The Misunderstood History of Credits, Deductions, and Loopholes

August 22, 2013

Individual Tax Expenditures Have Grown Dramatically

Washington, D.C., August 22, 2013—The various credits, deductions, and loopholes in the tax code known collectively as “tax expenditures” have increased dramatically since the last major reform effort, and now account for almost twice the cost that they did in the early 1990s, according to a new study from the Tax Foundation.

“Congress last passed a major overhaul of the tax code in 1986, which reduced the total cost of tax expenditures by about one-third,” said Tax Foundation chief economist William McBride. “Beginning in the mid- to late 1990s, however, numerous tax expenditures were added, expanded, or otherwise allowed to grow.”

Today, the tax expenditure budget is $1.2 trillion a year, which represents inflation-adjusted growth of 44 percent since 1986 and 96 percent growth since 1991, when tax expenditures were at their lowest.

All of the growth in the cost of tax expenditures since 1986 has been in the individual side of tax code, with about two-thirds of the inflation-adjusted increase coming from just three provisions: the earned income tax credit, the child credit, and the exclusion for employer-provided healthcare. Corporate tax expenditures have actually declined, such that their share of the tax expenditure budget is now about 9 percent, half of what it was in 1986.

Tax expenditures can be grouped into three major categories: first, social welfare programs run through the Internal Revenue Service, like the earned income tax credit; second, “corporate welfare” carveouts meant to help certain industries, like renewable energy credits; and third, provisions that mitigate the double taxation of saving and investment, like the preferential rates on capital gains and dividends. Of those three, social welfare programs account for approximately 37% of the total budget, corporate giveaways take up 3%, and provisions that encourage saving and investment take up 60%.

“Some of the social welfare expenditures may achieve some other purpose, such as more redistribution, more healthcare, or more education,” added McBride.  “Unfortunately they come with many downsides relating to their implementation through the tax code, namely ineffectiveness, fraud, abuse, and overspending. One avenue for tax reform would be to move these provisions to the spending side of the ledger, overseen by a spending agency subject to the annual appropriations process rather than the IRS.”

Tax Foundation Fiscal Fact No. 391, “A Brief History of Tax Expenditures” by William McBride, is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Communications Manager Richard Morrison at 202-464-5102 or morrison@taxfoundation.org.

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