To restore funding for public investments, Congress should enact a tax reform that reduces tax
expenditures (subsidies provided through the tax code) to raise revenue. Some lawmakers have
debated whether or not revenue saved from reducing tax expenditures should be used to reduce tax
rates rather than finance needed public investments, an issue that has been addressed in previous CTJ
reports. Less attention has been given to how Congress should prioritize which tax expenditures
should be limited or reformed. This is particularly true of tax expenditures for individuals. (A future
CTJ report will address tax expenditures for businesses.)
Tax expenditures can be evaluated based on three criteria: cost, progressivity and effectiveness in
achieving non-tax policy goals. This report takes cost into account by focusing on the ten most costly
tax expenditures for individuals, illustrated in the bar graph on the following page. This report
evaluates these tax expenditures based on progressivity and effectiveness in achieving non-tax policy
goals — which include subsidizing home ownership and encouraging charitable giving, increasing
investment, encouraging work, and many other stated goals. Based on data from Congressional
Budget Office (CBO) and from the Institute on Taxation and Economic Policy (ITEP), this report
- Tax expenditures that take the form of breaks for investment income (capital gains and
stock dividends) are the most regressive and least effective in achieving their stated policy
goals, and therefore should be repealed.
- Tax expenditures that take the form of refundable credits based on earnings, like the Earned
Income Tax Credit (EITC) and the Child Tax Credit, are progressive and achieve their other
main policy goal (encouraging work) and therefore should be preserved.
- Tax expenditures that take the form of itemized deductions are regressive and have mixed
results in achieving their policy goals, and therefore should be reformed.
- Tax expenditures that take the form of exclusions for some forms of compensation from
taxable income (like the exclusion of employer-provided health insurance and pension
contributions) are not particularly regressive and have some success in achieving their
policy goals, and therefore should be generally preserved.
This report draws partly on recent data from the Congressional Budget Office on the ten largest
tax expenditures affecting individuals, which CBO concludes will cost more than $900 billion in
2013 and make up two-thirds of the cost of all federal tax expenditures. The graph above
illustrates the revenue foregone in 2013 for each of the top ten tax expenditures for individuals
These revenue amounts do not necessarily indicate how much would be raised by repealing one
or more of these tax expenditures. (This is because people may respond to the repeal of one tax
break by utilizing another more heavily or changing their behavior in other ways.) Nonetheless,
these figures are useful for comparing the relative importance of tax expenditures.