Joint Committee on Taxation Estimates Federal Tax Expenditures for 2014-2018
August 2014On August 5, 2014 the staff of the Joint Committee on Taxation released a report entitled estimates of federal tax expenditures for fiscal years 2014-2018. The report is of interest because discussions of U.S. corporate tax reform often center on reducing the U.S. corporate tax rate while expanding the corporate tax base. An expansion of the corporate tax base would ordinarily result in a reduction in corporate tax expenditures.
Definition of tax expenditures
Federal law defines a tax expenditure as “revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” The Joint Committee notes that “tax expenditures are similar to direct spending programs that function as entitlements to those who meet the established statutory criteria.”
The Treasury Department and the Joint Committee on Taxation each prepare estimates of tax expenditures. The Joint Committee notes that there are differences in the methods used by the Treasury and the Joint Committee in preparing their estimates. Perhaps the biggest difference is that under the Joint Committee’s approach a tax expenditures is measured by the difference between the taxpayer’s tax liability under present law and the tax liability that would result if the tax expenditure provision were repealed and the taxpayer were allowed to take advantage of any of the remaining tax expenditure provisions that apply. By comparison, the Treasury estimates tax expenditures by assuming the taxpayer is prohibited from taking advantage of any remaining tax expenditure provisions that may be available.
The Joint Committee’s report makes the important point that the measure of a tax expenditure is not the same as the revenue estimate for the repeal of the tax expenditure. Thus, the repeal of a tax expenditure does not automatically translate into an equivalent revenue gain. There are three reasons for this difference. First, revenue estimates incorporate behavioral changes that are anticipated to occur in response to the repeal of a tax expenditure. Second, tax expenditures are changes in the reported tax liabilities of taxpayers without regard to timing. Revenue estimates, on the other hand, are concerned with the timing of tax receipts. Finally, the effect of the repeal of a tax expenditure (e.g., an income exclusion) may have an effect on the FICA tax base which would be reflected in a revenue estimate.
Significant U.S. tax expenditures
The Joint Committee’s report shows clearly that tax expenditures disproportionately accrue to the benefit of individuals as opposed to corporations. The largest corporate tax expenditure is the deferral of active income of controlled foreign corporations. The Joint Committee estimates that tax expenditure to be $418 billion for 2014-18. By comparison, the reduced rate of tax on dividends and long-term capital gains for individuals is estimated to be $632 billion for 2014-18, and the net exclusion of pension contributions and earnings is estimated to be $647 billion for 2014-18. Other significant tax expenditures accruing to individuals include the deduction of state and local government income taxes, sales taxes and personal property taxes ($316 billion), the deduction for charitable contributions ($192 billion), and the exclusion of employer contributions for health care, health insurance and long-term care insurance premiums ($785 billion).
Reviewing these numbers one realizes that any long-term efforts to address the U.S. budget deficit will not be successful unless reductions in individual as well as corporate tax expenditures are considered.
 JCX-97-14 (August 5, 2014). Congressional Budget and Impoundment Control Act of 1974 (Pub. L. No. 93-344), sec. 3.3. FICA is the Federal Insurance Contributions Act. In addition to the individual income tax, the United States imposes a separate tax on earnings to fund Social Security and Medicare benefits. If the BEPS initiative is successful, that tax expenditure should be reduced as foreign income tax on such deferred earnings is increased.
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