I . .1*9 

a pri r 

U.S. General Accounting Office 

PAD 80-26 

1979 
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. 
PREFACE 

Tax expenditures are selective tax reductions for special 

groups of people or for people engaged in special activities. 

Examples include the tax deduction for medical expenses and 

the tax credit for business investments in certain depreciable 

property. By allowing taxpayers to deduct medical costs from 

their taxable income or credit a part of investment costs 

against their tax, the Government effectively shares those 

expenses, no less than if each beneficiary were paid out of 

funds that the Congress had appropriated for the purpose. 

The beneficiaries have long understood that the Federal 

Government was paying part of their costs. Their spokesmen 

regularly appear at congressional hearings to support these 

tax subsidies. They often record their own costs net of the 

tax saving. But the Federal Government itself has only 

recently begun viewing the tax reductions as the equivalent 

of direct outlays. 

This paper is an introduction to the tax expenditures 

concept. It has been prepared for congressional staff, executive personnel, GAO's own staff, and anyone else whose work 

involves the Federal budget or who is interested in any of 

the program areas in which tax expenditures are used--or may 

one day be used--to influence private behavior. The paper 

presents criteria for identifying tax expenditures, describes 

the relative advantages of tax spending and direct spending, 

and explains how tax expenditures budgets are constructed. 

Appendix I contains a list of tax expenditures, with a brief 

explanation of each provision. An annotated bibliography in 

appendix I1 directs readers to other publications for addiitional information. 

The tax expenditures concept is based on the idea that 

an income tax system can be divided into two parts. One part 

contains just the rules that are necessary to carry out the 

revenue-raising function of a tax on income: rules prescrib-l 

ing how net income is to be measured, what the tax unit is, 

what tax rates are to apply, and so forth. The other part 

contains exceptions to these rules that reduce some people's 

taxes but not others'. These exceptions have the same effectas Government payments to the favored taxpayers. By identifying these provisions as tax expenditures, officials are 

better able to determine the total amount of Government effort 

or influence in a program area. 

The cost of a tax expenditure is the revenue that the 

Government did - not collect because a particular provision 

was in the tax law. For 

T" 
allowed for medical expenses in 1978 and if tax rates and 

other provisions had been the same, the Government would have 

collected an extra $2.8 billion in income taxes from individuals. Accordingly taxpayers with medical expenses saved $2.8 

billion on their 1978 taxes; or to look at it another way, 

the Government "spent" $2.8 billion through the tax system 

to help them pay their medical bills. Estimates of the 

costs of all tax expenditures in fiscal year 1980 are presented in appendix I. 

The tax expenditures concept is still being developed 

and some of its features remain controversial. Many persons 

object to the designation of some tax provisions as "expenditures" made through the tax system. We believe that it is not 

necessary to agree with the budgetmakers on every line item in 

the tax expenditures budgets to find the concept useful. We 

hope that this paper will foster a wider understanding of tax 

expenditures and encourage those who design, administer, and 

evaluate Government programs to pay closer attention to the 

many effects of the Federal tax system. 

We invite questions and comments on this paper. Please 

address them to Harry S. Havens, Director, Program Analysis 

Division. 

Comptroller General 

of the United States 

ii 
Contents 

PREFACE 

CHAPTER 

1 INTRODUCTION 

Development of tax 

Purpose of this paper 

expend i t ur e s budg et s 

2 

3 

4 

IDENTIFYING TAX EXPENDITURES 

Defining tax expenditures 

The normal tax structure 

Income 

Taxpaying entity 

Accounting methods 

Accounting periods 

Deductions 

Tax rates 

Credits 

Conclusion 

THE INTERNAL REVENUE CODE 

AND TAX EXPENDITURES 

Why are there tax expenditures? 

The advantages and disadvantages 

Tax expenditures and tax reform 

of tax expenditures 

THE TAX EXPENDITURES BUDGET 

The cost of tax expenditures 

Estimating costs 

Estimating secondary 

Projecting cost estimates 

effects 

Budget functional categories 

Page 

i 

1 

3 

4 

6 

6 

7 

9 

12 

12 

13 

13 

15 

16 

17 

18 

18 

19 

23 

24 

24 

24 

25 

26 

27 
Paq e 

CHAPTER 

5 SOME TECHNICAL ISSUES 

A normal or an ideal 

tax system? 

Gifts 

Personal deductions 

Expenses of earning 

The corporation income tax 

Foreign income 

income 

Other taxes 

Uses of tax expenditures budgets 

APPENDIX 

I 

I1 

CBO 

DISC 

GAO 

I RC 

IRS 

WIN 

Annotated list of tax expenditures 

Bibliography 

ABBREVIATIONS 

Congressional Budget Office 

domestic international sales corporation 

General Accounting Office 

Internal Revenue Code 

Internal Revenue Service 

work incentive 

28 

28 

29 

30 

32 

33 

33 

34 

35 

39 

64 
CHAPTER 1 

INTRODUCTION 

The Federal Government sponsors many programs to promote 

the health of its citizens. They include such familiar 

examples as Medicare and Medicaid, the medical research programs of the National Institutes of Health, and the medical 

care provided in Veterans Administration hospitals. A less 

familiar program is one in which the Government forgoes $3 

billion of revenue to assist one-fifth of the population to 

pay its medical and dental bills. This program's benefits 

are somewhat oddly structured; the program gives no benefits 

to persons unless their medical bills exceed 3 percent of 

their income, then pays 14 to 18 percent of the excess to 

low income persons, 20 to 30 percent of the excess to middle 

income persons, and nearly 70 percent of the excess to persons 

with the highest incomes. The program's best feature is 

administrative simplicity: the beneficiary does not have to 

apply to a Government office and wait for approval and payment; instead he simply reduces his income tax. Since the 

percentage of medical expenses above the floor that is borne 

by the Government is by law equal to the highest income tax 

rates paid by the beneficiary, and since the program applies 

only to persons who itemize deductions on their income tax 

returns, the reduction in taxes is accomplished by including 

medical expenses in the taxpayers' itemized deductions. 

The Government's dedication of money to an activity by 

allowing a special reduction in taxes rather than a direct 

payment is called a "tax expenditure." 1/ Looking at provisions of the tax law this way emphasizes their similarity 

to direct expenditures and suggests that the Federal revenue 

losses they create could be "budgeted" the way direct expenditures are. By implication, they must be accounted for 

in the budget process if the total Government effort in a 

- 1/The term was invented by former Assistant Secretary of the 

Treasury Stanley S. Surrey, from whom the illustration 

given in the first paragraph is adapted. Strictly speaking, 

the term "tax expenditure" refers to the "spending" itself, 

the amount of revenue lost, rather than to the tax law provision that gives rise to the spending. But this distinction is seldom observed by writers on the subject, and it 

is common to refer to provisions of the law as "tax expenditures," as is done in this paper. Tax expenditures have 

also been called tax incentives, tax subsidies, tax benefits, tax preferences, loopholes, backdoor spending, and 

the like. 

1 
program area is to be known. This is the concept of the 

"tax expenditures budget," which was added to the budgetmaking process by the Congressional Budget and Impoundment 

Control Act of 1974. 

The tax expenditures concept is merely one way of looking 

at tax provisions. The Congressmen who enacted the deduction 

for medical expenses probably did not think of themselves as 

appropriating money to pay some taxpayers' medical bills. The 

deduction is identified as a tax expenditure because its 

effect is to subsidize medical care (regardless of its original purpose). 

Identifying such effects as subsidies is exactly the 

reason for constructing tax expenditures budgets. By lumping 

together the total Government support for an activity, including direct payments, loans, loan guarantees, and tax expenditures, it is possible to evaluate that support in ways that 

might not otherwise be apparent. One type of support may be 

far more (or less) effective than others, leading to a 

restrdturing of the support. The effects of the tax expenditure may conflict with the goals of the direct payment programs, and hence one or the other should be changed. It might 

be that the existence of one type of program'makes another 

redundant. Both tax expenditure and direct expenditure policies can benefit from this type of analysis. 

Thinking of tax reductions as the equivalent of direct 

expenditures can also be useful in other analyses, such 

as studies of program costs. In fact, an excellent example 

of this use of the concept appears in a 1973 GAO report 

on the Navy's leasing of tankers (prepared by auditors who 

had never heard the term "tax expenditures"). 1/ The Navy had 

concluded that it was cheaper to lease certain-tankers for 

its cargo fleet than to buy them. However, the Navy was able 

to lease the ships at less than economic cost because the 

lessors were willing to "lose" money (for tax purposes) on 

the contracts and make their "profit" in tax savings, by 

deducting the paper losses from income from other sources. 

GAO contended that the tax losses were just as much a cost 

to the Government as the direct outlays appearing in the 

Navy's budget and should therefore have been counted as a 

cost in deciding whether to lease or buy the ships. 2/ These 

tax costs are exactly what is meant by tax expenditures. 

- l/"Build and Charter Program for Nine Tanker Ships," 

- 2/This example is discussed in more detail in chapter 5. 

August 15, 1973 (B-174839). 

2 
DEVELOPMENT OF TAX 

EXPENDITURES BUDGETS 

Although the idea that special tax reductions are equivalent to direct expenditures had already been expressed 

several years earlier, the first tax expenditures budget in 

the United States only appeared in the Secretary of the 

Treasury's Annual Report for 1968. It was a listing of a 

few provisions of the Internal Revenue Code that allowed 

tax reductions for designated activities or specific groups 

of taxpayers, with an estimate of their "cost" to the Government in uncollected taxes. Several expanded versions were 

later prepared as the usefulness of the concept was recognized. Such budgets are now required by law in the budgets 

prepared by both the executive branch and the Congress. At 

least one State regularly prepares a tax expenditures budget 

for all its taxes. The concept has been much discussed in 

the tax literature. More than 90 tax expenditures have been 

identified in the Federal individual and corporation income 

taxes; the total revenue loss attributed to tax expenditure 

provisions has been estimated at over $100 billion for 

1979. 1/ Proposals to create new tax expenditures are regularly Fresented in such policy areas as energy conservation, 

pollution control, and college education. 

In spite of its growing use the concept is still unfamiliar to many persons, and to some people it still carries 

unpleasant connotations. The idea ,that the Government wants 

to "budget" uncollected tax monies suggests to some a confiscatory tax, as if the Government were entitled to all of a 

taxpayer's income. 

This is not the meaning intended by those who originated 

or those who now use the tax expenditures concept. Their 

view is that the purpose of the tax system is to raise 

revenues for the Government, that there are rules for determining who is to bear what share of the tax burden, and that 

when those rules are bent to benefit some special group or 

promote some special activity, the result is the same as 

if the money had been collected according to the rules and 

returned to the special beneficiaries by direct appropriation. 

- 1/The revenue loss estimates used in the body of this report 

come from Special Analyses, The Budget of the United States 

Government for Fiscal Year 1980 (Washington: U.S. Government Printing Office, 1979), Special Analysis G. 

3 
PURPOSE OF THIS PAPER 

This paper has been prepared to introduce the tax 

expenditures concept to GAO personnel and others who work 

in Federal program areas affected by tax expenditure provisions. The tax expenditures concept is growing in importance. 

It is to be found today in tax reform proposals, program 

costs and agency budgets, surveys of alternative means of 

financing, or any of the multitude of areas where tax incentives are used or proposed to influence behavior (ranging 

from national defense to home gardens). Other countries, 

such as Canada, West Germany, and the Netherlands, are 

preparing or studying tax expenditures budgets. 

of them are published annually by the Office of Management 

and Budget, 1/ the Congressional Budget Office, 2/ and 

congressionaT committees. 3/ Tax lawyers and ec’6nomists 

interested in the subject Eave published a number of detailed ., ‘\ discussions of the concept. This paper assembles information 

from those sources in an attempt to provide a reasonably 

complete and not overly technical discussion of the topic. 

Tax expenditures budgets and explanations of some aspects 

-h 

\\ 

\\ -. 

Chapter 2 describes the criteria necessary to define 

the concept and to identify Internal Revenue Code provisions 

that create tax expenditures. Chapter 3 discusses how such 

provisions get into the law and reviews some of the arguments 

made for and against the use of tax expenditures. Chapter 

4 covers the construction of tax expenditures budgets. 

Chapter 5, which brings up a few of the problems that have 

not yet been resolved in the definition and uses of the concept, is slightly more technical than the rest of the paper 

and may be omitted by those seeking only familiarization. 

Appendix I lists all the tax expenditures that are currently 

identified, presents the Congressional Budget Office’s estimates of their cost for fiscal year 1980, and provides a 

- l/Special Analyses, The Budget of the United States Government (Washington: U.S. Government Printing Office, 

annual). 

- 2/Five-Year Budget Projections and Alternative Budgetary 

Strategies, Supplemental Report on Tax Expenditures 

(Washington: Congressional Budget Office, annual). 

- 3/E.g., U.S. Congress, House Committee on Ways and Means, 

Estimates of Federal Tax Expenditures, Committee Print, 

annual . 4 
brief description of each one. 

bibliography of published tax expenditures budgets and articles 

discussing various aspects of the concept for those who want 

more information than this brief paper provides. 

Appendix I1 contains a 

5 
CHAPTER 2 

IDENTIFYING TAX EXPENDITURES 

The mere fact that a tax provision can be construed as 

serving another purpose besides determining tax liability 

does not make it a tax expenditure. Allowing an exemption 

for each child, for example, might be said to encourage 

large families; but it may also represent society's judgment 

that a family's income does not belong entirely to the person 

who earns it. Nor does the fact that a tax reduction could 

be considered the equivalent of a direct outlay make it a 

tax expenditure. The exemption from tax of persons earning 

less than a certain amount of income could be considered the 

equivalent of welfare payments; but it may be based on nothing more than the fact that for administrative reasons the 

first dollar of income is not the best starting point for 

an income tax. (A tax on very low incomes can cost more to 

collect than it brings in.) More is needed to define the 

concept. 

DEFINING TAX EXPENDITURES 

The original 1968 tax expenditures budget defined a tax 

expenditure provision as a deduction, exemption, credit, or 

exclusion designed to promote some objective other than the 

measurement of net income, such as "economic growth or a 

desirable expenditure pattern by taxpayers." This type of 

provision was contrasted to the part of the tax system 

designed to measure net income, which was said to conform 

to "widely accepted definitions of income and standards of 

business accounting" and the "generally accepted structure 

of an income tax." - 1/ 

Similar definitions have been used in later budgets. 

The Special Analyses that accompany the President's budget 

have added references to a "theoretically-pure income taxuB 

and the "international norms" of taxation. 2/ - 

The statutory definition was established by the Congrest i sional Budget and Impoundment Control Act of 1974. Tax 

U.S. Government Printing Office, 

- 2/Special Analyses, The Budget of the United States Government for Fiscal Year 1979 (Washington: U.S. Government 

Printing Office, 1978), pp. 152-53. 

6 

-. 
expenditures were defined as "those 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.'' 1/ Committee reports said 

that the provisions the Congress Ead in mind were those that 

deviated from the "normal tax structure for individuals and 

corporations." - 2/ 

These definitions are all nearly the same, and they 

establish one aspect clearly: some features of the existing 

income tax system reflect a widely shared view of the way a 

"normal" income tax should be designed to raise revenue, 

while some features reduce taxes on certain selected groups 

of persons. Therefore, a provision that reduces taxes below 

those required by the normal tax structure is a tax expenditure, and establishing criteria for identifying tax expenditures becomes primarily a task of defining the "normal" 

tax system. 

THE NORMAL TAX STRUCTURE 

A normal tax structure is a theoretical model embodying 

principles of fairness and neutrality generally agreed to 

underlie a nation's tax system. It is of course a pure 

abstraction; no such structure can be found on any nation's 

law books. Some ambitious persons have labored to build 

systems that would perfectly reflect these underlying principles, but without much success, because it is impossible 

to persuade all persons to agree on what features are fair 

and what are not. 

