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The Use of Tax Credits to Reduce Tax Liabilities Has Exploded in Recent Years

1 min readBy: Kyle Pomerleau, Scott Hodge

Over the past 25 years, lawmakers have increasingly turned to using targeted taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credits to benefit key constituents—such as families with children—or to incentivize certain economic behavior—such as replacing the windows in your home. Tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s differ from deductions in that they directly lower your tax liability rather than reduce your taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. . Some tax credits, such as the Earned Income Tax Credit, the Child Credit, and some educational credits are refundable, meaning you can get a check from the IRS even if you owe no income taxes. Millions of taxpayers receive such refundable checks. The combined cost of these tax credits peaked in 2010 at $233 billion (in today’s dollars) and has since dropped to $176 billion. If tax credits were classified as a spending program, they would be one of the largest domestic programs in the budget.

For more charts like the one below, see the second edition of our chart book, Putting a Face on America's Tax Returns.