What Are Tax Expenditures?

Tax expenditures (also known as tax breaks) include exemptions, deductions, credits, and preferential rates that allow households and corporations to reduce the taxes they owe. There are more than 150 tax expenditures written into the individual and corporate tax codes. All together they cost the government about $1.5 trillion each year, more than the budget of any agency or major spending program, including Social Security, Medicare, and the Department of Defense.

Many economists recommend eliminating many of these tax expenditures. Many create market distortions that are damaging to economic growth and productivity. Because they subsidize activities to encourage certain behaviors, they can redirect investment to politically favored industries and sectors of the economy. They also tend to benefit high-income taxpayers more than lower income groups. And because they are not subject to the regular review, their costs are often overlooked by policymakers and the public. 

Related: Infographic: How The U.S. Tax System Works