As Americans across the country filed their tax returns over the past few months, two competing approaches to improving our federal tax code have emerged. One approach is to offer specific proposals to reform, eliminate, or otherwise cut back on the unfair and inefficient tax breaks—known as tax expenditures—that clutter the current code. The other approach is to offer specific proposals to cut tax rates, promise to pay for them with tax-expenditure reforms, but stay silent on exactly how to do that.
Tax expenditures are spending programs hidden in the tax code that allow individuals and corporations to reduce their tax bill through deductions and exemptions, credits, or preferential rates for certain types of income. They include broadly utilized tax breaks such as charitable gift deductions and state and local tax deductions, and lower capital-gains tax rates, but they also include obscure and narrowly defined tax breaks such as those that benefit only hedge-fund managers, oil companies, or corporate-jet owners.
Both President Barack Obama and House Budget Committee Chairman Paul Ryan (R-WI) agree on the need to reform these tax expenditures. But that is about all they agree on.
For more on this topic, please see:
- Competing Approaches to Tax Reform by John Craig and Michael Linden