Tax expenditures

Most of the presidential candidates have unveiled new tax plans for the federal government. One of the terms that comes up regarding these plans is tax expenditures. What exactly are these and why are they important?  N.C. State University economist Mike Walden responds.

“Well, let me translate… . When you hear the term tax expenditures in any kind of debate about taxes, what you should think about here is really the value of exemptions, deductions and credits given in the tax code. That’s really what the term tax expenditure refers to.

“So, for example, if you make a charitable deduction, you get to deduct that from your taxable income. That’s considered, in this parlance, a tax expenditure. Tax expenditures are big. They represent at the federal level several hundreds of billions of dollars. They also represent additional tax revenue that the federal government or any government that’s giving these could get back. And a big debate that I think you’re going to hear this year is, Should we have a tax code that gives fewer exemptions, deductions, and credits but that has lower tax rates? Or should we have a tax code that does have targeted exemptions, deductions and credits?

“But in order to make up for the lost revenue you have to have higher tax rates. That’s a debate that we’ll hear this year. It’s actually been a long-standing debate in the country for decades.”