The federal tax code is riddled with provisions that benefit individuals and businesses working in certain sectors or engaging in specific activities. In 2019, these provisions — known as tax expenditures — cost the federal government 6.6% of gross domestic product (GDP) in lost revenue, which is greater than the amounts spent on Social Security (4.9% of GDP), Medicare (3.7%), national defense (3.2%), and the entire nondefense discretionary budget (3.1%). Although some tax expenditures help working-class people, 24.1% of their overall benefits go to the top 1% of income-earners, and 58.8% go to the top 20%. The regressive and economically inefficient nature of tax expenditures makes them a ripe target for progressive reform.
This isn’t to suggest that every expenditure helps special interests. For example, the earned income tax credit subsidizes the wages of low-paid workers and pulls four million Americans out of poverty every year. But according to the U.S. Treasury Department, the tax code is littered with over 160 expenditures, including highly regressive expenditures such as the mortgage interest deduction, the state and local tax deduction, the carried interest loophole, and the pass-through business loophole. These carveouts leave the federal government with a Swiss cheese tax code — one that fulfills its basic purpose but is littered with holes. Just as PPI has advocated a regulatory improvement commission to streamline economic regulations, the U.S. also needs to examine the many cracks and holes in the federal tax code.
A few large tax expenditures are already well-known. But most are quite small, and they survive largely by remaining out of sight and out of mind. They also sometimes benefit from lobbying efforts by well-connected industry leaders who prefer that their pet carveouts remain free from public scrutiny. This post, therefore, sheds light on five smaller tax expenditures — the types that don’t normally make the headlines — which ought to be eliminated to boost federal revenues and remove unfair loopholes. Specifically, Congress should:
These five changes, if enacted by themselves, would raise just under $31 billion over 10 years. But more importantly, these five arcane loopholes are just the tip of the iceberg — policymakers who are willing to take a deeper dive into the tax code will find even greater savings hidden under the surface.
