Monday, May 12, 2008
This document ... reconsiders the utility of the JCT Staff’s current implementation of tax expenditure analysis. Tax expenditure analysis can and should serve as an effective and neutral analytical tool for policymakers in their consideration of individual tax proposals or larger tax reforms. Its efficacy has been undercut substantially, however, by the depth and breadth of the criticisms leveled against it. Tax expenditure analysis no longer provides policymakers with credible insights into the equity, efficiency, and ease of administration issues raised by a new proposal or by present law, because the premise of the analysis (the validity of the “normal” tax base) is not universally accepted. Driven off track by seemingly endless debates about what should and should not be included in the “normal” tax base, tax expenditure analysis today does not advance either of the two goals that inspired its original proponents: clarifying the aggregate size and application of government expenditures, and improving the Internal Revenue Code. The JCT Staff therefore has begun a project to rethink how best to articulate the principles of tax expenditure analysis, in order to improve the doctrine’s utility to policymakers, reemphasize its neutrality, and address the concerns raised by many commentators.
This pamphlet introduces a new paradigm for classifying tax provisions as tax expenditures. Our revised classification divides the universe of such provisions into two main categories: tax expenditures that can be identified by reference to the general rules of the existing Internal Revenue Code (not, as is the current practice, by reference to a hypothetical “normal” tax), which we label “Tax Subsidies,” and a new category that we have termed “Tax-Induced Structural Distortions.” The two categories together cover much the same ground as does the current definition of tax expenditures, and in some cases extend the application of the concept further. The revised approach does so, however, without relying on a hypothetical “normal” tax to determine what constitutes a tax expenditure, and without holding up that “normal” tax as an implicit criticism of present law. The result should be a more principled and neutral approach to the issues.
Section I of this pamphlet presents an overview. It briefly reviews the concept of tax expenditure analysis, explains the reasons for revisiting it now, and introduces the new paradigm for categorizing tax expenditures. Section II outlines the development of tax expenditure analysis and describes how that doctrine is used today by the JCT Staff and by the Treasury Department. Section III summarizes commentators’ principal objections to how tax expenditure analysis is currently implemented. Section IV responds to those criticisms by describing in detail our new taxonomy of tax expenditures. Section V explains the economic considerations that underlie tax expenditures and applies that economic thinking to our new paradigm. Finally, Section VI reviews some of the issues associated with quantifying tax expenditures under the revised definitions.