Costly Tax Expenditures in the Spotlight

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Tax reform gained renewed attention in Washington following a report on tax expenditures from the Congressional Budget Office (CBO) and a Senate subcommittee hearing that focused on Apple’s extensive use of certain breaks to lower its tax bill.

The CBO released a report on Wednesday analyzing the fiscal impact and distribution by income of the 10 largest tax expenditures in the individual income tax system. CBO estimated that these tax expenditures alone would cost the federal government nearly $12 trillion over the next decade.

Reducing or eliminating some of the major tax expenditures would be politically difficult, however, because they are so popular. Some of the tax expenditures analyzed by the CBO included the exclusion for employer-sponsored health insurance, the mortgage interest deduction, the earned income tax credit, and the preferential treatment of income from capital gains.

CBO also concluded that more than half of the revenue forgone through these tax expenditures went to the wealthiest fifth of households, with 17 percent going to the wealthiest 1 percent of Americans.

The congressional concern over Apple’s tax practices had a Casablanca feel, with the investigating lawmakers shocked, shocked to hear that the U.S. tax code had allowed a company to dramatically reduce what it would have otherwise owed the government.

The Senate panel’s investigation, however, turned up no evidence of illegal behavior. The basic problem is what is legal under the unfair, overly complex tax laws that Congress has failed to fix.

External links:
The Distribution of Major Tax Expenditures in the Income Tax System (CBO)
Senate Subcommittee Hearing on Off-Shore Profit-Sharing and the U.S. Tax Code

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