This observer is no huge fan of the term “tax expenditure,” which implies that tax revenue has been collected and spent in some way. Those who use the term “tax expenditure” are actually describing cases in which tax is not collected for one reason or another.
A fundamental flaw in the income-tax system is the idea that Congress should legislate with tax breaks — that it should withhold taxation as a reward for doing the things that lawmakers cannot persuade citizens to do on their own.
Both parties are guilty of this form of tax abuse, which the bureaucracy calls tax expenditure. It’s one of the few vestiges of bipartisanship on Capitol Hill. According to data from the Treasury Department and the Joint Committee on Taxation, which are charged by Congress with reporting on the problem and given no power to do anything about it, tax expenditures exceeded $1.2 trillion in fiscal 2012 — just a little less than the individual income tax takes in.
There are a couple of hundred officially recognized tax expenditures, plus some that the Treasury and the Joint Committee on Taxation ignore, such as the personal exemptions and the standard deduction.
Most itemized deductions — pretty much everything on Schedule A of Form 1040 — are counted as tax expenditures. And special rates for special kinds of income, such as those for capital gains and dividend income, are considered tax expenditures.
Some of the biggest tax expenditures are exclusions from taxable income for a variety of employer-provided fringe benefits, including health insurance, term life insurance, and accident insurance; educational assistance; and coverage of commuter costs. …
… The sum of tax expenditures is up about 44% beyond inflation since the Tax Reform Act of 1986, which was the last time Congress took serious aim at its own tax abuses.
Two-thirds of the growth came from just three accounts: the Earned Income Tax Credit, a form of negative income tax that subsidizes low-wage workers; the child credit, which subsidizes the instinct to have babies; and the income exclusion for employer-provided health insurance, which subsidizes big employers and their employees and stimulates demand for health care. …
… Even the best tax expenditures clutter the code with trivia and add to the complexity of filing taxes. The worst also fritter away money that would be better used lowering tax burdens for all citizens.