For the same reason, no two persons are likely to agree 

on every detail of the "normal tax structure." Critics of the 

tax expenditures concept maintain that these disagreements 

discredit the concept. The fact is, however, that a number 

of remarkably consistent tax expenditures budgets have been 

constructed, implying broad agreement on many of the features 

of the normal income tax structure among those who construct 

the budgets. It would be overstating matters to say that 

there is equal agreement on the details of the structure 

- l/Section 3(a)(3), Congressional Budget and Impoundment Control Act of 1974, Public Law 93-344 (31 U.S.C. 1302). 

- 2/U.S. Congress, House, Congressional Budget and Impoundment 

Control Act of 1974, Conference Report No. 93-1101 to accompany H.R. 7130, 93d Cong., 2d sess., June 11, 1974, p. 50. 

The quotation is from the Senate version of the bill. 

7 
among tax scholars generally--tax expenditures budgets, after 

all, are only constructed by partisans of the concept, not 

by those who spurn it. But it is probably accurate to say 

that most of the central features of the normal tax system 

are not seriously in dispute. Disagreements are more common 

over certain peripheral features of the normal structure. 

The weightiest objection to the tax expenditures concept comes from those who deny that a normal tax structure 

can be defined. They disclaim the existence of universal 

norms of taxation that can be elaborated into a complete 

tax structure. In their view any tax structure is inescapably 

arbitrary because it must contain details that cannot be 

derived from the original norms. These critics believe that 

none of the tax expenditures budgets are useful because they 

merely catalogue deviations from a standard that was completely arbitrary in the first place. If the standard were 

changed the budgets would be too. 

The current view among tax policymakers is that it is 

possible to reach broad agreement on enough features of the 

normal income tax structure to prepare a meaningful tax expenditures budget for the Federal income taxes. There are still 

other features that many scholars think should be in the 

normal structure; until now, however, the budgetmakers have 

been unable to agree upon their inclusion. Work continues on 

the architecture of the normal tax structure and one day more 

details may be added, leading to the identification of new 

provisions in the Internal Revenue Code as tax expenditures 

or the deletion of some old ones from the list. 

There are a number of problems that any tax system must 

solve. For an income tax the normal tax structure must 

include a definition of income. It must provide ways of deciding who is liable for the tax, which is the same as deciding who owns the income. It needs rules for deciding how the 

income is to be accounted for (and for what period). It needs 

rules for determining allowable deductions. (Some deductions 

are implied in almost any definition of income, such as the 

cost of goods sold and other expenses of earning income.) It 

must have a schedule of tax rates. It must determine how to 

tax certain legal entities, such as corporations and trusts. 

And it must be applied to taxpayers operating across international boundaries. 

a 
In the following sections some of these problems will 

be examined and the solutions implied in the tax expenditures 

budgets will be used to define the "normal tax structure for 

individuals and corporations." - 1/ 

Income 

Income in the normal structure is intended to be as 

comprehensive as can be accurately determined. The starting 

point is the concept known as the "total accretions" def inition of income, more often called the "Haig-Simons" def inition, after two of the economists who developed it. 

Robert Murray Haig defined income as the increases in 

one's economic power capable of being valued in money. Economic power means the power to satisfy one's economic wants 

and consists of either current consumption or the wealth 

available for future consumption; so, according to Henry Simons, this income is equal to the sum of consumption expenditures and changes in net wealth. Haig-Simons income, then, 

is the money value of all consumption in a given period, plus 

or minus the money value of all changes in net wealth between 

the beginning and end of the period. 

The advantage of defining income in terms of its uses 

(consumption or accumulation) instead of its sources is to 

obviate arguments whether one dollar is different from 

another. It is possible to maintain that "capital gains" are 

not the same as "wages"; but in the hands of the recipient 

a dollar of one is useful in the same way as a dollar of the 

other. Thus anything that is useful for consumption (now 

or in the future) is income, and no discussion of its source 

is necessary. 

This definition of income includes many things not 

usually thought of as income. Gifts are income to the recipient because a dollar received by gift is no different from 

any other dollar. The money value of all goods and services 

received is income, because a free lunch or airplane ticket 

represents just as much consumption as a purchased one. An 

- l/One flaw in this approach is that some admitted tax expenditures are left out of the budgets for practical reasons. 

Some tax expenditure provisions involve revenue losses 

too small to be worth estimating. Other provisions that 

may create significant tax expenditures are omitted because 

the data necessary to estimate their cost are completely 

inadequate. The following discussions try to allow for 

these deliberate omissions. 

9 
increase in the value of the property one owns, such as 

stocks or real estate, is income in the period during which 

the increase occurs, because it increases the wealth available 

for future consumption. Similarly, a decline in value reduces 

income. The value of goods one produces for oneself, such as 

homegrown vegetables, is income because this value also represents consumption. Even the services of one's durable consumer goods, such as a house or a car, are consumption when 

the goods are used, and so the amount of rent one would have 

had to pay for them (the "imputed rental value") is income 

under the Haig-Simons definition. 

The imputed rental value of owned assets may need further 

explanation. If one buys an income-producing property, such 

as a house to be held for rent, the price one pays reflects 

the present value of the income one expects to receive from 

the property in the future. When the rent is eventually 

received part of it goes to pay the expenses of owning and 

operating the property, and, if all goes well, something is 

left over as a return on the investment. The rate of this 

return should be at least as great as the original discount 

rate; that is, it is the profit one expected to get in the 

first place. By analogy, when one buys a house for one's 

own use one is buying a stream of future housing services, 

discounted to the present. The value of those services, 

less expenses (including depreciation), is income under the 

Haig-Simons definition, just as if one were renting from 

oneself and paying oneself the profit represented by the 

discount rate. Cars, washing machines, and other consumer 

durables likewise return a stream of valuable services that 

represents a "profit" on one's investment in them. 

The Haig-Simons definition of income is recognized as 

being altogether too comprehensive to be a practical basis 

for taxation; it is intended as a tool for analyzing or a 

standard for judging other concepts of income. The definition 

of income in the normal tax structure is a substantially 

modified version of the Haig-Simons definition. 

The appreciation or depreciation in the value of owned 

assets is routinely estimated for some purposes, such as 

constructing balance sheets or applying for credit; but 

until the assets are actually sold or exchanged, that value 

remains to some degree uncertain. Saying that one has property worth $100 is not the same as persuading someone else 

to pay $100 for it. So the tax law generally requires that 

these increases or decreases in paper values be made real 

("realized") in a transaction of some sort before they are 

included in income or deducted as losses. This requirement 

is accepted as the normal one in the tax expenditures budgets. 

In some cases "realization" is liberally interpreted; for 

10 
example, transferring appreciated property by gift or 

inheritance is considered a transaction (since the owner 

is, in effect, disposing of accumulated, untaxed income), 

and a failure to tax the appreciation as income at that time 

is considered a tax expenditure. There are a few other ambiguous casesp but in general realization is fundamental to the 

definition of income in the normal system. 

A similar problem surrounds the income arising from 

"transactions" with oneself, such as the imputed rent on 

owner-occupied housing. Although it can be argued that such 

income exists in the aggregate, it is very difficult to determine if any given individual is a recipient of such income, 

and even more difficult to know how it should be measured. 

Not all investments make a profit; in market transactions, 

such as renting a house, there are accounting standards for 

determining profit and loss, so we can know who had income 

and who did not. In the absence of a market transaction, we 

do not know whether a particular homeowner had a positive or 

negative llincomel' from his house. Homegrown vegetables present 

the same problem; if they are sold we know their value (the 

price someone was willing to pay), but if they are not sold 

we do not know if they had any value at all. (Farmers frequently eat what they cannot sell; the product is consumed at 

home precisely because it has no market value.) Thus the 

economists' definition of income is modified in the normal 

tax structure to require that it be obtained in an objective 

transaction. (This could be viewed not as a modification 

of Haig's definition, but merely as an explanation of what 

is meant by "capable of being valued in money.") 

Gifts are also troublesome to classify. They unquestionably are income by the Haig-Simons definition; and they 

are definitely not income under the Internal Revenue Code. 

Their exclusion from taxable income is not counted as a tax 

expenditure item in the tax expenditures budgets. Scholarships and fellowships are specifically excluded from income 

under the Internal Revenue Code; they were excluded to avoid 

arguments over whether or not they were really gifts. The 

exclusion of scholarships and fellowships is considered 

a tax expenditure. Certain prizes and awards are likewise 

excluded from taxable income, but are not treated as tax 

expenditures, perhaps because they are thought to resemble 

private gifts in that the recipient does not specifically 

seek the prize or award. Social security payments and cash 

welfare payments from governments are excluded from income 

under the Code because the IRS ruled that they came under the 

11 
general exclusion for gifts. 1/ These exclusions are considered tax expenditures because most direct government 

payments do constitute income and these are in the form of 

cash--the most normal kind of income. Valuation difficulties may explain why several of these exclusions are not 

considered tax expenditures, although many persons recognize 

that the omission of such programs as food stamps, which 

have a readily determined value, calls for further examination. The treatment of gifts is discussed in more detail in 

chapter 5. 

Taxpayinq entity 

In the "total accretions" income model, only individuals exist. Any income arising in corporations or other 

organizations should be attributed to the individuals who 

own or comprise the organization. In the United States, 

however, taxes fall on legal entities, and the structure 

that treats individuals (or couples), trusts, corporations, 

cooperatives, churches, lodges, labor unions, etc., as separate taxpaying or tax-exempt entities has been accepted as 

normal. Tax expenditures have been identified in deviations 

from a flat-rate corporation income tax for ordinary corporations, but not in the exemption from the corporate tax for 

tax-exempt (nonprofit) organizations or those that simply 

pass their taxable income through to their owners (partnerships, "Subchapter s" corporations, etc.). For the most part 

the existing legal structure has been considered normal in 

this area. (This will be brought up again in chapter 5.) 

Accounting methods 

The use of different accounting methods, such as cash or 

accrual, has not given rise to any tax expenditures; apparently any method is normal if it is consistently applied and 

creates no preferential distortions in income. The Internal 

Revenue Code does require that costs of goods included in 

inventories be accrued and charged off only when the goods 

are sold; an exception to that requirement for noncorporate 

farmers is considered a tax expenditure. Various ways of 

valuing inventories, such as last-in, first-out, have not 

been called tax expenditure provisions, nor have the special 

accounting methods for installment sales, construction contracts, etc. 

- 1/U.S. Congress, Senate Committee on the Budget, Tax Expenditures: Relationships to Spending Proqrams and Background 

Material on Individual Provisions (Washington: U.S. Government Printing Office, 1978), pp. 138, 147. 

12 
Tax expenditures have been identified in special accounting privileges that distort the relationship between income 

and the costs of producing it; this topic is discussed below 

under "Deductions." 

Accounting periods 

The accounting period generally required by the Code 

and accepted as normal is an annual one. However, except in 

farming and a few other seasonally cyclical pursuits, a year 

is an arbitrary period and strict adherence to it would be 

unfair to individuals with extraordinarily large incomes in 

a particular year (because of the graduated rates) or to 

businesses with alternating profit and loss years (because 

the Government would be sharing in the profits but not in 

the losses). So there are provisions that reduce the effects 

of the annual accounting period: extraordinary increases in 

individuals' incomes can be averaged over a 5-year period; 

losses can be carried back or forward to other years. These 

are accepted as a part of the normal tax structure. 

The preferential tax rates on capital gains are sometimes defended on similar grounds as a means of mitigating 

the effects of the annual accounting period and the progressive rates; gains accruing over many years might otherwise 

be taxed at very high rates in the year they are realized. 

However, the situation is not so simple with capital gains. 

If the tax were paid year by year as the gains accrued, it 

would be lower, but it would also be paid earlier; the current deferral of the tax is itself a tax advantage. Capital 

gains are subject to income averaging for individuals, just 

like any other extraordinary increase in income. And the 

capital gains tax rates are extremely generous and, except 

for the 1-year holding period, unrelated to the length of 

time the gains have been accruing. For these reasons the 

reduction in tax on capital gains income is considered a 

tax expenditure rather than a justified form of income 

averaging . Deductions 

Under the Haig-Simons concept, as under any other reasonable definition of income, income is defined net of the 

cost of producing it. The expenses necessary to produce 

income are therefore considered normal deductions by those 

who prepare the tax expenditures budgets. The disagreements 

arise over what is an expense of producing income and whether 

the expenses have been related to the right income. 

13 
Some expenditures serve a mixture of purposes: they 

produce income and also satisfy personal needs and desires. 

Examples are commuting expenses, which are not deductible 

under the Internal Revenue Code, and business lunches, which 

are deductible. If the personal consumption component of the 

deductible expenses of this type is considered inadequately 

restricted, they are listed as tax expenditures. Charitable 

deductions for corporations and the child care credit for 

individuals 1/ have been identified as tax expenditures 

because they-are thought to allow tax reductions without 

adequately testing for the business or nonbusiness purposes 

behind them. 

Expenditures that are accepted as necessary to produce 

income may nevertheless be difficult to relate to particular 

income. The rules followed are usually those of the accounting profession, which differ from those of the Internal Revenue Code in some cases. For tax accounting purposes, some 

expenses are deducted before the income they really relate 

to is reported (for example, the cost of drilling an oil well 

may be deducted before the oil is sold), and some, which 

are admittedly estimates to begin with, are estimated by more 

generous rules than normal accounting standards would permit 

(for exampleo deducting as depletion a percentage of the 

gross sales price of minerals instead of the prorated cost 

of the well or mine). These and other special tax accounting 

rules, such as depreciation and amortization of property at 

a faster rate than it really wears out or becomes obsolete, 

additions to bad debt reserves that are greater than those 

based on actual loss experience, and deductions of costs 

that should have been added to capital accounts, create tax 

expenditures because they do not relate income to expenses 

in a manner consistent with generally accepted accounting 

principles. 

Other than the expenses of earning income, only one type 

of deduction is accepted as normal in the tax expenditures 

budgets. This is the portion of the individuals' incomes that 

is not to be taxed at all. The personal exemptions for oneself 

and one's dependents and the standard deduction or "zerobracket amount" establish the threshold at which income taxation begins. This threshold varies, as do the tax rate 

schedules, by family status, and the deductions that make 

up the tax threshold are considered normal--that is, they 

- 1/In principle there is no difference between a credit against 

tax and a deduction from income. Only the mechanics of 

computing the tax saving are different. See the section on 

credits in this chapter. 

14 
are not considered tax expenditures. The extra amounts 

allowed for the aged and the blind, however, - are considered 

tax expenditures, as are the itemized deductions for 

medical expenses, interest, taxes, charitable contributions, 

and casualty losses. 

These distinctions are among the most controversial in 

the tax expenditures budgets. The argument centers on the 

concept of "ability to pay." Most income tax systems reflect 

the principle that equally situated taxpayers should pay 

equal amounts of tax. One of the fundamental problems a 

tax system must solve is deciding which taxpayers are equally 

situated with respect to ability to pay. If all circumstances 

are considered, it may be that no two taxpayers are equally 

able to pay. The tax system must establish classes of taxpayers within which all are presumed to have equal (or substantially similar) abilities to pay. The tax rate schedules 

and the tax threshold discussed above establish such classes 

by size of income and family status, and, in the tax expenditures budgets, these are considered the only normal classes. 

Itemized personal deductions, like the extra exemptions 

for age and blindness, introduce some special classes into 

the tax system. The classes of old taxpayers, blind taxpayers, taxpayers with medical bills, taxpayers with mortgages 

or consumer debts, taxpayers with consumption expenditures 

or property subject to sales or property taxes, taxpayers 

in States with income taxes, taxpayers making charitable contributions, and taxpayers with uninsured damaged property are 

felt to be too special for the normal tax system. 

There remain several technical problems in this area, 

and the place of proper deductions in a normal tax system 

is discussed further in chapter 5. 

Tax rates 

There are separate individual income tax rate schedules 

for married couples combining their incomes on one return in 

order to be treated as one taxpaying unit, for single individuals maintaining households for dependents, for other 

single individuals, and for married persons filing separate 

returns. Family status is considered a normal reason for 

varying tax liability. This is partly in recognition of the 

legal and moral obligations involved in family relationships, 

which the tax law has always allowed for; normal families 

really do share income, so family status is important in 

determining ability to pay. 

