The case for broad reforms in the federal income tax has been bolstered by a recent projection that special provisions known as “tax expenditures” will drain $1.5 trillion from federal revenue this year.
That figure, up from $1.2 trillion last year, includes the impact of these provisions on regular income taxes and the payroll taxes that support Social Security and Medicare.
The Congressional Budget Office (CBO) included the $1.5 trillion projection in its latest Budget and Economic Outlook, noting that this amount “equals nearly half of all federal revenues projected for 2015 and exceeds projected spending on Social Security, defense or Medicare.”
As CBO explains, these exclusions, deductions, preferential rates and credits in the tax system are called “tax expenditures” because they resemble direct government spending by “providing financial assistance to particular activities, entities, or groups of people.”
But the budget office notes that tax expenditures are “much less transparent than spending on benefit programs” and are not subject to the annual appropriations process.
Some of the largest tax expenditures include, for example, subsidies for home mortgages and employer-provided health care.
Cutting back on tax expenditures could reduce federal deficits, simplify the tax code, treat people more equally, and reduce government involvement in the private sector. Because many of these provisions are so popular among those they benefit, however, many lawmakers are reluctant to question them.