CBO's Economic and Budget Outlook: Tax Expenditures
The CBO has just released the Economic and Budget Outlook. The document is full of extremely useful information, and provides a useful anodyne for some of the reality-free analyses floating around (examples here). For now, I'll just highlight two interesting graphs regarding tax expenditures:
Figure 4-4 from CBO, Economic and Budget Outlook (January 2012).
From the document:
The major tax expenditures considered here fall into four
categories—exclusions from taxable income, itemized
deductions, preferential tax rates, and tax credits. Of
those tax expenditures, four are exclusions of certain types
of income from individual income taxes: employers’ contributions
for health care, health insurance premiums,
and long-term care insurance premiums for their employees;
contributions to and earnings of pension funds
(minus pension benefits that are included in taxable
income); unrealized capital gains from assets that are
transferred at the owner’s death; and untaxed Social Security
and Railroad Retirement benefits. Employers’ contributions
for health insurance and contributions to pension
funds are also excluded from payroll taxes.
The exclusion of employers’ health insurance contributions
is the single largest tax expenditure in the individual
income tax code; including effects on payroll taxes, that
tax expenditure is projected to equal 1.8 percent of
GDP over the 2013–2022 period (see Figure 4-5). The
exclusion of pension contributions and earnings has the
next largest impact, generating net tax expenditures
(including effects on payroll taxes) estimated to total
1.1 percent of GDP over that period.14 The exclusion
of unrealized capital gains at death is projected to generate
tax expenditures equal to 0.3 percent of GDP over
those 10 years, and tax expenditures for the exclusion of
untaxed Social Security and Railroad Retirement benefits
are projected to equal 0.2 percent of GDP.
Three other major tax expenditures allow taxpayers who
itemize deductions to deduct their spending for certain
items from their taxable income. The deduction for interest
paid on mortgages for owner-occupied residences is
the biggest of those three; tax expenditures for that
deduction are projected to equal 0.8 percent of GDP
between 2013 and 2022. By comparison, the tax expenditures
for deductions for state and local taxes and for
charitable contributions are each projected to equal
0.3 percent of GDP over that period.
Some forms of income are subject to preferential tax rates
under the income tax. Both long-term capital gains and
dividends are taxed at lower rates in 2012 than other
forms of income. Although the preferential rate on dividends
is scheduled to expire at the end of December
2012, a slightly higher preferential rate on long-term
capital gains will continue after that. Tax expenditures for
those preferential rates on dividends and long-term capital
gains are projected to total 0.5 percent of GDP
between 2013 and 2022.
The other major tax expenditures projected by CBO are
two refundable tax credits, both targeted toward households
with children. ...
The magnitude of these expenditures, relative to the Nation's tax revenues and outlays. That is why Jeffry Frieden and I stressed the need for dealing with these tax measures, in addition to increasing tax revenues (such as by letting all the provisions of the 2001 and 2003 tax cuts expire) in our book, Lost Decades. Previous discussion of tax expenditures also in this post.
The relative importance of these various tax expenditures is illustrated in Figure 4-5.
Figure 4-5 from CBO, Economic and Budget Outlook (January 2012).
For more on tax expenditures, one should also see Part II (specifically Chapter 10: "Spending through the tax code") in Bruce Bartlett's excellent new book, The Benefit and The Burden: Tax Reform-Why We Need It and What It Will Take (Simon and Schuster, 2012)
(reviewed positively in Forbes, among other places). Bartlett provides a narrative history explaining why many of these tax expenditures came to be, thus contextualizing these otherwise sometimes inexplicable provisions.
More on the CBO Outlook later.