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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