Tax expenditures are popular - here's why

| Posted in analysis, data, economic development, evaluation, government, tax | | No Comments

The short answer: the public believes tax expenditures cost less than direct spending.

What is a tax expenditure?

The US Government Accountability Office explains that:

Tax expenditures are reductions in a taxpayer’s tax liability that are the result of special exemptions and exclusions from taxation, deductions, credits, deferrals of tax liability or preferential tax rates.

Similar to spending programs, tax expenditures represent a substantial federal commitment to a wide range of mission areas. . . .Tax expenditures are often aimed at policy goals similar to those of federal spending programs.

 

Source: Tax Expenditures: Background and Evaluation Criteria and Questions, GAO-13-167SP, January 2013.

Tax expenditures may be described as revenue losses from these types of special tax terms or as spending or subsidies delivered through the tax code.

Perceptions of tax expenditures

Tax expenditure budgets have brought this aspect of government spending to greater light, and the result seems to be that the public is pretty happy with what it learns. A recent article, New Research on the Stubborn Persistence of Tax Expenditures (1), examines surveys and research studies “showing that the public prefers the government to spend through the tax code rather than directly.”

The articles offers the following conclusions from its review:

  • The public consistently prefers spending through the tax code to spending outside of it, even when the substance and specified cost of the proposed policies are the same.
  • The public believes tax expenditures are cheaper than equivalent spending programs even when the costs are made explicit.
  • Simplifying the details of a tax expenditure did not appear to change these outcomes. In other words, it’s not a lack of understanding that is driving the preference.
  • On the other hand, giving the public information about the distributive consequences of a tax expenditure did seem to matter. Providing information on beneficiaries of tax expenditures was more likely to move opinion than more information on their characteristics or total costs.
  • Partisanship and ideology matter. While both liberals and conservatives favor tax expenditures over direct spending, “the effect is especially pronounced for self-styled conservatives.”
  • The status quo (appears to) matter. Entrenched tax expenditures tend to have high levels of support.

Two conclusions that may resonate in the economic development field are 1) that if politicians compete for votes by offering policies the public wants, then it is no surprise that they enact more tax expenditures instead of direct spending and 2) tax expenditure budgets don’t change people’s minds about tax expenditures (thereby reducing their use) and might actually encourage more tax expenditures as a result of additional interest groups seeking tax benefits in the name of parity.

I encourage you to read the full (but still brief) article, which you can access here

(1) Clarke, Conor, New Research on the Stubborn Persistence of Tax Expenditures (March 21, 2016). Tax Notes, Vol. 150, No. 12, 2016. Available at SSRN: http://ssrn.com/abstract=2759522

 

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