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Tax expenditures are a significant part of America’s tax code, playing a major role in our economy. Sometimes referred to broadly as “loopholes,” tax expenditures are preferences built into the code that individuals and businesses can take advantage of. Tax expenditures come in a variety of forms including the following:
From an economic standpoint, tax expenditures are very similar to government spending. They are policy choices intended to encourage certain behaviors, and have significant influence over decisions made by individuals and businesses in our economy. For example, the mortgage interest deduction was intended to support homeownership, and the exclusion of employer-sponsored health insurance was meant to support companies covering their employees’ health care. In this way, expenditures are, in essence, spending through the tax code.
It is difficult to precisely track and evaluate the efficiency of tax expenditures, as many beneficiaries might have engaged in the desired behavior (e.g., buying a home) without the added tax incentive. But like spending, tax expenditures result in lost revenues and higher deficits for the government. In 2023, tax expenditures totaled $1.8 trillion — which is more than we spend on many major government programs.
In 2023, just five tax provisions accounted for $1 trillion – which is more than the government spent on Medicare or defense that year. These tax expenditures include: