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Tax Expenditures Presented by Todd R. Engwer. Author – Christopher Howard Associate Professor of Government at William & Mary College. Author of The Hidden.

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Presentation on theme: "Tax Expenditures Presented by Todd R. Engwer. Author – Christopher Howard Associate Professor of Government at William & Mary College. Author of The Hidden."— Presentation transcript:

1 Tax Expenditures Presented by Todd R. Engwer

2 Author – Christopher Howard Associate Professor of Government at William & Mary College. Author of The Hidden Welfare State: Tax Expenditures and Social Policy in the United States (Princeton University Press,1997) & Other Journals Ph.D. in Political Science – Massachusetts Institute of Technology

3 Definition A tax expenditure is a provision in a law that usually encourages certain behavior by individuals or corporations by deferring, reducing, or eliminating their tax obligation.

4 Basic Process By law all revenue measures must originate with congress Senate finance committee House means and Ways committee Tax expenditures essentially sole responsibility of Treasury Department and Internal Revenue Service

5 Rule Process Notice of proposed rule making in Federal Register Obtain input – public and representatives in tax area – highly specialized field Issue final regulations Drafting regulated to Treasury/IRS bureaucrats – generally Tax Attorneys Final signoff by IRS Commissioner & Secretary of Treasury

6 History 1974 Budget Act – formally defined tax expenditures Mandated publication of annual tax expenditure budget Initially applied to corporate & Individual income taxes – subsequently expanded to include estate and gift tax

7 Issues Policy debates over tax expenditures have largely been centered around personal income tax US Gov’t publishes two similar but not identical tax expenditure lists First by Treasury Department Second Congressional Joint Committee on Taxation

8 Relation to Key Tools Coerciveness – measures the extent to which a tool restricts individual or group behavior as opposes to merely encouraging or discouraging it Tax expenditures appeal to many policy makers because they appear to entail little coercion. Tax expenditures entice individuals & corporations to behave in socially desirable ways but do not compel them to

9 Tools Directness measures the extent to which the entity authorizing or inaugurating a program carries it out. Tax expenditures are “highly indirect” Primarily used to encourage individuals and corporations to buy homes, equipment etc Public financing & private delivery makes tax expenditures a classic example of “third-party government”

10 Directness continued Detractor – gov’t officials can only make an educated guess regarding what tax expenditures will cost and who will receive them Decision to claim benefits rests with the individual – contributes to the uncontrollability Third-party providers a key political constituency

11 Earned Income Tax Credit 1975 temporary tax expenditure Permanent in 1978 Provided incentive for unemployed to work Received cash rebate regardless if tax was owed or not Shown to be effective increasing workers wages and reducing poverty

12 Automaticity Measures the extend to which a tool utilizes an existing Administrative structure to produce its effects rather than having to create its own special administrative apparatus Tax expenditures highly automatic Attractive to policymakers – aid can be given quickly ex. Incentive checks

13 Visibility 1986 Tax reform act – Reagan Era Eliminated interest deduction on consumer debt Essentially lowered income tax rate w/out adding to deficit Repealed investment tax credit for business 1990 Budget Enforcement Act New or expanded tax expenditures had to be offset by tax increase or spending cut Little effect – did not apply to existing measures

14 Variants Tax expenditures not really a single tool more like a family of tools Policymakers create deductions, exemptions or specials exclusions To reduce tax liability Lower tax rates through deferment on capital gains Can create tax credits

15 Highlights Policymakers decide how to target the program Narrowly defined - more difficult to determine eligibility Longevity – business lobby for permanent tax expenditures for predictability Tax expenditures can be temporary then converted to permanent

16 Tool Selection More choice means more efficiency Benefits delivered swiftly & cheaply Tax expenditures can help with market corrections Reduces demand for direct tools – health care Social stigma reduced Political ideology

17 Challenges Tax expenditures are not as easy to implement as politicians claim Changes require tax code to updated Tax expenditures is a direct conflict with revenue mission of IRS Force Treasury & IRS agents to use discretion to determine intent of law and how to implement into the tax code

18 Other Challenges Congress & President Multiple tax expenditures addressing so many problems makes addressing a policy issue in a unified manner difficult Taxpayers challenges Tax code complex often forces individuals to seek professional services Tax code can be interpreted differently

19 Compliance US Gov’t uses mandatory withholding Citizen assess tax expenditure eligibility Unreported Income largest source of tax evasion IRS uses audits to assist with compliance Job security for accountants and tax attorneys Costly for citizens to pay for tax service as well as time factor

20 Equity Horizontal equity – taxpayers with comparable incomes have comparable tax liabilities Often inequitable Vertical equity – tax burden should be based on ability to pay/progressively higher marginal tax rate Tax expenditures generally favor the more affluent Potential solution for parity would be to convert tax deductions to tax credits

21 Overall Assessment Efficiency – often takes years to translate law into action Effectiveness – often criticized for lack of coordination with direct spending programs/competing interest Legitimacy – tax code creates a loss of trust in gov’t – frustrated by bureaucracy Causes citizens to look for ways to beat the system

22 Potential Solutions Strip tax code of all tax expenditures Enact a moratorium on changes to tax code Standardize eligibility criteria Clearly define/standardize definitions Combine related tax expenditures into one category Increase standard deduction by replacing tax expenditures

23 Final Thoughts Overall it would be difficult to determine the level of effectiveness due to scope of tax expenditures Despite the difficulty tax expenditures can create some positive outcomes Charitable giving Hope tax Credit/Lifetime Learning credit for college students


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