Chris Edwards (Cato Institute), Tax Expenditures and Tax Reform:
The federal income tax is continually changing. A Republican Congress cut taxes in 2017, and then a Democratic Congress raised taxes in 2022. Presidential candidates will likely propose reforms in 2024, and policymakers will decide whether to extend the Republican tax cuts after 2025.
When Congress changes taxes, “tax expenditures” usually come into play. These are generally thought of as breaks, preferences, or loopholes in the tax code that distort the economy and increase complexity. Despite occasional efforts to simplify the code, the number of tax expenditures on one official list has risen from 53 in 1970 to 205 in 2023.
Policymakers should pursue tax reforms to cut tax rates and end preferences, but official tax expenditure lists are not good guides for which preferences to end. The lists are built around a tax base called Haig‐Simons income, which is anti‐growth and redistributionist. And the lists are biased in ways that make it appear that the tax code favors high earners.
In this policy analysis, I discuss a better way to measure and end tax preferences, which is to start from a consumption base. Such a base would be neutral with respect to saving and investment, unlike the current income tax base. I also identify tax preferences to repeal in moving toward a consumption‐based tax system and discuss tax reforms for business investment, personal saving, health care, housing, municipal bonds, and the state and local tax deduction.
Congress should cut tax rates and repeal loopholes, but it needs to make sure that it is repealing actual loopholes and moving toward a more neutral tax base. The reforms proposed here would simplify the tax code, increase fairness, reduce distortions, and promote growth.
Dan Mitchell, A Primer on So-Called Tax Expenditures