Tax Expenditures And Horizontal Equity: A Present-Day Reassessment

Nir Fishbien (Michigan; Google Scholar), Tax Expenditures and Horizontal Equity: A Present-Day Reassessment, 28 Chap. L. Rev. ___ (2025):

Tax expenditures are “revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” The concept of tax expenditures was coined by the first Assistant Secretary for Tax Policy, Stanley S. Surrey, in the late 1960s, and was codified by the Congressional Budget Act of 1974, which requires that a list of tax expenditures be included in the U.S. budget. The concept relies on the Haig-Simons definition of income (with certain adjustments) as the baseline, a deviation from which is considered a tax expenditure.

There are two basic problems with attempts to define tax expenditures against a Haig-Simons baseline. First, it is not clear why the Haig-Simons, and not other definitions of income, should be used as a baseline. Second, it is not clear why such deviations are normatively problematic. Put bluntly, who cares whether a specific tax provision is a deviation from some theoretical definition of income?

This article represents an attempt to recapture Surrey’s original view of tax expenditures and assess its present-day implications, most importantly that tax expenditures should be viewed as an attempt to identify departures that violate principles of horizontal equity, i.e., the idea that taxpayers with equal ability to pay should bear an equal burden of tax. As such, eliminating tax expenditures means eliminating many of the biases that are currently an integral part of the tax system. Doing so will make the tax system much more equitable for most Americans than any tax reform currently contemplated by Congress.

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