Corporate and Individual Tax Expenditures

April 29, 2014

Lawmakers looking to reform the tax code should examine the efficacy of our tax expenditures, writes Alan Cole, economist for the Tax Foundation's Center for Federal Tax Policy.

Tax expenditures are, functionally, "spending" through the tax code. When a taxpayer claims a deduction, a credit or an exemption, his tax bill is reduced by that amount. Because the IRS could achieve the same result by mailing a check to the taxpayer, these tax provisions are called tax "expenditures."

Most tax expenditures -- 87 percent of them, projected at $1.036 trillion in fiscal year 2014 -- are individual ones, while corporate tax expenditures are expected to reach $148 billion.

  • The largest individual tax expenditure is the exclusion of employer contributions to insurance premiums -- a $196 billion expenditure, worth more than all corporate expenditures combined.
  • The largest corporate tax expenditure is the deferral of income from controlled foreign corporations, worth $76 billion. For U.S. corporations abroad, their foreign earnings are not taxed as long as those earnings remain abroad and are not brought into the United States.

Cole divides tax expenditures into three categories: those that make the tax code more neutral, those that contribute to social welfare, and those that benefit one class of corporations (often referred to as "corporate welfare").

  • Most tax expenditures fall into the first category, making the tax code more neutral. But this is not the most efficient way to create neutrality in the tax code. Instead, lawmakers need to redesign the code and make the tax base neutral to begin with.
  • Social welfare expenditures should be redesigned and turned into actual spending items. This would allow all voters to see the costs and benefits of these programs.
  • Corporate welfare should be eliminated entirely, which would allow lawmakers to reduce rates on everyone.

Source: Alan Cole, "Corporate vs Individual Tax Expenditures," Tax Foundation, April 23, 2014.

 

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