Tax Expenditures Should Be Measured and Evaluated

Greater understanding of comparative effectiveness would help government enact programs that deliver maximum bang for the buck.

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Tax expenditures are typically not measured or evaluated for effectiveness despite making up such a large portion of overall spending. Direct spending, by contrast, is subject to annual performance measurement, budget review, and often in-depth evaluative  research.

Putting a critical eye on tax expenditures can help determine the best approaches to achieve our goals. The type of subsidy—for example, a tax credit versus a tax deduction versus a preferential rate—used to deliver a tax expenditure can produce different results. Some studies suggest that tax expenditure spending programs that are intended to stimulate the economy may be more effective when delivered through reduced  withholding rates instead of as lump-sum tax rebates. These two subsidies deliver the same amount to people, but a reduced withholding rate makes people’s take-home pay look bigger while a tax rebate looks like a government-issued check.

Determining whether direct spending or a tax expenditure is more effective at achieving a given end is likewise important. Both tax expenditures and direct spending may cost the same amount. But one process may be more efficient than the other. Greater understanding of comparative effectiveness—among different tax approaches and direct spending—would help government enact programs that deliver maximum bang for the buck.

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