15 
The individual income tax rate schedules are "graduated" 

or "progressive," i.e., the rates increase as income 

increases. Although there are theoretical arguments for (and 

against) progressive income taxation, they are not reflected 

in the tax expenditures budgets, (It is usually said that 

there is no basis for deciding how much progression is normal 

or desirable, but that consideration of ability to pay 

requires some progression.) The progressive rate structure is 

accepted as normal because historically it has predominated 

in this country and most other countries with income taxes. 

The corporation income tax rates are also progressive 

(though mildly so) But this is not considered "normal." 

One reason is the legislative history of the provision, which 

indicates that the lower tax rates on the first $100,000 of 

profits are a special reduction to benefit small business. 

Another is that, in economic theory, there is no basis for 

saying that one corporation has a greater ability to pay 

than anotherp because it is the position of the owners and 

not the corporations that determines ability to pay and 

there is no justification, therefore, for progressive corporate tax rates. Whatever the reason, a flat rate (proportional) tax is considered "normal" for corporations, and the 

revenue loss due to the lower rates on the first $100,000 is 

considered a tax expenditure. 

In a few cases tax rates vary by source of income. There 

is a 50 percent maximum tax rate on the earned income of 

individuals and a reduced effective rate on an individual's 

long-term capital gains. The capital gains of corporations 

are also taxed at reduced rates, and there was a reduction, 

which is now being phased out, in the maximum corporate tax 

rate for income earned in foreign trade in the Western Hemisphere. All of these preferences are said to create tax 

expenditures. 

Credits 

Tax credits are dollar-for-dollar reductions in tax 

liability. They are simply another device for determining 

final tax liability; most deductions, for example, could be 

expressed as credits and most credits as deductions. A credit 

that does not vary with income (as they usually do not) is 

the equivalent of a deduction with a flat rate of tax (cog., 

a credit of 20 percent of the cost of solar energy equipment 

is the same as deducting the cost of the equipment for a taxpayer whose marginal tax rate is 20 percent). A deduction is 

like a credit that increases as the tax rates increase (e.g., 

a deduction for charitable contributions is like a 14 percent 

credit for a taxpayer in the lowest tax bracket and a 70 

percent credit for a taxpayer in the highest tax bracket. 

16 
Credits that are identified as tax expenditures (investment 

credit, credit for the elderly, etc.) are so classified for 

the reasons already discussed (i.e.r they reduce tax liability for reasons that are unrelated to the revenue-raising 

function of the income tax). 

The only normal credits that are compatible with the 

normal tax structure are the now-repealed general tax credit 

(which substituted for additional deductions or exemptions 

as a part of the tax threshold), those that are merely 

administrative devices for refunding other taxes (excess 

social security taxes, highway use taxes paid on gasoline 

not used on the highway), and those that are, or are treated 

as being, prepayments of income tax (including the credit 

for income taxes paid to foreign governments). 

Conclusion 

A pattern for the "normal tax structure" does emerge 

from the tax expenditures budgets (even if it is a little 

frayed at the edges). "Income" consists of all accretions 

to wealth or to the power to consume arising in transactions 

that objectively fix their value. Deductions are allowed 

only for the expenses of earning income and, for individuals, the amount established as the starting point for the 

rate schedules. The income and expenses can be determined 

by any generally accepted accounting method that relates 

the amount and timing of the expenses to the actual production of the income. The period for the determination is an 

annual one, except as modified by the income averaging and 

loss carryover provisions. 

The income tax, or exemption from the tax, is determined 

separately for each type of legal entity. The tax liability 

for individuals may vary according to size of income and 

family status, both of which are deemed to reflect variations 

in the taxpayer's "ability to pay." No comparable reasons 

are admitted for varying the tax liabilities of corporations 

and no deviation from a strictly proportional rate is permitted, unless the income is simply passed through to another 

entity. 

Anything else that reduces tax liability is a tax expenditure. 

17 
CHAPTER 3 

THE INTERNAL REVENUE CODE AND TAX EXPENDITURES 

If the "normal tax structure"--the consensus on the 

way the income tax system should be--is something different 

from the current Internal Revenue Code, the question arises 

why it is. Why are provisions enacted for nontax reasons; 

and, if these reasons were good ones,. why does anyone object 

to them? 

WHY ARE THERE TAX EXPENDITURES? 

The "tax expenditures" label covers many different types 

of Code provisions, so there are many different answers to 

the question of why such provisions are enacted. 

In some instances, the answer is simply that under the 

principles of taxation current when a provision was enacted 

it was not considered a "special" provision but a necessary 

part of the tax system. This is certainly the case with the 

consumer interest deduction, for example. All interest has 

been deductible during most of the existence of the income 

tax in this country, perhaps on the grounds that it was a 

reduction in "ability to pay" (income legally obligated to 

others was not available to pay income taxes) or on equity 

grounds (to avoid making a distinction between those who 

borrow and those who use their own money). The tax analysts 

who compiled the tax expenditures budgets consider these 

views incorrect, but the legislators who enacted the provisions presumably did not (as some people still do not--see 

chapter 5). 

In other cases provisions now regarded as tax expenditures have arisen through attempts to treat various groups 

more consistently. Scholarships and fellowships, for example, 

were excluded to resolve disputes over whether they were nontaxable gifts or taxable compensation for services. Government transfer payments such as public welfare and social 

security benefits were excluded by Internal Revenue Service 

rulings that cause them to be treated the same as support by 

private gifts or welfare. 

In still other cases, it is uncertain whether a provision is intended primarily to improve tax equity or to foster 

a social goal. Tax relief for the elderly or for persons 

with large medical bills, for example, is recognized as being 

directed to special groups, but the groups have been regarded 

as deserving special tax treatment, either because they are 

less able to pay taxes than other groups or because their 

reduced ability to pay all expenses could be partially 

18 
relieved by tax breaks. The latter view (a nontax reason) 

is accepted by most tax analysts today, but it was not necessarily the view of those who enacted the provisions. 

And there is the ever-growing class of provisions that 

were added to the Code because they were tax expenditures. 

Probably the most famous, and certainly the most widely 

supported, such provision is the tax credit for business 

investments in depreciable property. When enacted in 1962, 

it was explicitly designed and presented as a tax expenditure 

(without that name) to stimulate business expansion and 

modernization. It was the forerunner of many other tax 

expenditures; a glance at the tax legislation of the next 

15 years might leave the impression that the chief purpose 

of the tax system was to influence or control private behavior and that raising revenue was secondary. Today these 

intentional tax incentive provisions range from tax deferrals 

on income earned in international trade (DISC program) to 

credits for hiring welfare recipients as domestic servants 

(WIN program). 

It is one of the little ironies of the tax expenditures 

concept that the proliferation of these provisions has surprised both the tax reformers who promoted the concept and 

those who opposed it. From the beginning, most of these 

reformers hoped and most of their opponents feared that highlighting tax expenditures would lead to the repeal of existing 

ones and an increasing reluctance to enact new ones. Instead 

the use of the tax system to affect social and economic behavior has expanded. 

THE ADVANTAGES AND DISADVANTAGES 

OF TAX EXPENDITURES 

Policymakers have seldom confronted the choice between 

funding a Government program through the tax system and funding it by the authorization and appropriation process, In 

the case of a few tax expenditures, such as the investment 

tax credit, policymakers may have first decided on program 

goals and then considered how to achieve them. But most 

tax expenditures have been enacted as a simple decision to 

reduce someone's taxesc normally with no thought given to 

enacting a direct spending program instead. In view of 

their origin it is not surprising that most tax expenditure 

programs have few features in common with direct spending 

programs. They differ because reducing taxes is a different 

process from establishing programs. 

One difference is that reducing taxes is usually more 

gratifying than increasing spending. Even if the same people 

receive the same benefit, the tax expenditure is likely to 

19 
be viewed more favorably. This advantage may disappear if 

familiarity with the tax expenditures concept causes people 

to regard the two actions as the same. 

Tax expenditures, as most of them are currently structured, are administered very simply. The beneficiary applies 

for the money merely by making a few entries on a tax return 

that would have been completed anyway. The records that must 

be kept to support the application are only a little different 

from the ones already being kept for tax purposes. Payment 

is prompt; in fact, it comes before the Government has even 

approved the application, because payment takes the form of 

a reduction in the tax due or an increase in the applicant's 

refund. If the use of the money is audited at all, it will 

be done by IRS agents who may already be auditing the tax 

return; and they will be primarily interested not in evaluating 

the Government's nontax objectives but in checking the accuracy 

of the tax computation. The taxpayer's additional paperwork 

and bother and the Government's additional administrative 

costs are likely to be negligible. The Government's interference in the applicant's business or personal life will seem 

minor compared to that in most direct programs. 

A direct program requiring an application to the Government for a grant, a wait for approval and payment, and a 

justification of what was done with the money would involve 

far more costly and obtrusive administration. If one is 

to get money from the Government, the tax system currently 

affords a less painful way of getting it than most direct 

programs. 

The advantage of administrative simplicity may disappear 

with time and attention. The investment tax credit, that 

bellwether of deliberate tax incentive programs, has grown 

in complexity with each revision and now covers some 40 pages in the Internal Revenue Code. As tax expenditure programs 

are increasingly regarded as the functional equivalent of 

direct spending programs, they may tend to become more like 

them in restrictiveness, red tape, and Government interference. 

Tax expenditures by definition can only benefit those 

who owe taxes, or who would owe them without the tax expenditure provision. This restriction could be an advantage in 

programs that are designed to benefit corporate businesses 

because it provides a built-in test of efficiency. The 

corporation must earn enough profit to owe taxes before 

it receives any benefit, so a highly inefficient business, 

too unprofitable to survive, will not be subsidized. (But 

unincorporated businesses or organizations that are suffering 

'osses can pass their tax reductions to owners who have 

20 
taxable income from other sources.) This advantage is lost 

if the tax expenditure is made "refundable," i.e., payments 

through the tax system are supplemented by direct payments 

to those who do not owe enough tax to get the full benefit. 

Because they are a part of the tax system, tax expenditures tend to be more widely publicized than most Government 

programs. Nearly all of the population is aware of the 

income tax system. Probably no other Government activity 

directly affects so many people. A program highlighted on 

a tax return or in an IRS publication reaches a far wider 

audience than do any but the most highly publicized directspending programs. 

Funding Government programs by tax expenditures rather 

than by direct authorization and payment also has disadvantages. Many of the characteristics cited as advantages 

above can also be cited as disadvantages. 

The perception that tax expenditures are not a use of 

Government funds may make it easier to obtain support for 

a program initially, but it often makes it harder to review, 

evaluate, and terminate the program later. If a tax provision is not regarded as a Government program, it is difficult 

to justify evaluating its effectiveness as if it were. As 

noted above, however, this perception seems to be changing 

and more and more tax expenditures are being reviewed as 

Government activities even by those who dislike the name 

"tax expenditures." 

A related disadvantage is that tax expenditures have 

usually been subject to less administrative and congressional 

review. Most direct programs come up for annual appropriations and often for renewed authorization; tax provisions 

tend to be enacted and forgotten except by IRS auditors, 

the taxpayers who benefit, and their lobbyists. With the 

increasing attention paid to the tax expenditures budgets 

and the tax system generally, this disadvantage is disappear ing. 

The structural differences that give tax expenditures 

administrative simplicity, lower costs, and minimal Government involvement arise mostly from the fact that they really 

are not administered at all; IRS processes the tax expenditure payments, but no one is responsible for checking the 

program itself to see whether its objectives are being 

accomplished. If careful administration is a good management 

practice, if strict qualification requirements, advance 

approval, effectiveness reviews, and fraud investigations 

are necessary for directly funded programs, it seems that 

they should also be required for tax expenditure programs. 

21 
MU 

In other words! the administrative structure should depend 

on the nature of the program, not on the source of the 

funding e 

The lower administrative costs are no doubt offset 

to some extent by the costs involved in learning about and 

taking advantage of tax expenditure provisions. Fees for 

lawyers, accountants, and tax practitioners are an obvious 

component of these costs; the taxpayers' own searches for 

tax reductions are less obvious but possibly more costly 

in total. Tax expenditures did not create the tax planning 

industry, of course, but more time will be spent searching 

the more likely it seems that the search will be rewarding. 

Some disadvantages arise because the system for funding 

programs is also the system for raising revenue. For example, 

many tax expenditures take the form of reductions in taxable 

income (exclusions, deductions, etc.). Because the individual income tax rates are progressive, the programs have an 

"upside-down" effect: the wealthier the taxpayer, the more 

the Government contributes. A subsidy program designed to 

pay nothing at all for casualty losses suffered by the very 

poor and up to almost 70 percent of the losses suffered by 

millionaires would not stand much chance if it were proposed 

as a directly funded program. It has this structure because 

the casualty-loss deduction necessarily follows the structure 

of the progressive income tax. 

To avoid this effect, tax expenditures are now often 

structured as flat-rate credits against tax rather than 

deductions from income. A credit makes the Government 

payment the same percentage of the expense for everyone-- 

at least, everyone who owes enough tax to use the credit. 

Credits still provide no benefit to those who owe no tax, 

so some, such as the earned income credit and a few of 

the energy credits, have been made refundable, meaning 

that direct payments are made when the credit exceeds tax 

liability. 

Since tax expenditure programs are embedded in the tax 

law, the amount of the benefit they provide depends on the 

rest of the tax system. A nonrefundable credit for home insulation, for example, may be intended to benefit persons down 

to a certain income level. If the tax threshold is increased 

for an unrelated reason (to adjust tax burdens for inflation, 

for example), some intended beneficiaries will be excluded 

because they will no longer owe enough tax to use their 

credits. If marginal tax rates are changed, the size of 

the benefit a taxpayer receives will also be changed. 

22 
Tax expenditures also affect the rest of the tax system. 

If Government receipts are held constant, a tax reduction 

for one person means a tax increase for someone else. Each 

of the revenue losses caused by tax expenditure provisions 

is made up by higher taxes on everyone else. Thus funding 

a program through the tax system makes the system look more 

inequitable, as though it were a system for conferring privilege. (The result, of course, is the same as if the taxes 

were distributed equitably and the inequity were in the 

distribution of the direct expenditures.) Since the public's 

perception of the fairness of the tax system is important, 

this is a serious disadvantage. Tax rates are higher than 

would be necessary without tax expenditures; if there were 

fewer tax expenditures, the tax base would be broader and 

the same amount of revenue could be raised with lower rates. 

Tax expenditures also add greatly to the complexity of an 

already overly complicated tax system and burden the congressional tax committees and IRS with responsibility for numerous nontax programs. 

TAX EXPENDITURES AND TAX REFORM 

The disadvantages of tax expenditures, and especially 

their effect on the revenue-raising function of the tax 

system, have led many analysts and political figures to 

generally oppose their use to fund Government programs. 

Some of these persons have argued that the curtailment of 

tax expenditures should be a major goal in any effort to 

reform the tax system. 

Tax reform has certainly been an important aim of many 

proponents of the tax expenditures concept. The original 

tax expenditures budget was little more than a catalogue of 

Code provisions regarded as ripe for reform. Some persons 

regard the present, more comprehensive lists in the same 

way. Some of those who dislike the concept also suspect 

that the principal purpose of a list of tax expenditures 

is to prepare the way for tax reform. Because of this view, 

judgments as to what are and what are not tax expenditures 

are sometimes clouded by the conviction that including a 

provision in the budget means targeting it for repeal. 

But tax reform is essentially irrelevant to the concept. 

If a careful analysis concluded that every line item in the 

tax expenditures budget is the best possible use of Government funds, the concept would still have proved its value. 

The purpose of the budgets is to facilitate such a review, 

as is done (or should be done) with all Government programs. 

23 
CHAPTER 4 

THE TAX EXPENDITURES BUDGET 

After provisions of the Internal Revenue Code have been 

identified as tax expenditures, two more steps are necessary 

to compile a "tax expenditures budget." The cost of each 

provision must be estimated and it must be classified in the 

budget functional category in which it would appear if it 

were a direct expenditure program. 

THE COST OF TAX EXPENDITURES 

Estimating costs 

of all tax expenditures is the difference between the revenue 

raised by the normal tax structure and that raised by the 

existing structure. The cost of any particular tax expenditure is its contribution to that total cost. 

