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Tax Expenditure: Definition, Impact and Analysis
Tax expenditures are an often misunderstood concept in the financial and economic world. In this article, we will explore the definition of a tax expenditure, its impact on the economy, and how to analyze the data associated with it.
Tax Expenditures Defined
The Joint Committee on Taxation (JCT) defines a tax expenditure as “a tax provision that alters the amount of tax due in a manner that is akin to spending through the tax code.” This definition is further clarified by the JCT as “a permanent tax provision that reduces the amount of tax due by providing an exemption, deduction, credit, deferral, or preferential tax rate.” This definition is important to understand as it helps to differentiate a tax expenditure from a spending program, which provides a direct benefit to an individual or organization.
The Impact of Tax Expenditures
Tax expenditures have a significant impact on the economy. According to the JCT, the total tax expenditure in 2016 was $1.4 trillion, which amounts to 8.6% of gross domestic product. This large amount of spending through the tax code has a direct effect on economic growth. Tax expenditures also have a significant impact on the budget deficit, as the amount of money lost in tax revenue due to the tax expenditure must be made up through other forms of government spending.
Analyzing Tax Expenditures
When analyzing tax expenditures, it is important to consider both the short-term and long-term effect of the policy. In the short-term, tax expenditures can have a positive effect on the economy, as they can provide an incentive for individuals and businesses to invest in certain sectors or activities. In the long-term, however, it is important to consider the impact that the tax expenditure will have on the budget deficit.
