The Federal budget and budgetary process has its own lexicon. Most are familiar with some of the more common terms bandied about by the press and politicians as they debate how to bring the deficit under control. To the vocabulary of earmarks, discretionary and mandatory spending, and on- and off-budget, readers will be introduced in 2012 to the phrase "tax expenditures".
The subject of tax expenditures will prove as contentious as entitlement spending; and tax expenditure reform will be as critical as entitlement reform to fixing the nation's finances.
What are tax expenditures? They are concessions written into the tax code. Individual concessions may apply solely to individuals or corporations; or, they may span both groups. Periodically the Congressional Joint Committee on Taxation estimates what these tax breaks cost the Federal government in foregone revenue. The last, published in December 2010, spans fiscal years (FY) 2010 to 2014.
Mention tax breaks to the man on the street, and the phrase conjures up concessions written to benefit certain industries or individual corporations. Certainty based on the separate, individual line items, the majority are directed at American businesses. But in terms of the dollar amounts the big beneficiaries – by a wide margin – are individual taxpayers.
For FY 2010 to 2014, thirty-one out of the forty largest tax expenditures largely accrue to individuals. Projected tax expenditures, corporate or individual, for this period total $5.6 Trillion – an average of $1.1 Trillion per annum. Thirty-one of the forty largest items are targeted at individual filers. Number one is the exclusion for employer health care contributions (worth $659.4 Billion for FY 2010 to 2014); number two is the mortgage interest deduction ($484.1 Billion); and, number three is long-term capital gains and dividend preference rates ($402.9 Billion). In total the bill for these thirty-one items comes to $4.6 Trillion.
Now the largest corporate specific tax concession is projected at $70.6 Billion for FY 2010 to 2014. The next is estimated at $45.3 Billion. Both are small-change in comparison the largest individual oriented tax expenditures. Of the top forty, the largest corporate concession ranks 22nd on the list. Corporate tax breaks are a small part of the problem.
President Obama's budget for FY2012 anticipates revenues of $2.6 Trillion, expenditures of $3.7 Trillion and a deficit of $1.1 Trillion. In other words, the projected deficit for FY2012 is roughly equal to the average annual revenue loss from tax expenditures.
Obviously the reduction of a tax expenditure is tantamount to a tax increase. These concessions have become de facto entitlements, as sacrosanct as Social Security. If our fiscal problems are to be resolved, the average American, many middle-class, must forego the largess each expects as his due from the Federal Government.
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