According to the model presented in chapter 2, the cost 

In the real world these costs cannot be determined 

directly. No one knows what revenue the normal tax structure 

would raise. The present system creates incentives for 

people to alter their behavior and so presumably influences 

the way they act. They would probably act differently under 

another system, with consequent effects on revenue, but there 

are too many unknowns to estimate the differences, 

The approach actually taken in estimating the revenue 

lost by tax expenditure provisions is to consider each provision in isolation and determine how total taxes would change 

if it were repealed and all elsep including taxpayer behavior 

and the rest of the tax systemo remained the same. 

The estimating technique varies according to the type 

of tax expenditure. The cost of a tax expenditure that takes 

the form of a tax credit, such as the investment credit, is 

just the amount by which the tax liabilities are reduced (as 

reported on tax returns). The cost of tax expenditures that 

take the form of a reduction in taxable income--a deduction, 

exclusion, exemption, or deferral--depends on the way the 

reduction is distributed by taxpaying entity and tax class. 

Information about this distribution is gathered from tax 

returns or other sources, the tax for each class of taxpayers 

is recomputed on reported income plus the reduction, and 

the difference between that computation and the actual tax 

is the amount of the tax expenditure. For example, information on the ownership of tax-exempt State and local government securities is obtained from the Federal Reserve Board or 

24 
other financial sources; the amount of tax-exempt interest 

is distributed by tax class based on this information and 

added to each class's taxable income;. a new tax is computed 

for each class; and the differences between the new tax and 

the reported tax for all classes are summed to obtain the 

cost of this tax expenditure. 

This approach cannot be generalized to produce a reliable 

estimate of the total cost of all tax expenditures. Earlier 

in this paper, "over $100 billion" was mentioned as the total 

cost. This figure is merely the sum of the costs of the individual provisions, estimated as described above. Although it 

is common to make such a summation, the figure is of limited 

usefulness. 

The reason is that removing two or more provisions at 

the same time will often produce a different amount of revenue 

than the sum of the revenues estimated to be lost by each 

provision separately. For example , repealing all itemized 

deductions would produce a different revenue gain from the 

sum of the costs of each deduction by itself. As each deduction were repealed, taxable income would increase and push 

the affected taxpayers into higher tax brackets; however, 

because the "zero-bracket amount" effectively places a floor 

under each taxpayer's deductions, a point would come when 

the repeal of further deductions produced little or no additional revenue. 

This example illustrates an important difference between 

an estimate of the cost of a tax expenditure and an estimate 

of the cost of a direct spending program. Tax expenditure 

costs should always be estimated incrementally, i.e., by 

assuming that only a single provision were removed, while the 

rest of the tax system remained unchanged. Otherwise the cost 

would depend on what other provisions were being removed at 

the same time--perhaps would even depend on the order of their 

removal. Cost estimates for direct spending programs require 

no corresponding assumptions about other spending programs. 

Estimatinq secondary effects 

The " other - th ing s- be ing-equal" approach to estimating 

costs has attracted criticism. Business interests, for example, maintain that the investment tax credit does not cost 

the Government revenue but creates it. They estimate how 

much employment and profits have increased in response to 

the investment credit and conclude that the increased taxes 

on wages and profits are greater than the direct costs of 

the credit. If secondary and "ripple" effects are taken 

25 
I 

into account, such arguments could be made about many or 

most of the tax expenditure provisions. Those who defend 

the estimates reply that these effects are even more conjectural than the assumptions in the tax expenditures budgets. 

It is still unclear, for example, whether the investment 

credit has significantly boosted total investment spending. 

However important these questions may be in appraising 

the costs and benefits of tax expenditures, they do not discredit the tax expenditures budget. Secondary and "ripple" 

effects become a part of the budgeting process only after 

initial costs have been established. The U.S. Budget does 

not record the costs of the social security programs net 

of the welfare payments that might be required if there 

were no such programs. The budget of the Public Health 

Service is not presented net of the taxes on the wages of 

the workers its programs have kept healthy enough to work. 

These are important in deciding whether to undertake or 

continue a program, but they are not relevant to the question 

of how many resources the program consumes. The same is 

true of tax expenditures. 

Projecting cost estimates - 

Estimating future revenue losses from tax expenditures, 

especially new ones, raises some additional problems. Tax 

expenditures are like entitlement programs with permanent 

appropriations: every beneficiary who establishes that he 

belongs to a class entitled to the benefit receives it automatically, and the amount of the Government's obligation 

depends entirely on the actions of private individuals and 

whatever limits may be built into the program. This means 

that analysts who are estimating future costs cannot avoid 

making assumptions about the way behavior will be affected. 

For existing tax expenditure programs, it is usually 

assumed that everyone will go on doing whatever he has done 

in the past. Future costs can be projected based on past 

relationships of the factor being estimated (the medical 

deduction, for example) to economic and demographic indicators (age and income distributions, for example) or 

other variables that can be projected into the future. 

For new or drastically changed tax expenditures, however, 

some effects must be estimated or assumed in order to estimate costs. For example, to estimate the cost of a tax 

credit for home insulation, it is necessary to estimate 

how many homeowners in each tax bracket will insulate their 

homes each year thereafter and how much they will spend. 

Analysts are reluctant to simply project historical data 

into the future, because that is the same as assuming that 

26 
the credit will have no effect at all. So the estimate must 

be based on some guess about how much more insulation will 

be installed in response to the credit, and the accuracy of 

the estimate will depend on the accuracy of the guess. 

A directly funded entitlement program has the same 

defects. If the Government set up an office to pay 15 percent of any bill for home insulation that was presented to 

it, estimating the future costs of the program would be as 

difficult as estimating the costs of the future tax expenditure; the cost would depend on the program's effect. Even 

for directly funded programs with specific limits there 

are spending shortfalls and cost overruns, and the "limits" 

are frequently breached by supplemental appropriations, so 

the tax expenditures budgets are not very different from 

the direct spending budgets in this respect. 

BUDGET FUNCTIONAL CATEGORIES 

Since one of the principal reasons for constructing a 

tax expenditures budget is to facilitate comparisons between 

tax and direct expenditures, the budgets are organized according to the same functional categories that appear in the 

direct outlays budget. Tax expenditure provisions are fitted 

into the regular budget categories dealing with the same 

subject. For example, the Code provisions that exclude from 

taxable income some of the benefits received by members of 

the armed forces are shown as additional costs in the budget 

function "National Defense," subfunction "Military Personnel." 

Members of the armed forces do not pay taxes on some of their 

combat pay, on mustering-out payments, on the value of free 

meals and lodging, or on subsistence payments in lieu of 

meals and lodging. These special tax benefits are the same 

as additional compensation to military personnel, so the revenue lost from them is the equivalent of an additional budget 

outlay for national defense of an estimated $1.4 billion 

in 1979. 

27 
CHAPTER 5 

SOME TECHNICAL ISSUES 

The tax expenditures concept is still in its early childhood, if not its infancy. Many aspects of it have not been 

sufficiently researched or discussed. Problems remain in 

definition, scopep presentation, analysis, and many related 

issues. Most such problems may be peripheral concerns that 

do not much impair the usefulness of the tax expenditures 

budgets; a few seriously limit some uses of the concept. Several problems of varying seriousness are discussed below,, 

A NORMAL OR AN IDEAL TAX SYSTEM? 

Tax expenditures are defined in terms of the "normal 

tax structure." Everyone can agree that "normal" means conformity to a norm or standard, but not everyone agrees on the 

standard. In ordinary usage, that standard is the average, 

the commonly agreed on, the usual. To most of the economists 

(and some of the lawyers) who write about tax matters, however, 

the standard is an ideal one, derived from the Haig-Simons 

definition of income and other concepts from economic theory 

(a "theoretically pure income tax,'n in the words of Special 

Analysis G of the President's 1980 Budget). 

If "normal" were accepted at its ordinary meaning of 

''usual" or "agreed on," there would probably be no tax expenditures budgets; the Internal Revenue Code is the nearest thing 

we have to an agreed-upon tax structure. 1/ If "normal" were 

to be taken to mean the economist's ideal; the tax expenditures budget would be very different; some of the differences 

were discussed in chapter 2. In this paper, we have taken the 

position that the existing tax expenditures budgets measure 

deviations from the normal and therefore indirectly establish 

what is meant by normal. This definition is somewhere between 

the above two meanings; essentially, "normal" in this paper 

means the standards established by the two most influential 

groups of tax analysts in the Federal Government, the tax 

staffs of the Treasury Department and the Joint Committee 

on Taxation, who have constructed the official budgets in 

consultation with each other. 

This definition of normal leaves some areas where the 

principles followed are not completely clear. The tax staffs 

- l/Several tax analysts hold this view; see, e.g., the articles 

by Boris Bittker and Walter Blum listed in the bibliography. 

28 
' are obviously influenced strongly by the ideal concepts of 

: the economists and seem reluctant to stray too far or too 

i openly from them in creating their definition of "normal." 

In a number of areas, confusion may arise because the ideal 

and the normal do not match. 

! Gifts 

Under the Internal Revenue Code, transfers of value for 

which no value is received in return are not income. Such 

unrequited transfers are income under the Haig-Simons definition. What they are under the normal tax structure of 

the tax expenditures budgets is not clear. 

From the published budgets and explanations, the treatment of unrequited transfers is as follows: 

1. Cash transfer payments from governments (social security and welfare) are income and their exclusion from 

taxable income creates a tax expenditure. 

2. In-kind transfers from government (school lunches, public housing) are income but are not included in the tax 

expenditures budgets because their value is too difficult to estimate, or they are like other government 

services and therefore are not taxable income in the 

normal system. 

3. Transfers from private institutions (soup kitchens) are 

not included because they are mostly in-kind transfers, 

and government in-kind transfers are not included. 

4. Gifts between individuals are not income because they 

are usually between related parties, often within 

families, because they are too difficult to estimate, 

perhaps because they are not deductible by the donor, 

and because they may be subject to the separate tax 

on transfers (estate and gift tax). 

5. Scholarships and fellowships are income and their exclusion creates a tax expenditure (perhaps because they are 

not really gifts, since something is expected in return 

for them) e 

6. Prizes and awards are not mentioned in the budgets, perhaps because little revenue is lost by their limited 

exclusion. 

7. Life insurance proceeds that are excluded under the Code 

are not income, presumably because they are either 

29 
returns of previously taxed income, the earnings of this 

income (whose exclusion from current taxation - is a tax 

expenditure), or bequests. 

8. Bequests and inheritances are not income, presumably for 

the same reason or reasons that gifts are not. 

These classifications may be -- ad hoc decisions not much 

related to one another, or they may result from the application of consistent principles that we could not discern. 

The classifications almost imply the principle that gifts 

should be taxable to the recipient when received from a taxexempt source; but they do not quite follow this principle 

and the implication may be accidental. The existence of 

separate estate and gift taxes apparently has something to 

do with the ad hoc decisions, - 1/ although it is not clear 

why it shoulzPersonal deductions 

The provisions in the Internal Revenue Code that allow 

taxpayers to deduct medical expenses, interest, taxes paid, 

nonbusiness casualty and theft losses, and charitable contributions, have consistently been designated tax expenditure 

provisions by those who prepare tax expenditures budgets. 

They have been so designated because they are not costs of 

earning income; therefore, in the view of those who construct 

these budgets, they must be personal consumption expenditures. 

Since the Haig-Simons definition of income is the sum of 

consumption and changes in net worthl the personal expenses 

for which deductions are allowed do not alter income and hence 

in the normal income tax system have no effect on one's tax 

liability. 

This reasoning is countered by critics who maintain that 

no personal expense is consumption unless the expenditure is 

voluntary. Expenditures for medical care and supplies are, 

in a manner of speaking, involuntary if the alternative is to 

remain ill, at peril to one's life. Taxes too are said to be 

involuntary, in the sense that few people willingly pay taxes; 

nor does anyone willingly suffer a casualty or theft loss, 

Charitable contributions are conceded to be voluntary; but 

are they consumption themselves or transfers of consumption 

power? The latter, say those who believe that the charitable 

deduction creates no tax expenditure. (Few of them draw the 

- l/Special Analyses, The Budget of the United States Government for Fiscal Year 1980 (Washington: U.S. Government 

Printing Office, 1979), p. 187. 

30 
logical conclusion that such contributions must therefore 

be income to the recipients and the failure to tax them 

creates a tax expenditure.) 

How convincing are these arguments? Proponents of the 

tax expenditures budgets reply that even if some personal 

expenditures are truly involuntary, the tax system allows 

for a normal level of such expenditures by exempting a certain amount of income--the so-called "zero-bracket amount"-- 

from tax. 

More serious is the question of how to know which expenditures were voluntary and which were not. In truth, most 

expenditures must lie within a spectrum ranging from "wholly 

voluntary" at one extreme to "wholly involuntary" at the 

other. There must be few at the latter end. Medical expenseE 

include many payments for services that are not strictly 

necessary for the preservation of life or health. Taxes, 

which are payments for government services, are not much 

less voluntary than any payment for a good or service. Is 

the annual payment of a property tax on a person's house 

distinguishable from the same person's mortgage payments 

by the willingness with which it is paid? Casualties and 

thefts create losses that are purely involuntary; but the 

decision to carry insurance is not, in those cases where 

insurance is available. 

The interest deduction is called a tax expenditure 

by nearly all those who embrace the concept, apparently on 

the grounds that the payment of interest is essentially a 

personal consumption expenditure that differs little from 

other such expenditures. A payment for the use of money, 

they say, is essentially no different from a payment for 

the use of, say, shelter, clothing, or transportation. 

If it is inappropriate to allow a deduction for these expenditures in determining a person's true income, no deduction 

for interest payments is appropriate either. 

This reasoning is so widely accepted that the interest 

deduction has been a relatively noncontroversial item in 

all tax expenditures budgets. But there are a few dissenters 

who maintain that a deduction for interest payments must be 

allowed if horizontal equity--the equal treatment of persons 

in substantially equal circumstances--is to be accomplished. 

They point out that if one person finances current consumption 

by selling income-earning assets from his portfolio, at a 

cost measured by a loss of future income, the Government 

"shares" the cost in the form of forgone taxes on that future 

income; but the forgone revenues are not called a tax expenditure. Another person finances the same consumption not by 

-1ling assets but by borrowing cash. Both persons are in 

31 
substantially the same economic position after these trarisactions; but unless the Government allows the borrower a deduction for the interest he pays, the seller of assets will in 

future pay less taxes. Both persons have effectively done 

the same thing: financed current consumption out of future 

income. Both should therefore pay the same taxes. 

The disagreement over the proper treatment of the interest deduction raises some complicated issues that have been 

omitted from the illustration above. The subject is important 

enough to warrant serious examination in a separate report. 

Expenses of earning income 

In principle the costs of earning income should be subtracted from gross income in order to define the net income 

taxable base. The principle is clear, but in practice it 

is often difficult to distinguish personal consumption expenditures from expenses incurred for the purpose of earning 

income. Many expenses have the characteristics of both. The 

standards for an ideal tax system that have been developed by 

tax scholars offer little or no guidance for deciding which 

expenditures should be deductible as business expenses and 

which should not. The makers of tax expenditures budgets 

have therefore been forced to decide for themselves, aided 

by legal and accounting principles, whether the deductions 

for business expenses that are allowed by the Internal Revenue 

Code belong in a normal income tax. 

The expenses of earning wage income illustrate the 

difficulties. Some fringe benefits that employees enjoy, 

such as reimbursement of their own travel and entertainment 

expenses, are not taxed as income to them but nevertheless 

are deductible from their employers' gross income as ordinary 

and necessary business expenses. The deductions are not 

labeled tax expenditure provisions. On the other hand, the 

budgetmakers have been strict about designating as tax 

expenditures the few provisions in the tax law that either 

allow wage earners to deduct certain expenses of earning 

income (the child care expense deduction) or afford wage 

earners tax relief partly on the grounds that the law grants . them few opportunities to deduct some expenses of earning 

income (the maximum tax provision). A great deal of work 

remains to be done in this area to provide clearer standards 

for budgetmakers and enable them to be less arbitrary in 

their decisions. 

