In discussions about the impending fiscal cliff and moving the federal budget more toward balance, the term tax expenditures comes up frequently. Is this just another name for federal spending? N.C. State University economist Mike Walden responds.
“Actually …, it’s logical that you would think it is, but it’s actually just the opposite. What tax expenditures mean are spending that you and I do and businesses do that allow us and businesses to get what’s called tax deductions or tax credits, therefore reducing actually the amount that we pay in taxes. So it really means just the opposite of what you might expect.
“And these are things like when we’re looking at the personal level, the home mortgage interest deduction, charitable deductions, the earned income tax credit, the child tax credit, child-care tax credit. So, again these are things that the federal government has deemed valuable for people to do and spend their money on, and one way that they encourage us to do that is to give us this tax break.
“Now why this has come up in the discussions is these tax expenditures make a big, big difference to how much money the federal government collects. If all of the tax expenditures were eliminated, that would mean the federal government each year would take in $1 trillion — $1 trillion — more dollars in federal tax revenues. That would be enough to virtually eliminate the annual budget deficit.
“Now the discussions that we’re watching probably would not go that far. In fact highly unlikely they would go that far, but what’s being discussed are, for example, eliminating some of those tax expenditures, keeping others (and) maybe keeping a cap on how much could be taken or perhaps limiting tax expenditures to certain taxpayers, eliminating them for others, like higher income people.
“So, this is a very, very crucial area of the tax a fiscal cliff discussions to watch.”
Category: Economic Perspective