single largest tax expenditure category, the exclusion of employer-sponsored health care benefits from taxable income, is relatively well-distributed, though the upper and upper-middle classes benefit most.

Two tax expenditure categories (together costing about as much as the pension exclusion) are heavily concentrated on the bottom quintile of the income ladder: the earned income and child tax credits.

If properly examined, this blizzard of numbers from CBO help explain the partisan politics of the “tax reform” debate. Republicans favoring elimination of tax expenditures in exchange for across-the-board income tax rate reductions are in essence proposing to take money out of one pocket of the very wealthy and rebating it into another. They will oppose elimination of or significant reductions in the health care benefit exclusion unless it is accompanied by a repeal of the Affordable Care Act, so that’s really off the table for the time being. To the extent that they increasingly deplore the EITC and the refundable feature of the child tax credit as “welfare,” the GOP version of “tax reform” could be highly regressive in its impact on the neediest Americans.

For Democrats, the obvious strategy, aside from resisting regressive across-the-board rate reductions, is to insist on reducing tax expenditures by “capping” the total dollar amount any taxpayer can receive.

That’s pretty much all you need to know.

Washington Monthly - Donate today and your gift will be doubled!

Support Nonprofit Journalism

If you enjoyed this article, consider making a donation to help us produce more like it. The Washington Monthly was founded in 1969 to tell the stories of how government really works—and how to make it work better. Fifty years later, the need for incisive analysis and new, progressive policy ideas is clearer than ever. As a nonprofit, we rely on support from readers like you.

Yes, I’ll make a donation

Ed Kilgore

Ed Kilgore is a political columnist for New York and managing editor at the Democratic Strategist website. He was a contributing writer at the Washington Monthly from January 2012 until November 2015, and was the principal contributor to the Political Animal blog.