Monday, March 18, 2013

My simple explanation of what a "Tax Expenditure" is---this is a term you WILL hear more about in the coming weeks as we approach ANOTHER budget crisis.

My take on the difference between a Tax Expenditure and a Government Expenditure.  This stuff tends to hurt most peoples brains BUT the distinction matters because it is a BIG topic of discussion with Congress and the President as they attempt to tackle our Federal budget problem(s).

(When I refer to "Government" below, I am referring to the Legislative and Executive branches because they determine taxing and spending policy)
You earn $1,000 in income.  Government taxes that income at 10%.  You pay $100 in taxes. Government then spends that $100 on a program to promote clean air.  You are taxed and the government spends it--- a straight up "Direct Government Expenditure" towards a policy goal).
Alternative scenario.
You earn $1,000 income. Government taxes that income at 10% and you owe $100 in taxes. Assume at this moment the Government has your $100.  Instead of spending it directly on a program to promote clean air, government returns it to you in the form of a $100 tax credit for buying a hybrid car to promote clean air.  You have your $100 back to spend on something specific.
This is referred to Government spending (to accomplish a goal they COULD do themselves with the tax revenue) through the Tax Code---or more simply, a "TAX EXPENDITURE" 
A Government Expenditure is when government taxes you and spends the money directly to achieve a policy goal.
A Tax Expenditure is when the government forgoes the tax revenue it WOULD HAVE collected from you and though tax credits and/or deductions allows you to spend it on a specific thing to achieve a policy goal.
Below is a list of the most expensive and popular Tax Expenditures.  The numbers to the right represent the amount of tax revenue forgone by the Federal government because of the granting of various tax deductions and tax credits to achieve various policy goals. (number is "billions of dollars")
tax expenditures deductions
Source: Business Insider

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