by Alan Cole
Tax Foundation
April 24, 2014
A tax expenditure is a departure from the default tax code that lowers a taxpayer’s burden—for example, an exemption, a deduction, or a credit. They are called tax “expenditures” because, in practice, they resemble government spending. For example, a taxpayer claiming the American Opportunity Tax Credit gets a lower tax bill because he has qualifying college expenses—but one could achieve a functionally identical result by administering the credit through a spending program instead of the IRS. The tax credit “spends” by forgoing the revenue collection in the first place. The issue of what constitutes a tax expenditure has important implications for tax policy, because the elimination of tax expenditures is a popular way to pay for tax reform. It is thus important to know that some tax expenditures represent partial moves toward a neutral tax base and are not arbitrary pork-barrel spending.

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