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Just the Basics: Tax Expenditures

Tax expenditures — subsidies delivered through the tax code as deductions, exclusions, and other tax preferences — have been in the news as many policymakers have proposed cutting them to reduce the deficit, finance investments, reduce tax rates, or a combination of those goals.  As Tax Day approaches, we’ve updated several backgrounders that explain how the federal government and states collect and spend tax dollars.  Today, we review our revised tax expenditures backgrounder.

Tax expenditures reduce the amount of tax that households or corporations owe.  To benefit from a tax expenditure, a taxpayer must undertake certain actions or meet certain criteria.  For example, some households with a mortgage can reduce their taxes by claiming a tax deduction for their mortgage interest, and corporations can receive a tax subsidy for investing in machinery.

In fiscal year 2013, tax expenditures reduced federal income tax revenue by over $1.1 trillion, and they reduced payroll taxes and other revenues by an additional $120 billion.  For comparison, just the federal income tax expenditures together cost more than Social Security, or the combined cost of Medicare and Medicaid, or defense or non-defense discretionary spending (see chart).


Click here to read the full paper.  For more on how deductions and credits work, see our related Policy Basics:  Tax Exemptions, Deductions, and Credits.