NCPA - National Center for Policy Analysis

Corporate and Individual Tax Expenditures

August 13, 2015

Differentiating between tax expenditures and the "normal" tax code is both subjective and difficult. By definition a tax expenditure is a decrease of a taxpayer's burden through exemptions, deductions or a tax credit. Elimination of tax expenditures is a popular way to pay for tax reform, but a haphazard elimination of all tax expenditures, regardless of kind, would be misguided, says Alan Cole of the Tax Foundation.

According to the Office of Management and Budget, a projected $1.208 trillion for the fiscal year 2016 will be spent on individual tax expenditures. 

  • The largest individual tax expenditures tend to prioritize health, housing and individual savings.
  • Deductibility of mortgage interest on owner-occupied housing is the largest individual tax deduction at ($69 billion).

Although smaller than individual, some corporate tax expenditures are quite substantial.

  • Deferral of income from controlled foreign corporations ($65 billion) allows for corporations to defer taxes on foreign earnings as long as the earnings remain invested abroad.
  • Deductions for U.S. production activities is the equivalent to reducing the corporate income tax rate from 35% to 31.85% on income from qualified domestic production activities.

These and other tax expenditures can be divided into roughly three categories:

  • Those that modernize the tax code and move it toward tax systems similar to ones used by U.S. trade partners.
  • Tax expenditures designed with broader social policy priorities in mind.
  • Subsidies to specific industries.

The policy recommendation is to eliminate expenditures in the third category, discuss elimination or modification for those in the second and keep tax expenditures in the first.

Source:  Alan Cole, "Corporate and Individual Tax Expenditures

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" Tax Foundation, August 3, 2015.

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