TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 9, 2013

GAO: Evaluating Tax Expenditures

GAO LogoThe Government Accountability Office has released Tax Expenditures: Background and Evaluation Criteria and Questions (GAO-13-167SP):

Tax expenditures are reductions in a taxpayer's tax liability that are the result of special exemptions and exclusions from taxation, deductions, credits, deferrals of tax liability, or preferential tax rates. Similar to spending programs, tax expenditures represent a substantial federal commitment to a wide range of mission areas. If the Department of the Treasury (Treasury) estimates are summed, an estimated $1 trillion in revenue was forgone from the 173 tax expenditures reported for fiscal year 2011. Tax expenditures are often aimed at policy goals similar to those of federal spending programs. Existing tax expenditures, for example, are intended to encourage economic development in disadvantaged areas, finance postsecondary education, and stimulate research and development. For some tax expenditures, forgone revenue can be of the same magnitude or larger than related federal spending for some mission areas. The revenue the federal government forgoes from a tax expenditure reduces revenue available to fund other federal activities, requires higher tax rates to raise any given amount of revenue, increases the budget deficit, or reduces any budget surplus.

Given the interest in tax expenditures' effectiveness, Congress asked GAO to develop a framework that could be used to evaluate their performance. In response, this guide describes criteria for assessing tax expenditures and develops questions Congress can ask about a tax expenditure's performance.

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Deferrals should be scored according to Present Value rather than using a 10-year budget horizon. The horizon method, standard for budget analysis, ignores the loss of future revenue from 100% taxable withdrawals under the current rules.

This is the same accounting defect that made creation of Roth accounts look like a good deal for the government when the opposite was true.

Posted by: AMTbuff | Jan 9, 2013 12:06:49 PM