32 
The corporation income tax 

In the world of ideal tax systems corporations do not 

exist. Only individuals exist; and if they happen to band 

together to create a business enterprise, the profits and 

losses should be attributed to the individuals. In that 

case there would be no need for a corporation income tax. 

The individual who owned a share of corporate stock would 

be taxed on his portion of the corporation@s profits. 

Because the corporate income tax is considered an anomaly in the ideal tax system, little thought has been devoted 

to the structure of a normal income tax for corporations. 

If it is normal to have a tax at the corporate level on 

corporate profits, some additional ways in which corporations 

escape or defer the tax are candidates for the tax expenditures budgets. A partial list would include such provisions 

as those allowing tax-free reorganizations and mergers, 

special tax computations for insurance companies, investment 

companies, etc. I tax-exempt and tax passthrough organizations, 

and even the deduction for intercorporate dividends. - 1/ 

Foreign income 

The place of national boundaries in the ideal system is 

apparently as uncertain as it is in the real one. The United 

States taxes the worldwide income of its own citizens. (It 

is one of the few countries in the world to attempt to tax 

nonresident citizens on the income they receive outside their 

countries' bordercs.) It also taxes all income generated 

within its jurisdiction received by anyone (with a few specific 

exceptions). But it allows the exclusion of some income earned 

by nonresident individual citizens, deferral of tax on the 

unrepatriated earnings of some foreign subsidiaries of U.S. 

corporations, credits against U.S. taxes for income taxes 

paid to foreign governments, and a number of special arrangements based on treaties with specific countries. 

Of these exceptions, the limited exclusion of the foreign earnings of individual citizens is considered a tax 

- 1/The courts allowed a tax on corporate profits before the 

passage of the 16th Amendment, based on the argument that 

the Government had the right to tax the privilege of doing 

business as a corporation and that net income was a reasonable measure of the value of that privilege. According to 

this viewp intercorporate dividends could appropriately be 

taxed at a higher rate than the other elements of corporate profits, because the right of one corporation to own 

stock in another is an additional valuable privilege. 

33 
expenditure by everyone, the deferral of tax on unrepatriated 

earnings is considered one in all the budgets now but was 

not considered one in the President's budgets before 1979, 

and the foreign tax credit and the preferences granted by 

treaty are not considered tax expenditures by anyone. The 

President's 1978 and earlier budgets omitted the deferred 

income and foreign tax credits on the stated grounds of 

''the international norms of taxation," which are not further 

explained. - 1/ 

OTHER TAXES 

The tax expenditures concept is not necessarily limited 

to the income tax. Tax expenditures could arise in deviations 

from a normal tax structure for wealth transfer (estate and 

gift) taxes; excise taxes; State and local saleso property, 

and income taxes; or even social security taxes (the exemption 

of government employees, perhaps). But the tax expenditures 

budgets ignore these tax systems, mostly because little effort 

has been devoted to establishing the normal structures for 

these taxes. 

A tax expenditures budget has been prepared for the 

Federal estate and gift taxes by private researchers. 2/ It 

establishes the normal structure, by analogy with the Tncome 

tax, as a tax on all transfers of net wealth for which adequate compensation is not received (except for some transfers 

between husband and wife). Provisions that deviate from this 

norm and so create tax expenditures are the special valuation 

of real property and deferral of tax payments for bequests of 

farms and closely-held businesses, the deduction for charitable contributions, the exclusion of some annuities and life 

insurance proceeds, the failure to tax all generation-skipping 

transfers, the preferential taxation of gifts made more than 

three years before death, the orphans' exclusion (a small 

- l/Special Analyses, The Budget of the United States Government for Fiscal Year 1978 (Washington: U.S. Government 

Printing Office, 1977), p. 124. The foreign tax credit 

is sometimes defended as a protection against double taxation. This principle does not apply domestically, however: 

taxation of the same income by two political units (the 

Federal and State governments, for example) or even twice 

by the same unit (income subject to Federal income and 

social security taxes) is considered normal. 

- 2/Stanley S. Surrey, William C. Warren, Paul R. McDaniel, 

and Harry L. Gutman, Federal Wealth Transfer Taxation 

(Mineola, N.Y.: Foundation Press, 1977), pp. 882-87. 

34 
deduction for bequests to certain minor children), the 

exclusion of gifts to political organizations, the credit 

for State death taxes, and the redemption at face value 

of Government bonds currently selling at a discount and 

presented in payment of estate taxes ("flower bonds"). The 

total revenue loss attributed to these provisions was estimated at more than $2.5 billion for 1978. 

State and local property taxes are another obvious area 

for tax expenditure analysis. Large cities especially have 

begun considering the cost of exempting nonprofit organizations, churches, Federal Government property, and the like 

from property taxation. A type of tax expenditure analysis 

is already in use in this area. 

The other taxes may be further away from useful tax 

expenditure analysis. Sales taxes are exceedingly complex, 

and standards are difficult to decide on. Federal excise 

taxes involve relatively little money and would probably 

not be worth the trouble, The social security tax allows 

so few deductions that it would probably not be worth the 

effort either. 

USES OF TAX EXPENDITURES BUDGETS 

The tax expenditures budgets are admittedly incomplete. 

They do not account for all the differences between HaigSimons income and the income tax base; they do not identify 

all the discrepancies between the Federal income tax structure and a "theoretically pure income tax." Some omissions 

are due to unresolved conceptual problems, such as the handling of transfers or the corporate profits tax; some are due 

to inadequate data, such as the value of government services 

received or imputed rents on owner-occupied housing; some 

are aspects of the tax system that have not been sufficiently studied, such as the relationship of accounting 

standards to the normal tax structure. 

The principal uses of the budgets are not much impaired 

by these omissions. One can still see that certain activities 

are supported indirectly through the tax system instead of or 

in addition to directly through the appropriations process; 

that certain groups of taxpayers have saved taxes at the 

expense of other taxpayers; and that the Government's influence is much larger than is commonly supposed. 

But because the budgets are incomplete, they are of 

limited help in comparing the burdens borne by different 

taxpayers. To make such comparisons more information is 

needed than appears in the tax expenditures budgets. 

35 
Scholarships and fellowships offer an example. Two 

university students, one receiving a scholarship for his 

tuition costs and the other attending a tuition-free university, appear for all practical purposes to be in the same 

position. But the first is said to be receiving a tax 

expenditure and the second is not. Obviously, tax equity 

would not be improved by taxing the scholarship. 

Or consider the tax burdens borne by homeowners and 

renters. Tax expenditure provisions said to subsidize home 

ownership are the deductions for mortgage interest and property taxes, the deferral of capital gains on exchanges of 

houses, and the exclusion of capital gains on homes sold by 

older persons. In addition, a small part of the tax expenditure due to capital gains is attributable to the sale of 

private homes. For the rental market, the only subsidies 

shown are the two deductions for rapid amortization and 

depreciation, the expensing of construction period taxes 

and interest, and an indeterminate amount also included 

under the capital gains heading. For 1978, these were 

estimated to total about $11 billion worth of subsidies 

for homeowners and only about $0.5 billion for the rental 

market, not all of which had to be passed on to the renters, 

of course. 

But there is more to the renters' story. On its tax 

returns the real estate rental industry has reported net 

losses for decades. For 1976 (the latest statistics available) the industry as a whole reported $4.4 billion in profits, but $6.1 billion in losses. Tax return statistics for 

residential property are not published separately from those 

for commercial property, but rental housing is a well known 

tax-loss industry. Rental housing developments are marketed 

as tax losses, promising that a small investment will produce 

a large tax saving and some tax-free cash flow for investors 

in high tax brackets. This suggests that the rents charged 

do not cover all expenses and a profit for the owners (as in 

the Navy ship example in chapter 1); in other words, renters 

are also receiving a tax subsidy. And some of this subsidy 

is not in the tax expenditures budgets. 

Rental housing is depreciated by the straight-line method in the normal tax system; accelerated depreciation 

methods are considered tax expenditure provisions. However, 

it is possible to achieve a tax profit using only straightline depreciation. This is because the building is usually increasing in value the first few years of its life, not 

depreciating. If the property is rented for just enough to 

cover operating expenses and debt service, the depreciation 

deduction becomes a loss to be deducted from income from 

36 
other sources. If the building is sold for even as much 

as was paid for it (and it often will actually have appreciated in value) the depreciation previously deducted becomes 

a part of the profit on the sale, which is taxed at capital 

gains rates. Deducting depreciation on a building that is 

not declining in va1u.e thus allows the investor to defer 

taxes for some years and pay at t'he capital gains rates when 

the tax is finally paid. 

In the tax expenditures budgets capital gains on the 

sale of rental housing are not shown as a separate estimate 

and the deferral due to depreciation deductions is not shown 

at all. In some circumstances it is also possible for the 

investor to defer even the capital gains tax by a tax-free 

exchange; tax-free exchanges of rental housing are not in 

the budgets. Real estate investment trusts and limited partnerships have the advantages of corporations in accumulating 

large funds for investment in rental housing, but do not pay 

corporate profits taxes; this is not in the tax expenditures 

budgets. Deferral of tax through installment sales reporting 

is not in the budgets; it is useful for deferring taxes on 

sales of either owner-occupied or rental housing, but presumably is more useful to landlords than to homeowners, who have 

other tax breaks that are even more useful. The failure to ~ 

tax the imputed rental value of owner-occupied housing is 

also not in the budgets (see chapter 2), but this failure 

looks a little different when the full picture is considered. 

From the published statistics it appears that the net rental 

value of rental housing is not taxed either. 

As a final word on incomplete budgets the Navy ship example cited in chapter 1 should be mentioned. The specific tax 

expenditure involved in this example has not been identified 

earlier because it is not in the tax expenditures budgets. 

The tax losses in the example were due mostly to accelerated 

d e p r e c i a t i o n o f the ships, which allowed the lessors to defer 

taxes for some years. Accelerated depreciation of ships is 

considered normal because ships, like automobiles and other 

machinery, really do lose value faster when new. But the 

ships in this example were leased for fixed amounts for 

their entire depreciable lives; repairs, inoperable periods, 

etc. , were at the Navy's expense, not the lessors'. So the 

declining value of the property was irrelevant to determining 

the income of the lessors; that income continued no matter 

what happened to the ships. The lessors' income was properly 

measured by amortizing the value of the lease, not depreciating the leased property. This situation is not in the tax 

expenditures budgets, presumably because of the difficulty 

of estimating excess depreciation on leased property (which 

depends in part on the terms of the lease). But the Navy 

37 
ship report is nevertheless an excellent example of a proper 

use of the tax expenditures concept; and it suggests that 

the real usefulness of the concept does not depend on how 

complete the budgets are. 
APPENDIX I APPENDIX I 

ANNOTATED LIST OF TAX EXPENDITURES 

This list includes all the tax expenditures listed in 

the most recent tax expenditures budgets published in the 

Special Analyses of the U.S. Budget and by the Congressional 

Budget Office. The list, like the tax expenditures budgets, 

is organized by the functional categories used in the direct 

expenditures budget. The authority for and descriptions of 

most entries were adabted from Tax ExDenditures: Relationships to Spending Programs and BackgrGund Material on Individual Provisions (U.S. Senate Committee on the Budget, 1978). 

Descriptions of tax expenditures added or substantially modified since that publication are based on the committee reports 

on the Revenue Act of 1978, the Energy Tax Act of 1978, and 

the Foreign Earned Income Act of 1978. Cost estimates are 

taken from Five-Year Budaet Proiections 4 d and Alternative 

Budgetary Strategies for Fiscal Years 1980-1984, Supplemental 

Report on Tax Expenditures (U.S. Congressional Budget Office, 

Tune 1979). 
APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority 

APPENDIX I 

De sc r ipt ion 

Exclusion of 1,470 Internal Revenue Military personnel are not taxed 

benefits and Code (IRC) secs. on quarters and meals provided, allowances to 

Armed Forces Revenue Regulation ters and meals, mustering-out 

personnel (IR Reg.) 1.61-2; payments, combat pay, and a few 

112, 113; Internal allowances given in lieu of quarcourt decisions other such benefits. 

Exclusion of 130 IRC secs. 104(a)(4), Military pensions based on dismilitary dis- 104(b) ability are often not subject to 

0 @ ability pensions income tax. 

-INTERNATIONAL AFFAIRS- - - - - - - - - - - - - - - - ---------------- 

Exclusion 

income ea 

abroad by 

citizens 

of 

rned 

U.S. 

555 IRC secs. 911-913 U.S. citizens and legal residents 

living and working in other countries may reduce their foreign 

earned income in one of several 

ways. Persons required to live 

in work camps under hardship conditions may exclude a portion of 

their income. Others (except U.S. 

Government employees) may deduct 

certain excess foreign living 

expenses, such as the cost of 

schooling for their children and 

housing costs in excess of U.S. 
housing costs. U.S. Government 

employees may exclude certain 

housing and other allowances and 

benefits. 

Deferral of tax 1,260 IRC secs. 991-997 Corporations established to 

on income of domes- export U.S,-made products may 

tic international defer indefinitely the corporate 

sales corporations 

(DISCS) 

tax on a part of their profits. 

Deferral of tax 445 IRC secs. ll(d), The profits of foreign subsidion income of 882, 951-964 aries of U,S. corporations are 

controlled foreign generally not taxed by the U.S. 

corporations until the money is returned to 

this country? permitting indefinite deferral of the U.S. tax. 

Special tax date 5 IRC secs. 921, 922 Formerly, the law allowed profits 

for Western Hemi- earned in trade with Western Hemisphere trade sphere countries to be taxed at a 

corporations reduced rate. This provision is 

I--' 

being phased out and will be eliminated by 1980. 

------------ -GENERAL SCIENCE, SPACEp AND TECHNOLOGY- - - - - - - - - - - - 

Expensing of 1,780 IRC sec. 174 

research and 

development 

expend it ur e s 

Research and development costs 

may be deducted as current 

expenses in the year incurred 

instead of being capitalized and 

charged against the income they 

produce as it is earned. 
APPENDIX I APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority Descr iption 

Expensing of 1,665 IRC secs. 263(c), The costs of searching for oil, 

exploration and 465, 616, 617, minerals, etc. and bringing 

development costs 704(d), 1254 them to the point of production 

(including "intangible drilling" 

costs) may, for tax purposes, be 

deducted currently from other 

income; in normal accounting 

practice, such expenses would be 

capitalized and charged against 

the income from the property as 

it is produced. Most of the 

revenue loss relates to oil and 

gas income. 

Excess of percent- 1,750 

age over cost 

depletion 

IRC secs. 613, 

613A 

Taxpayers are allowed to deduct 

as depletion each year a fixed 

percentage of their income from 

many types of mineral property 

rather than their prorated investment in the well or mine; the 

latter is considered the "normal" 

deduction and the extra deduction that percentage depletion 

produces is considered a tax 

expenditure. The deduction for 

all minerals is included here 

because most of it relates to 

fuels. 
Capital gains treat- 85 IRC sec. 631(c) 

ment of royalties 

on coal 

Residential energy 435 IRC sec. 44C 

credits 

Lessors of coal deposits can 

arrange the terms of the lease 

so that the royalties are taxed 

at the lower capital gains rates 

instead of as ordinary income. 

Tax credits are allowed for home 

insulation and other energysaving features and for installing solar and wind devices as 

alternative energy sources in 

private homes. 

A1 ternative conser- 390 IRC secs. 46(a), Credits are also granted to busivation and new 46(c) (6) , 48(1) nesses for various energy-saving 

technology credits features and alternative energy 

sources. 

rp 

w ------------ -NATURAL RESOURCES AND ENVIRONMENT- - - - - - - - - - - - - - 

Exclusion of 460 IRC sec. 

and local government pollution 

control bonds 

interest on State 103(b) (4) (F) 

State and municipal bond interest is generally not subject to 

Federal income tax unless the 

bonds are used to build facilities leased to private businesses ("industrial development 

bonds"). Some types of nontaxable industrial development 

bonds are allowed, however; 

the interest on bonds used to 

finance pollution control facilities leased to private concerns 

remains exempt from Federal 

income tax. 
APPENDIX I APPENDIX I 

Est ima t ed 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority Description 

---------- -NATURAL RESOURCES AND ENVIRONMENT (cant.)- - - - - - - - - - - - 

Exclusion of 60 IRC secs. 118(b), Builders and developers often 

payments in aid of 362 (c) pay for the water and sewage 

construction of facilities for their developwater and sewage ments. The facilities then 

facilities become the property of the local 

private utility serving the 

development. The contributions 

are not considered taxable 

& & income to the utility. 

