The Hidden Welfare State Burman and Slemrod: Chapter 7

Tax Expenditures Tax expenditures make up a substantial part of the federal budget. Some of them are larger than the entire budgets of the programs or departments that spend money for the same or related purposes. For example, the value of the tax breaks for homeownership exceeds total spending by the Department of Housing and Urban Development. Tax Policy Center at the Urban Institute

Why have tax expenditures been growing? How do you initiate a new program? Raise taxes and expenditures Cut taxes Which is politically more attractive?

Earned Income Tax Credit (EITC) Example of Married Filing Jointly with One Child

Tax Credit AGI Credit Per $ AGI $0 - $10,050 $0.34 $10,050 - $24,000 $24,000 - $45,200 ($0.16)

Exemptions, Deductions, and Brackets Standard Deduction $12,700 Exemptions 3 $ 4,050 $12,150 Total $24,850 Taxable Income starts at $24,850 AGI $0 $24,850 0% $24,851 $43,500 10% $43,501 $45,200 15%

Effective Marginal Rates Range of AGI Credit Rate Tax Rate Effective Marginal Rate $0 - $10,500 Increasing Credit -34% $10,500 - $24,000 Flat Credit 0% $24,000 - $24,850 Declining Credit No Tax 16% $24,850 - $43,500 Declining Credit with Bracket I Tax Rate 10% 26% $43,500 - $45,200 Declining Credit with Bracket II Tax Rate 15% 31%