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What's a 'tax expenditure'? We decode a controversial budget term

Tax breaks like the home mortgage deduction confer financial benefits, and some argue they're part of the government safety net.

For the average person walking down the street, a tax expenditure is piece of meaningless jargon. But it gets used in a lot in budget debates, and if you know what the word means, those debates can get a lot more interesting -- and revealing. 

So here's a crash course. Tax expenditure literally means, "government spending, through the tax code." Which is weird because usually we think of taxing and spending as opposites. 

But Congress has written into the tax code a bunch of credits and deductions and exemptions for certain groups -- all kinds of groups: people with kids, people who have college savings accounts for their kids, people who don't earn a lot, people who’ve earned enough to own a home. 

And in the eyes of many budget wonks, all those tax credits and deductions and exemptions aren’t much different than the spending the government does on social programs like Medicare or Food Stamps.

Take that tax deduction home owners get on their mortgages.

“We could have a housing policy in the United States where everyone got a check every month to help them pay their mortgage,” says Suzanne Mettler, a political scientist at Cornell. “But instead we channel it through the tax code and we simply allow people to pay less,” she says.

From an accounting perspective, it's the same thing, Mettler argues.

“And like any social policy, it's targeted to particular groups of people that we think of as deserving. It's for some broader public good. We think it's good to have home owners in the United states,” she says.    

According to Mettler’s calculations, today the government "spends" more than $1 trillion a year on tax expenditures.  That's more than we spend on Medicare and Medicaid combined, and way more than on food stamps.

But before you casually weave the phrase "tax expenditure" in to your next dinner party, Richard Burkhauser, an economist also at Cornell, has a warning. He calls the phrase “a very slippery concept.”

Burkhauser has a problem with the idea that by giving someone a break on their taxes, the government is somehow spending money. He says, that implies that money belonged to the government, when it works the other way around.

“People who've earned money in the marketplace have earned it. It’s their money,” he says. “And we collectively decide how much of our money, we are going to give to the government.”

Whether you call them tax breaks, or tax expenditures, Burkhauser and Mettler agree that just like other parts of the safety net, these things transfer money from one group to another. But unlike other parts of the safety net, the money often flows from poorer Americans, to richer ones.

Show us your safety net: How did you get by when times got tough? And when times were good, what helped you get to that point? Click here to share your answer.

About the author

Krissy Clark is the senior reporter for Marketplace’s Wealth & Poverty Desk.
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Could it be that the reason the top 20% benefit more from tax breaks is that the top 20% pays more in taxes?

A recent Presidential candidate famously pointed out that 47% pay no taxes at all. It is difficult to cut taxes on those who pay no taxes. There are tax credits, but those are true expenditures rather than tax breaks.

There is also some room to argue with your contention that tax breaks always provide a greater benefit to the wealthy. Take the home mortgage deduction as an example. If two buyers each purchase a home for $200K, you would expect them to both receive a similar incentive. But if buyer A puts 20% downpayment and has excellent credit he gets a low interest rate, let us say 4%. Buyer B puts only 3% down and has questionable credit ends up with a loan that balloons to 9% after 3 years. In this case buyer B would pay a higher rate on a larger balance and get a much larger tax deduction.

That is two identical homes, but one buyer is getting 2 1/2 to 3 times the deduction. In this way we could say that tax breaks are very progressive.

There is a Civil War between spending and belt tightening. The plantation owners were born and bred into an economic system that made their prosperity dependent upon the institution of slavery. The plantation owners of today depend upon the institution of tax expenditures that reliably redistribute $1 trillion in wealth to the top in both good and bad economic times. For more than 20 years all increases in wealth have been redistributed to the top 10% while the middle class lost ground and the bottom half of the country gradually lost more than 70% of their net wealth.
The south has learned to prosper without slavery and the country can learn to prosper without tax expenditures. Unfortunately, the only reform in play is Rep. Camp's desire to eliminate just enough tax expenditures to enable the top individual and corporate tax rates to be reduced to 25%. This will enable successful investors and corporations to become even more profitable without any risk, without growing the economy and without creating a single new job. In theory, this modern slavery could continue to shift wealth to those who don't need it for decades.
The economic Civil War can be avoided if we stop fighting about spending and focus on better taxing. A revenue neutral 2% net wealth tax (excluding $15,000 and $500,000 in retirement funds) could create full employment by eliminating the job killing payroll taxes and reduce the income tax to 8% (because no tax expenditures are not needed with very low rates). Read more at TaxNetWealth.com

This is a great topic but I'm concerned that your examples and comparisons to food stamps, etc. may leave the impression that "tax expenditures" help primarily the poor. Burkhauser and Mettler's statement at the end deserves further development: "But unlike other parts of the safety net, the money often flows from poorer Americans, to richer ones." In his March 5, 2013 Congressional testimony, Jared Bernstein clearly illustrated how the top 20% of income earners benefitted far more than others under the 2012 tax expenditure. There are also corporate "tax expenditures" which include the infamous "Carried Interest Loophole" and S-Corporations. Benefits are greatest to those with the highest income. The current highly regressive tax expenditure system is sorely in need of revision to, as Bernstein argues, increase fairness and efficiency while reducing the deficit.

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