5-year amortization -10 IRC secs. 46(c), Certified pollution control 

of pollution con- 169 facilities may be written off 

trol facilities over a 5-year period in lieu 

of being depreciated over their 

useful lives. This results in 

larger deductions early in the 

life of the property and no 

deductions later. The cost is 

negative in 1980 because the 

amortization of earlier years 

resulted in smaller depreciation 

deductions in 1980. 

Capital gains treat- 455 IRC secs. 631(a)p In some circumstances profits 

ment of certain 63l(c), 1221, from the sale of standing timber 

timber income 1231 may be taxed at the lower capital gains rates instead of the 

ordinary rates. 
Capital gains treat- 20 IRC sec. 631(~) 

ment of iron ore 

Lessors of iron ore deposits 

can arrange the terms of the 

lease so that the royalties are 

treated as capital gains rather 

than ordinary income. 

Tax incentives for 10 IRC secs. 167(n), The expenses of rehabilitating 

preservation of 167(0), 191, 280B a certified historic structure 

historic structures may be either amortized over 

a 5-year period or treated as 

expenses subject to accelerated 

depreciation . 

Expensing of certain 505 IRC secs. 162, 175, Unincorporated farmers may use 

capital outlays 180, 182, 278, 447, the cash accounting method for 

1.162-12, 1.471-6 producing income in subsequent 

years, and are thus allowed to 

deduct currently expenses 

another type of business would 

have to capitalize. In addition, all farmers can take current deductions for such capital 

expenditures as soil and water 

conservation and land clearing 

expenses. 

lh 464, 465, 704(d); all expenses, even those becomVI IR Regs. 1.61-4, ing a part of inventories or 

Capital gains treat- 395 IRC secs. 1201, The gain from the sale of cerment of certain 1202, 1221-1223, tain farm products, such as 

ordinary income 1231, 1245, 1251, livestock and orchards, may be 

1252 treated as a capital gain and 

taxed at lower rates than ordinary income. 
APPENDIX I 

e 

APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Author i ty Description 

---------------- -AGRICULTURE (cent.)- - - - - - - - - - - - - - - - - 

Deductibility of 365 IRC secs. 1381-1388 Earnings retained by cooperatives 

noncash patronage dividends and cer- treated as deductible patronage 

tain other items dividends by the cooperatives and 

of cooperatives taxed to the members. If they 

were subject to the corporate 

income tax, corporation taxes 

would increase by $540 million 

and individual income taxes would 

decrease by $175 million, for 

a net tax expenditure of $365 

million. 

but allocated to members are 

Exclusion of 

certain costsharing payments 

30 IRC secs. 126, 1255 Federal and State programs to 

assist landowners in conserving 

soil, protecting the environment, 

improving forests, or providing 

habitat for wildlife are not taxable to the landowners if they do 

not improve the income-producing 

capability of the property. 

Dividend exclusion 450 IRC sec. 116 Individuals may exclude up to 

$100 of dividends received from 

U.S. corporations. 
Exclusion of 

interest on State 

and local industrial development 

bonds 

Exemption of 

credit union 

income 

4 

585 

100 

Excess bad debt 855 

reserves of f inancia1 institutions 

IRC sec. 103(b) State and municipal bond interest 

is generally not subject to Federal income tax unless the bonds 

are used to build facilities 

leased to private businesses 

( "industrial development bonds"). 

Some types of nontaxable industrial development bonds are 

allowed, however, if used for 

such public purposes as sewage 

disposal plants, parking lots, 

airports, sports arenas, etc. 

Pollution control facilities and 

residential housing are shown 

elsewhere; the rest are included 

here. 

IRC sec. 501(c)(14) Credit unions are not subject 

to the Federal corporation income tax. 

IRC secs. 585, 593, Banks and savings and loan associ596, and various tions are allowed to deduct as 

IRS rulings additions to their reserves for 

bad debts a percentage of their 

outstanding loans (or, for mutual 

institutions, a percentage of net 

income). For commercial banks 

this deduction is slowly being 

phased out, and by 1988 they must 

compute the deduction based on 

their own loss experience, the 

way other businesses do now. 
APPENDIX I APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority 

------------- -COMMERCE AND HOUSING CREDITS (C0nt.)- 

Deductibility of 

mortgage interest 

on owner-occupied 

homes 

Deductibility of 

property taxes on 

owner-occupied 

Deductibility of 

interest on cons ume r cr ed it 

,P homes 

03 

Expensing of 

construction 

period taxes 

and interest 

Excess first-year 

depreciation 

De sc r ipt ion 

------------ 

9,290 IRC sec. 163 Taxpayers who itemize deductions 

may deduct the interest they pay 

on their mortagages. 

6,615 IRC sec. 164 

2,945 

700 

185 

IRC sec. 163 

IRC secs. 163r 

164, 189 

IRC sec. 179 

Taxpayers who itemize deductions 

may deduct the property taxes on 

their homes. 

Taxpayers who itemize deductions 

may also deduct the interest they 

pay on any other nonbusiness debt 

(auto loansp credit cards, etc.). 

Interest and taxes paid while a 

building is under construction 

may be treated as current 

expenses (by corporations) or 

amortizable expenses (by individuals), rather than capitalized 

and depreciated like other construction costs. 

Taxpayers may take a deduction 

for depreciation of up to 20 percent of $10,000 worth of machinery 
Depreciation on 

rental housing in 

excess of straight 

1 ine 

350 IRC sec. 167(j) 

Depreciation on 255 IRC sec. 167( j) 

buildings (other 

than rental housing) 

in excess of straight 

1 ine 

~ Asset depreciation 3,030 IRC sec. 167(m); - range IR Reg. 

1.167 (a)-11; 

Rev. Proc. 72-10 

Capital gains 10,775 IRC secs. 

ing, timber, iron 

ore, and coal) 

(other than farm- 1201-1254 

and equipment in the first year of 

use in addition to their regular 

depreciation for the year. 

Residential rental property may be 

depreciated by accelerated methods 

for tax purposes, although 

s t r a i g h t - 1 i n e d e p r e c i a t i o n is 

considered the normal method for 

buildings. 

New nonresidential rental property 

may be depreciated by limited 

accelerated methods for tax purposes; straight-line depreciation 

is considered normal for buildings. 

The Internal Revenue Service has 

established classes of assets 

with assigned useful lives to use 

in computing the depreciation 

deduction; the ADR system allows 

taxpayers to arbitrarily choose 

lives up to 20 percent shorter 

than the assigned lives,. thus 

accelerating their depreciation 

deductions e 

Gains on the sale of capital 

assets held for longer than a year 

may be taxed at lower rates than 

other income. Corporations may 

compute their tax on all capital 

gains at a rate of 28 percent if 
APPENDIX I APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority Descr iption 

------------ -COMMERCE AND HOUSING CREDITS (cont.)- - - - - - - - - - - - 

Capital gains 

(other than farming, timber, iron 

ore, and coal) 

(cont.) 

Deferral of 

capital gains 

on home sales 

Capital gains 

at death 

1,010 

10,005 

Reduced corpora- 7,075 

tion income tax 

rates on first 

$100,000 of corporate income 

IRC sec. 1034 

IRC secs. 1014, 

1015, 1023 

IRC sec. 11 

this reduces their taxes; individuals accomplish the rate reduction by excluding 60 percent of 

their gains from taxable income. 

Profits from the sale of a taxpayer's principal residence are 

not taxed if the money is reinvested in another residence of 

equal or greater value. 

When property that has appreciated 

in value is transferred by gift 

or inheritance, the accumulated 

gain is not subject to income tax, 

as it would have been had the 

property been sold. 

The normal corporation income 

tax is considered a proportional 

(single-rate) tax imposed at the 

highest marginal rate. The lower 

rates on the first $100,000 of 

income create a tax expenditure. 
Investment credit 18,460 

(other than for 

TRASOPs and rehabilitated structures) 

Investment credit 

for rehabilitated 

structures 

Exclusion of 

interest on 

E State and local 

housing bonds 

180 

820 

IRC secs. 38, 

46-50 

IRC sec. 48(g) 

Businessmen may take up to 10 percent of the cost of machinery and 

equipment as a credit against 

their income tax. The extra 

credit for employee stock purchases (TRASOPs) and the limited 

credit for buildings are included 

elsewhere in this list. 

The Revenue Act of 1978 extended 

the 10 percent investment credit 

to rehabilitation expenditures 

for nonresidential commercial 

buildings at least 20 years old. 

One type of industrial development bond on which the interest 

is still nontaxable is that used 

to finance residential construction; see the general discussion 

of industrial development bonds 

above. 

5-year amortiza- -40 IRC sec. 184 Before 1976, railway cars could 

tion on railroad be amortized over a 5-year period 

rolling stock instead of being depreciated. 

Some of this equipment is still 

producing income; if it had been 

subject to normal depreciation 

its owners' taxes would have been 

higher in earlier years and would 

have been $40 million lower in 

1980 . 
APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority 

APPENDIX I 

Description 

-------.-------- -TRANSPORTATION (cant.)- - - - - - - - - - - - - - - - - 

Deferral of tax 70 46 U.S.C. 1177 Shipowners are allowed a tax deducon shipping cornpanies 

tion for deposits into a special 

reserve fund used to acquire additional or replacement ships. 

------------ -COMMUNITY AND REGIONAL DEVELOPMENT- - - - - - - - - - - - - - 

5-yea I: amo r t i z a- 15 IRC sec. 167(k) Expenditures for rehabilitating 

tation of lowincome housing 

VI h) tion for rehabili- low-income rental housing may be 

amortized over a 5-year period 

rather than depreciated over the 

useful life of the property. 

-------- -EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL SERVICES- - - - - - - .- - 

Exclusion of scholarship and fellowship income 

Parental personal 

exemption for 

students aged 

19 or over 

365 IRC sec. 117 Scholarships and fellowships are 

not included in taxable income. 

1,020 IRC sec. 151(e) The $1,000 personal exemption that 

parents are allowed for dependent 

children normally ends when the 

child reaches age 18 if the child 

has gross income of $1,000 or more; 

however, if the child is a fulltime student the parent may continue to claim the exemption. 
Exclusion of 

employee meals 

and lodging 

Exclusion of 

con t r i bu t ions 

to prepaid legal 

service plans 

350 

20 

Investment credit 450 

for employee stock 

ownership plans 

(TRASOPs) 

UI 

w 

Deductibility of 1,150 

charitable contributions (education) 

IRC sec. 119 

IRC sec. 120 

Meals and lodging furnished employees on the employer's premises for 

the convenience of the employer 

are not taxable income to the 

employee. 

Employers' contributions to prepaid legal service plans for 

their employees and the benefits 

their employees receive from the 

plans are not included in the 

employees' taxable income. 

IRC secs. 46(a)(2), Corporations are allowed an addi48(n) tional 1 or 2 percent investment 

credit (in addition to the normal 

10 percent) if they contribute an 

equivalent amount of their stock 

to a trust for their employees. 

This provision was added to the 

law by the Tax Reduction Act of 

1975; "TRASOP" stands for Tax 

Reduction Act Stock Ownership 

Plan. The official acronym is 

now "ESOP"--Employee Stock Ownership Plan. 

IRC sec. 170 Within certain limits, individuals who itemize deductions and 

corporations may deduct contributions to educational institutions 

and organizations. 
APPENDIX I APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority Descr iDt ion 

------ -EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL SERVICES (cont.)- - - - - - - 

Deductibility o 

charitable cont 

butions to othe 

than education 

and health 

f 6,405 IRC sec. 170 

r ir 

Maximum tax on 1,625 

personal service 

income 

Credit for child 

and dependent 

care expenses 

705 

IRC sec. 1348 

IRC sec. 44A 

Within certain limits, individuals who itemize deductions and 

corporations may deduct contributions to charitable, religious, 

scientific, veteran, and amateur 

sports organizations and institutions; to societies for the prevention of cruelty to animals or 

children; to Federal, State, and 

local governments; and to fraternal organizations for charitable 

uses. 

The maximum tax rate on "earned" 

income--wages and self-employment 

income--is 50 percent, although 

the statutory rate on investment 

and other "unearned" income can 

be as high as 70 percent. 

A credit of up to $400 for one 

dependent or $800 for two or more 

dependents is allowed to individuals and couples who maintain 

households for dependent children 

or disabled dependents and must 

pay for their care in order to 

work. 
Credit for employ- 160 

ment of AFDC recipients and public 

assistance recipients under work 

incentive programs 

General jobs credit 215 

Targeted jobs 

credit 

Employer educational assistance 

480 

30 

IRC secs. 40, 50A, Taxpayers who employ recipients 

50B of Aid to Families with Dependent 

Children or other public assistance may receive a credit for up 

to $6,000 of wages paid to each 

such employee. For nonbusiness 

taxpayers the credit is 35 percent of the first year's wages; 

for business taxpayers it is 50 

percent of the first year's wages 

and 25 percent of the second 

year's wages. 

IRC secs. 44B, 

51-53 

IRC secs. 44B, 

51-53, 6501( 9) 

IRC sec. 127 

For taxable years 1977 and 1978, 

employers could claim a credit 

for a part of their additional 

payroll if they had expanded 

their work force. 

Employers may take a credit for 

a percentage of the wages paid in 

the first 2 years of employment 

to employees from certain groups, 

such as public assistance recipients; disadvantaged youths, Vietnam era veterans, and convicts; 

vocational rehabilitation referrals; and cooperative education 

students. 

Education provided or paid for 

by an employer for an employee 

is not included in the employee's 

taxable income; the tax expenditure arises from education that 

is not "job related." 
APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Author i ty 

APPENDIX 1 

Description 

Exclusion of 9,595 IRC secs. 105, 106 Neither the contributions that 

employer contribu- employers make to accident and 

tions for medical health plans for their employees 

insurance premiums nor the benefits the employees 

and medical care receive from such plans are taxable to the employees. 

Deductibility of 3,120 

cn medical expenses 0-l 

IRC sec. 213 

Expensing of Less than IRC sec. 190 

costs of remov- 2.5 

ing architectural 

and transportation barriers to 

the handicapped 

Deductibility 

of char itable 

contributions 

(health) 

1,415 IRC sec. 170 

Individuals who itemize deductions may deduct large medical 

bills (generally the excess over 

3 percent of their adjusted gross 

income) and a portion of their 

medical insurance premiums. 

Taxpayers may treat expenses incurred in removing barriers to 

the handicapped as current deductions rather than capitalizing 

them. 

Within certain limits, individuals who itemize deductions and 

corporations may deduct contributions to charitable, educational, 

and scientific institutions and 

organizations concerned with 

health. 
Exclusion of 

social security 

benefits: 

Disability insur- 735 

ance benefits 

OASI benefits 

for retired 

workers 

Benefits for 

dependents 

and survivors 

cn Exclusion of 

railroad retirement benefits 

Exclusion of 

workmen's compensation benefits 

Exclusion of 

special benefits 

for disabled coal 

miners 

Exclusion of 

unemployment 

insurance benefits 

6,430 

940 

305 

1,285 

50 

1,935 

Various IRS 

rulings 

45 U,S.C. 231m 

Social security benefits are not 

subject to Federal income tax. 

Under the Railroad Retirement Act 

of 1974, most benefits are nontaxable. 

IRC sec, 104(a)(l) Workmen's compensation benefits 

are nontaxable. 

IRC sec. 104(a)(l); Payments for death or disability 

Revenue Ruling due to black lung disease are not 

72-400 taxable. 

IRC sec. 85 Unemployment compensation is 

generally not taxable unless 

adjusted gross income exceeds 

$20,000 for a single individual 

or $25,000 for a married couple 

filing jointly. 
APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) I 

Author i ty 

APPENDIX I 

Exclusion of 

public assistance benefits 

Exclusion of 

disability pay 

Net exclusion of 

pension contributions and earnings: 

Employer plans 

Net exclusion of 

pension contributions and earnings: 

Plans for selfemployed and others 

De sc r ip t ion 

------ -INCOME SECURITY (cont.)- - - - - - - - - - - - - - - 

39 5 Various IRS rulings 

150 IRC sec. 105(d) 

12,925 IRC secs. 401-407, 

410-415 

2,205 IRC secs. 219, 220, 

401-405, 408-415 

Welfare payments are not taxable. 

Retired individuals under age 65 

who are permanently and totally 

disabled may exclude up to $5,200 

a year of their disability pay. 

The exclusion is phased out for 

adjusted gross incomes of over 

$15,000 a year. 

Employees are not taxed on the 

amounts their employers contribute to retirement plans or on 

the income the contributions earn 

until the employee withdraws the 

money. 

Self-employed individuals and 

employees not covered by employerpaid pension plans may deduct 

limited amounts contributed to 

their own retirement plans. The 

income the contributions earn is 

not taxed until the money is withdrawn. 
Exclusion of other 

employee benefits: 

Premiums on group 

term life insurance 

Exclusion of other 

employee benefits: 

Premiums on accident and disability 

insurance 

Exclusion of other 

employee benefits: 

Income of trusts 

to finance supplemental unemployment 

Exclusion of 

interest on life 

insurance savings 

uI benefits 

w 

915 IRC sec. 79 Employers may buy up to $50,000 

of group term life insurance 

coverage for an employee and the 

employee will not be taxed on the 

premiums. 

80 IRC sec. 106 Employer-paid premiums on accident and accidental death insurance policies for employees are 

not taxable income to the ernployees. 

10 IRC sec. 501(c)(17) The earnings of trusts established to finance supplemental 

unemployment benefits are not 

taxed to the employees until they 

receive payments from the trust. 

2,720 IRC sec. 101(a), 

IR Reg. 1.451-2 

Most life insurance policies, 

except term insurance, earn investment income for the policyholder, 

because the premiums are invested 

and a part of the earnings are 

used to pay for the cost of insurance or to increase the policy 

benefits. If the policyholder 

dies, none of the earnings are 

subject to income tax; if the 

policyholder cashes in the policy 

while living, the part of the 

earnings used to pay for insurance is never taxed and the tax 

on the remainder is deferred from 

the year the income was earned to 

the year the policy is redeemed. 
APPENDIX I APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority Desc r iDt ion 

Exclusion of 535 IRC sec. 121 

capital gains 

on home sales for 

persons aged 55 

and over 

Additional 

exemption for 

the elderly 

Additional 

exemption for 

the blind 

0 

Deductibility of 

casualty losses 

Tax credit for 

the elderly 

1,855 IRC sec. 151(c) 

Taxpayers aged 55 and over are 

allowed to exclude from taxable 

income up to $100,000 of the gain 

on one sale of a principal residence . An additional personal exemption 

of $1,000 is allowed for a taxpayer who is aged 65 or over. 

35 IRC sec. 151(d) An additional personal exemption 

of $1,000 is allowed for a taxpayer who is legally blind. 

475 IRC sec. 165(c) (3) Individuals who itemize deductions may deduct the excess over 

$100 of each nonbusiness loss due 

to fire, storm, shipwreck, other 

casualty, or theft. 

160 IRC sec, 37 Individuals who are aged 65 or 

older are allowed a small tax 

credit, reduced if they have taxexempt retirement income or if 

their adjusted gross income 

exceeds $7,500 a year ($10,000 

for a joint return). A credit is 
Earned income 

credit: 

Nonrefundable 

portion 

350 IRC sec. 43 

also allowed to persons receiving 

payments from a public retirement 

system who are under age 65. 

Wage-earners and self-employed 

taxpayers who maintain households 

for dependent children receive a 

tax credit equal to 10 percent 

of up to $5,000 of earned income, 

reduced as income increases until 

it is phased out at $10,000. The 

credit is "refundable," meaning 

that if the credit is greater 

than the taxpayer's liability for 

the year, the difference is paid 

directly. This item includes 

only the portion that reduces 

taxes; the "refundable" portion 

is a direct outlay ($1,874 million in 1980). 

------------- -VETERANS' BENEFITS AND SERVICES- - - - - - - - - - - - - - 

Exclusion of vet- 1,005 38 U.S.C. 3101 All benefits paid by the Veterans 

erans' disability Administration are tax-exempt. 

compensation 

Exclusion of vet- 55 

erans' pensions 

Exclusion of GI 170 

bill benefits 
APPENDIX I 

Estimated 

cost Fiscal 

Year 1980 

Tax expenditure ($ millions) Authority 

APPENDIX I 

Credits for pol it ital contributions 

Exclusion of inN terest on general 

purpose State and 

local debt 

cn 

Deductibility of 

nonbusiness State 

and local taxes 

(other than on 

owner-occupied 

homes ) 

Tax credit for 

corporations doing 

business in U.S. 

possessions 

Description 

100 IRC sec. 41 Individuals are allowed a tax 

credit of 50 percent of the 

amount contributed for up to 

$100 given to political parties 

and candidates. 

-- -GENERAL PURPOSE FISCAL ASSISTANCE- - - - - - - - - - - - - - 

5,880 IRC sec. 103 

12,450 

730 

IRC sec. 164 

IRC sec. 936 

The interest on State and local 

government obligations is generally exempt from Federal income 

tax. 

Individuals who itemize deductions may deduct State and local 

income, personal property, and 

general sales taxes. Homeowners' 

property taxes are included elsewhere in this listing. 

Corporations doing business in 

Puerto Rico or other U.S. possessions, except the Virgin Islands, 

may credit the tax owed on any 

income earned in the possessions 

against their Federal income tax, 

thereby exempting such income 

from U.S. tax. 
Deferral of 

interest on 

savings bonds 

625 IRC sec. 454 Interest on U.S. savings bonds 

is not taxable until the bonds 

are cashed in. 

0-l 

w 
APPENDIX I1 APPENDIX I1 

t 

1 

t 

BIBLIOGRAPHY 

This bibliography lists materials on the tax expendi- 

.ures concept and tax expenditures budgets. To keep its 

ength within boundsp articles on particular tax expendi- 

.ures are included only if they illuminate the meaning or 

uses of tax expenditures budgets. A list of all articles 

on tax expenditures just in housing, for example, could 

well exceed this one in length, 

Two types of background materials are also included. 

One is articles dealing with "comprehensive income" (HaigSimons income), included because of the importance of comprehensive income in the development of the tax expenditures 

idea. The other is a few articles by tax practitioners 

(lawyeEs and accountants) on methods of sheltering income 

from tax by the judicious use of some tax expenditure provisions. 

*** 

Aaron, Henry. "Inventory of Existing Tax Incentives-- 

Federale'' In Tax Incentives, by the Tax Institute of 

America, pp. 39-48, Lexington, Mass.: Heath Lexington 

Books, 1971. 

This slightly different version of a tax expenditures 

budget includes only provisions of the tax law that were 

intended to have an incentive effect. 

e ''Tax Exemptions--The Artful Dodge." 

TKans-aCtiOn, vol. 6 (1969), pp. 4-6. 

An early discussion of the tax expenditures concept. The 

author is disturbed by the increasing reliance being placed 

on tax incentives and urges that they be accounted for, 

. "What is a Comprehensive Tax Base Anyway?" 

National Tax Journal, vol. 22 (1969) , pp. 543-49. 

This discussion of the economists' concept of income 

(Haig-Simons income) extends the debate on the subject 

that appears in Bittker, Galvin, Musgrave, and Pechman 

cited below. 

Andrews, William D. "Personal Deductions in an Ideal 

Income Tax." Harvard Law Review, vol. 86 (1972), pp. 309-85. 

One of the most influential criticisms of the tax expenditures budgets, based on the author's view that a better 

64 
APPENDIX I1 APPENDIX I1 

definition of net income is needed. He argues that the 

deductions for medical expenses and charitable contributions 

represent refinements of the net income concept, not tax 

expend i t ur e s . Balk, Alfred. "Costs, Benefits, and Other Factors in Local 

Property Tax Exemption of Charitable, Educational, and 

Religious Organizations." In Tax Incentives, by the Tax 

Institute of America, pp. 199-216. Lexington, Mass.: Heath 

Lexington Booksp 1971. 

A discussion of tax expenditures in local property taxation. 

Benson , Ben] amino "The Strategy of Tax She1 ter . 'I Journal 

of Accountancy, vol. 140 (1975), pp. 47-55. 

A good introduction to another side of the tax expenditures 

concept--how one can take advantage of them, written from 

the point of view of the tax accountant who must advise 

clients. This reference and a few others are included 

because the tax practitioners' down-to-earth advice on 

how tax incentives work is sometimes easier to understand 

than the more abstract explanations of economists and 

tax analysts. 

Bittker, Boris I. "Accounting for Federal 'Tax Subsidies' 

in the National Budget." National Tax Journal, vol. 22 

(1969), pp. 244-61. 

This article, the next one, and the "Reply to Surrey and 

Hellmuth" cited below constitute the most thorough and 

articulate attack on the theoretical foundations of the 

tax expenditures concept, based on Bittker's aversion to 

ideal tax systems. He thinks that no normal tax structure 

exists and that attempts to find one interfere with good 

tax analysis. 

"Income Tax Deductions, Credits, and Subsidies 

for Personal Expenditures." The Journal of Law & Economics, 

VO~. 16 (1973), pp. 193-213. 

. Review of Pathways to Tax Reform: The Concept 

of Tax Expenditures, by Stanley S. Surrey. The New York Times 

Book Review, January 6, 1974, p. 4. 

The author likes Surrey's careful analysis of issues but 

regrets that his ideas have been forced "into a doctrinal 

mold that obscures the merits of the raw material." 

65 
APPENDIX I1 APPENDIX I1 

. "The Tax Expenditure Budget--A Reply to 

Professors Surrey and Hellmuth." National Tax Journal, 

VO~. 22 (1969), pp. 538-42. 

Bittker sums up his argument in these words: "Law-- 

including tax law--is made, not discovered." 

Bittker, Boris I., Charles 0. Galvin, Richard A. Musqrave, 

and Joseph A. Pechman. 

A Debate. Branford, Conn.: Federal Tax Press, 1968. 

A Comprehensive Income Tax Base?. 

Most of the articles in this volume originally appeared in the Harvard Law Review. The debate is over the HaigSimons definition of income, with Bittker arguing that 

it furnishes little guidance to legislators deciding 

questions of tax policy and the other three disagreeing. 

Blum, Walter J. Review of Pathways to Tax Reform: The 

Concept of Tax Expenditures, by Stanley S. Surrey. 

Journal of Corporate Taxation, vol. 1 (1975), pp. 486-91. 

Blum praises Surrey's insights into the tax system but, 

like Bittker, disagrees with his premise that a "normative" 

tax structure can be found. 

Brannon, Gerard M. "Brannon Cuts Tax Expenditures by $14 

Billion." Tax Notes, vol. 8 (19791, pp. 171-73. 

A witty critique of the tax expenditures cost estimates 

for the itemized deductions. The $14 billion is "saved" 

by allowing for the "zero-bracket amount," which the 

author claims the estimators did not do. 

California. Legislature. Office of the Legislative Analyst. 

Analysis of the Budget Bill of the State of California for 

the Fiscal Year July 1, 1979, to June 30, 1980. Report 

of the Legislative Analyst to the Joint Legislative Budget 

Committee. 1979. 

See pp. A-63 through A-70 for a succinct but highly readable description of the tax expenditures concept, with a 

critique of the particular definition that appears in 

California law and suggestions for improving the State's 

tax expenditures budget. 

California. Office of the Governor. Governor's Budget for 

1979-1980. Submitted by Edmund G. Brown, Jr., Governor, 

to the California Legislature. 1979. 

Contains the latest in a series of tax expenditures 

budgets for the State of California that have appeared 

66 
APPENDIX I1 APPENDIX I1 

each year since 1976, the only such budgets ever published 

by a State. California's definition is more inclusive than 

the Federal Government's and tax expenditures are identified 

in all the State's taxes, not just its income taxes. 

Feld, Alan L. Review of Pathways to Tax Reform: The Concept 

of Tax Expenditures, by Stanley S. Surrey. Harvard Law 

Review, vol. 88 (1975), pp. 1047-55. 

A sympathetic review that includes a good summary of Surrey's 

views, balanced by some discussion of the views of critics. 

. "Tax Policy and Competition." Report prepared 

for the U.S. Federal Trade Commission, 1978. Reprinted in 

A Review of Selected Tax Expenditures: Investment Tax Credit, Hearings before the Subcommittee on Oversight of the 

Committee on Ways and Means, United States House of Representatives, 96th Cong., 1st sess., 1979, pp. 309-37. 

This report analyzes the effect of several tax expenditures 

on business competition. 

Germany, Federal Republic of. Ministry of Finance. Sechster 

Subventionsbericht. Bericht der Bundesregierung uber die 

Entwicklung ~. der Finanzhilfen und Steuerverghstigungen fur 

die Jahre 1975 bis 1978. Bonn: Bundesministerium der 

Finanzen [ 19771 . 

Germany and the United States are the only two countries that 

regularly publish tax expenditures budgets. This report 

contains the sixth in a biennial series of tax expenditures 

budgets that the Ministry of Finance has published since 

1967. Richer in detail than the U.S. budgets, the German 

budget identifies tax expenditures ("Steuervergunstigungen") 

in all Federal taxes, not just the income taxes, presents 

the costs of each provision in each of four consecutive 

years, discloses the legal authority for the tax expenditure, 

tells how long the provision has been in force and when 

it is due to expire (if at all), and presents the position 

of the administration on the desirability of maintaining 

the expenditure. The same report also includes a budget 

for direct subsidies ("Finanzhilfen") that presents the 

same information, 

"Gimme Shelters: A Common Cause Study of the Review of 

Tax Expenditures by the Congressional Tax Committees." 

Washington: Common Causeo 1978. Reprinted in Program 

Evaluation Act of 1977 and Federal Spending Control Act 

of 1977, Hearings before the Committee on Rules and 

Administration, United States Senate, on S. 2 and S. 124 

95th Cong., 1st and 2d sesso, 1978, pp. 305-95. 

4 

67 
APPENDIX I1 APPENDIX I1 

An analysis of the extent to which tax expenditure provisions have been subject to congressional review in the 

92d, 93d, and 94th Congresses. 

Goode, Richard. "The Economic Definition of Income." 

In Comprehensive Income Taxation, edited by Joseph A. 

Pechman, pp. 1-36. Washington: The Brookings Institution, 1977. 

Includes material on the relationship of the tax expenditures concept to the Haig-Simons definition of income. 

The discussion (pp. 30-36) by Henry Aaron and Charles 

Davenport focuses mostly on tax expenditures, with Davenport defending the concept vigorously. 

Haig, Robert Murray. "The Concept of Income--Economic and 

Legal Aspects." In The Federal-Income Tax, edited by 

Robert Murray - Haiq, -. pp. -- 1-28. New York: Columbia University Press, 1921. Reprinted in Readings in the Economics 

of Taxation, edited by Richard A. Musgrave and Carl S. 

Shoup, pp. 54-76. Homewood, Ill.: Richard D. Irwin, 1959. 

Haig's definition of income appears on p. 7 (p. 59 of the 

reprint) . 

Hanley, Thomas R., and George G. Bauernfeind. "The Tax 

Expenditures Budget." The Tax Adviser, vol. 7 (1976), 

pp. 614-19. 

Essentially a recapitulation of Special Analysis F of the 

President's 1977 Budget. 

Havemann, Joel. "Tax Expenditures--Spending Money Without 

Expenditures." National Journal, vol. 9 (1977), pp. 1908-11. 

A popularized description of the concept, with a good 

explanation of how tax expenditures are enacted and what 

advantages they have over direct spending programs. 

International Fiscal Association. Cahiers de Droit Fiscal 

International, vol. 6la--Tax Incentives as an Instrument 

for Achievement of Governmental Goals. 1976. 

Contains national reports for 19 countries in which local 

fiscal experts endeavor, with varying success, to identify 

and describe each country's major tax expenditures, explain 

why they were enacted, relate them to and compare them 

with direct spending programs that have similar objectives, 

estimate their cost, and appraise their effectiveness. 

Many of the authors valiantly made the first attempts ever 

to prepare tax expenditures budgets for their countries. 

68 

I 
APPENDIX I1 APPENDIX I1 

Jones, Reginald H. "Sunset Legislation." Tax Foundation's 

Tax Review, vol. 39 (1978), pp. 51-54. 

Although otherwise in favor of sunset legislation, the 

author opposes the application of sunset laws to tax 

expenditures because it would create a climate of business 

uncertainty. Like some other business spokesmen and politically conservative writers, he maintains that "budgeting" 

taxes - not collected is frivolous, that the concept is a 

stalking-horse for political liberals to increase taxes 

on upper-income persons, and that most of these provisions 

are really refinements to make the tax system fairer or 

to remove economic disincentives. 

Jordan, William D. Review of Pathways to Tax Reform: The 

Concept of Tax Expenditures, by Stanley S. Surrey. Texas 

Law Review, vol. 52 (1974), pp. 1041-48. 

Kirby, Vance N. Review of Pathways to Tax Reform: The 

Concept of Tax Expenditures, by Stanley S. Surrey. Northwestern University Law Review, vol. 70 (1975), pp. 372-87. 

Krane, Howard G. "Economic Analysis of Tax Sheltered Investments." Taxes, The Tax Maqazine, vol. 54 (1976), pp. 806-35. 

Another tax practitioner's explanation of the practical 

workings of tax shelters, with emphasis on after-tax 

rates of return. 

I Madden, Carl H., and James R. Morris. "Tax Incentives: I 

Employment and Training of the Disadvantaged." 

Incentives, by the Tax Institute of America, pp. 231-46. 

Lexington, Mass.: Heath Lexington Books, 1971. 

In - Tax 

The article opens with some of the business-conservative I 

criticisms of the tax expenditures concept. The discussion 

on pp. 281-82 contains an exchange on the subject betyeen 

Madden and Gerard Brannon. 

Mansfield, Harry K. Review of Pathways to Tax Reform: 

The Concept of Tax Expenditures, by Stanley S. Surrey. 

Harvard Journal on Legislation, vol. 13 (1975), pp. 222-29. 

McDaniel, Paul R. "Tax Expenditures in the Second Stage: 

Federal Tax Subsidies for Farm Operations." Southern 

California Law Review, vol. 49 (1976), pp. 1277-1321. 

The author offers this analysis as an example of the way 

tax expenditures can be evaluated after they have been 

identified. 

69 
APPENDIX 11 APPENDIX I1 

. "Tax Shelters and Tax Policy." National 

Tax Journal, vol. 26 (1973), pp. 353-88. 

A detailed analysis of how equipment leasing, real estate, 

and oil and gas tax shelters work. 

"The Tax Expenditure Concept: Theory and 

Practical Effect"; "Evaluation of Particular Tax Expenditures"; "Institutional Procedures for Consressional Review 

of Tax-Expenditures." 

619-25, and 659-64. 

Tax Notesf vol. 8 :1979), pp. 587-92, 

The second of these three articles is of special interest 

for its detailed discussion of the differences and similarities between direct and tax expenditures. The series is 

a good introduction to the current thinking of the most 

steadfast proponents of the tax expenditures concept. 

National Tax Journal, vole 16 (1963), pp. 63-67. 

The author was the first to suggest that "tax loopholes" 

should be accounted for in the Federal budget. The article 

contains a good summary of the tax expenditures concept, 

which the author also calls "tax exemptions." He has no 

objection to using them; he just wants them accounted for. 

McKenna, Joseph P. "Tax Loopholes: A Procedural Proposal." 

National Association of Manufacturers. Fiscal and Economic 

Policy Department. "'Tax Expenditures' Are in the Eye of 

the Beholder." Taxation Report. May 27, 1976. 

Recites most of the business-conservative critics' objections 

to the tax expenditures concept, 

Packman, Bruce B. "Tax Shelters: A Non-Dilettante's View." 

Taxes, The Tax Magazine, vol. 53 (1975), pp. 279-304. 

A tax practitioner's survey of various tax shelters, with 

many details about how they work. 

Pechman, Joseph, ed. Comprehensive Income Taxation. Washington: The Brookings Institution, 1977. 

Contains the article defining comprehensive income by Goode 

cited above and a number of articles on other aspects of 

net personal income. Most of the articles start with the 

Haig-Simons definition of income and attempt to reach a 

concept of taxable income. 

70 
APPENDIX I1 APPENDIX I1 

Shoup, Carl S. "A Comprehensive Income Tax Base." In Studi 

in Memoria di Antonio De Viti de Marco, edited by Ernest0 

dlAlbergo, pp. 491-98. Bari, Italy: Cacucci Editore, 1972. 

Explores the limits of the Haig-Simons definition of income 

and discusses the circumstances in which a comprehensive 

definition of income can be useful. The writing is clear 

and concise--deceptively soI because the ideas are dense 

and highly technical. 

e "Surrey's Pathways to Tax Reform--A Review 

Article." The Journal of Finance, vol. 30 (1975), pp. 1329-41. 

The most important review of the most important book on 

the subject. Following a synopsis of the volume, Shoup 

presents a thoughtful examination of the validity and 

usefulness of the concept itself. He explains, and to 

some extent reconciles, the differences between Surrey 

and his academic critics. 

1 

Simons's definition of income appears on pp. 49-50. 

l Stern, Phillip M. "Uncle Sam's Welfare Program--For the 

Rich." The New York Times Magazine, April 16, 1972, p. 28. 

' A popularized, somewhat sensational summary of the tax 

expenditures concept, entirely from a tax reformer's 

point of view. 

' Surrey, Stanley S. "Federal Income Tax Reform: The Varied 

Approaches Necessary to Replace Tax Expenditures with 

Direct Governmental Assistance." Harvard Law Review, 

VO~. 84 (1970), pp. 352-408. 

. "Government Assistance: The Choice between 

Direct Programs and Tax Expenditures." Tax Notes, vol. 8 

(1979)p pp. 507-10. 

Offers several criteria for deciding whether a program 

should be funded through the tax system or by direct outlays. 

e Pathways to Tax Reform: The Concept of 

Tax Expendituriss, 

1973. 

The principal exponent of the concept and the inventor of 

the name presents in this volume the definitive discussion 

71 
APPENDIX I1 APPENDIX I1 

of his ideas. As the title suggests, Surrey disapproves 

of most tax expenditures and thinks that their repeal 

should be a major goal of tax reform. The book presents 

criteria for identifying tax expenditure provisions, 

discusses their undesirable features, and analyzes the 

steps to be taken if they are repealed (some could simply 

be dropped, others should be replaced by direct spending 

programs, etc.). 

ough explanations in print of the workings of tax shelter 

arrangements. It incorporates the substance of Surrey's 

articles in the Harvard Law Review, The Tax Adviser, and 

the Tax Incentives volume. 

The book contains some of the most thor- 

. "Tax Expenditures." Challenge, vol. 18 

(1976), pp. 53-54. 

The least technical explanation by Surrey of his ideas 

on the subject. 

. "Tax Incentives as a Device for Implementing 

Government Policy: A Comparison with Direct Government 

Expenditures." 

705-38. 

karvard Law Review, vol. 83 (1970) , pp. 

. "Tax Incentives--Conceptual Criteria for 

Identification and Comparison with Direct Government 

Expenditures." In Tax Incentives, by the Tax Institute 

of America, pp. 3-38. Lexington, Mass.: Heath Lexington 

Books, 1971. 

. Tax Policy and Tax Reform: 1961-1969, 

Selected Speeches and Testimony of Stanley S. Surrey, 

edited by William F. Hellmuth and Oliver Oldman. Chicago: 

Commerce- Clearing House , 1973. 

Contains the 1967 speech in which Surrey introduced the 

term "tax expenditures," as well as a number of statements 

expressing his general philosophy of taxation. 

. "Tax Subsidies as a Device for Implementing 

Government Policy." The Tax Adviser, vol. 3 (1972), pp. 

196-204. 

A briefer statement of the theme of Pathways. 

Surrey, Stanley S., and William F. Hellmuth. "The Tax 

Expenditure Budget--Response to Professor Bittker." 

National Tax Journal, vol. 22 (1969), pp. 528-37. 

An answer to the criticisms in Bittker's National Tax 

Journal article cited above. 

72 
APPENDIX I1 APPENDIX I1 

Surrey, Stanley S. , and Paul R. McDaniel. "The Tax Expenditure Concept and the Budget Reform Act of 1974." Boston 

College Industrial and Commercial Law Review, vol. 17 

(1976), pp. 679-737. 

Summarizes the concept, discusses its development, replies 

to critics, and explains how tax expenditures are to be 

incorporated into- the budget process. 

. "The Tax Expenditure Concept: Current 

Developments and Emerging Issues." Boston College Law 

Review, vol. 20 (1979) , pp. 225-369. 

Relates the tax expenditures budgets to recent political 

and legal developments , discusses some criticisms of the 

concept, suggests additional uses for the budgets, and 

calls for criteria to help legislators decide when to 

use tax expenditures instead of direct expenditures. 

Surrey, Stanley S., William C. Warren, Paul R. McDaniel, 

and Harry L. Gutman. Federal Wealth Transfer Taxation. 

Mineola, N.Y.: The Foundation Press, 1977. 

A tax expenditures budget for the Federal estate and gift 

taxes appears on pp. 882-87. 

"Tax 'Expenditures.'" The Wall Street Journal, May 30, 1975, 

p. 8. 

This editorial attacks the tax expenditures concept as 

just another strategem by tax reformers to increase taxes 

on the well-to-do. 

U.S. Congress. Congressional Budget Office. Five-Year 

Budget Projections and Alternative Budgetary Strateqies 

for Fiscal Years 1980-1984, Supplemental Report on Tax 

Expenditures. June 1979. 

The latest in an annual series required by the Congressional 

Budget Act of 1974. It contains one year of historical 

data and projections for the next five years. 

. Federal Aid to Postsecondary Students: Tax 

Allowances and Alternative Subsidies. Background Paper. 

January 1978. 

. Real Estate Tax Shelter Subsidies and Direct 

Subsidy Alternatives. Background Paper. May 1977. 

These two reports are products of CBO's continuing effort to 

analyze tax expenditure programs in the same manner as direct 

73 
APPENDIX I1 APPENDIX I1 

spending programs and to appraise direct subsidy alternatives. 

They illustrate how tax expenditures can be evaluated when 

regarded as the equivalent of direct Government outlays. 

U.S. Congress. House. Committee on Ways and Means. 

Estimates of Federal Tax Expenditures. Annual. 

This series, published in 1972, 1973, and annually since 

1975, contains estimates of tax expenditure costs prepared 

by the staffs of the Joint Committee on Taxation and the 

Treasury Department. They are accompanied by brief discussions of how tax expenditures are identified. The estimates 

are also published by the Senate Committee on Finance and 

are submitted to and sometimes published by the Budget 

Committees. They could be considered the official congressional tax expenditures budget, to be distinguished from 

the executive budget that is submitted by the President. 

U.S. Consress. Senate. Committee on the Budaet. - Tax 

Expenditures: 

Individual Provisions. Committee Print. Washington: 

U.S. Government Printing Office, 1976. 

Compendium of Background Mateiial on 

- 

Expenditures: Compendium of Background Mateiial on 

Indj ' Office, 1976. 

. Tax Expenditures: Relationships to Spendin 

Proqrams and Backqround Material on Individual Provisions? 

Committee Print. Washington: U.S. Government Printing 

Off ice, 1978. 

These two committee prints describe every tax expenditure 

provision in the Federal income tax system, including 

the authority for the provision (law or regulation) , the 

rationale (if any) behind it, the effects of the provision, 

and estimates of its cost and how its benefits are distributed across income classes. The 1978 edition also 

describes a number of related direct expenditure programs 

and compares them with tax expenditures in the same budget 

categories. In studying a particular tax expenditure the 

more recent volume is usually the best place to start. 

U.S. Congress. Senate. Congressional Record. 95th Cong., 

2d sess., April 17, 1978, pp. S5703-S5709. 

Senator Edward Kennedy, who has been a leading proponent 

of the tax expenditures concept, here discusses what 

congressional procedures should be followed when proposals 

are introduced for new tax expenditures. 

U.S. Congress. Senate. Conqressional Record. 95th Cong., 

2d sess., September 30, 1978, pp. Sl6778-S16781. 

74 
APPENDIX I1 APPENDIX I1 

Senator Russell Long maintains that the tax expenditures 

concept is not a valid way of looking at the tax system 

and that tax expenditures should not be subject to sunset 

laws. 

U.S. Department of the Treasury. Annual Report of the 

Secretarv of the Treasurv on the State of the Finances 

for the-tiscal Year Endei June 30, 1968. 

U.S. Government Printing Office, 1969. 

Washington: 

An appendix to this report (pp. 322-40) contains the first 

U.S. tax expenditures budget. 

. Annual Report of the Secretary of the Treasury 

on the State of the Finances for the Fiscal Year Ended 

June 30, 1970. Washington: U,S. Government Printing 

Office, 1971. 

In 1970 the Treasury Department, under a new administration, 

no longer liked the tax expenditures concept. A list of 

tax "aids," which looks a lot like a tax expenditures budget, 

is included on pp. 306-08. 

U.S. Office of Management and Budget. Special Analyses, The 

Budget of the United States Government. Washington: U.S. 

Government Printing Office, annual. 

In response to the Congressional Budget Act of 1974, each 

President's budget since 1976 has contained a tax expenditures budget that includes cost estimates grouped in functional categories. A brief explanation of the tax expenditures concept is also included. In the budgets for 1976- 

1978 the material appeared as Special Analysis F; in 1979 

and 1980 it was Special Analysis G. Before 1979 a few 

items included in the congressional tax expenditures budget 

were omitted from the Presidentns budget: for example, 

excess depreciation due to the Asset Depreciation Range 

system and the failure to tax unrealized capital gains 

at death; for 1979 and 1980 the congressional and administration budgets include the same items. 

Wagner, Richard E. The Tax Expenditure Budget: An Exercise 

in Fiscal Impressionism. Government Finance Brief No. 29. 

Washington: Tax Foundation, 1979. 

The author tries to discredit the tax expenditures concept 

by reciting the standard arguments against it. 

75 
APPENDIX I1 APPENDIX I1 

White, Melvin I., and Anne White. "Tax Deductibility of 

Interest on Consumer Debt." Public Finance Quarterly, 

VO~. 5 (1977), pp. 3-7. 

Explains why the deductibility of interest on consumer debt 

should not be considered a tax expenditure. 

Will, George F. "The Non-Spending of Non-Taxes." The Washington Post, April 22, 1976, p. A19. 

Another statement of the business-conservative argument 

against calling money the Government does - not collect an 

expenditure. 

Willis, J.R.M., and P.J.W. Hardwick. Tax Expenditures in 

the United Kingdom. London: Heinemann Educational Books 

for the Institute of Fiscal Studies, 1978. 

Following a brief discussion of the tax expenditures concept, 

the authors identify, describe, and estimate the cost in 

the years 1973-74, 1974-75, and 1975-76 of tax expenditures 

in the income tax of the United Kingdom. The descriptions 

are thorough and include discussions of the rationale behind 

the provisions and of possible direct spending alternatives 

to the programs. The authors conclude by urging the U.K. 

government to regularly publish a tax expenditures budget 

like the ones published annually in this country. 

Wolfman, Bernard. "Federal Tax Policy and the Support of 

Science." University of Pennsylvania Law Review, vol. 114 

(1965), pp. 171-86. 

One of the earliest statements of the tax expenditures 

concept, which the author calls "tax preferences." He 

suggests budgeting them and reviewing them periodically. 

Wright, L. Hart. "Carter's Projected 'Zero-Based' Review 

of the Internal Revenue Code: Is Our Tax Code to be 

'Born Again'?" Michigan Law Review, vol. 75 (1977), 

pp. 1286-1317 . 

Contains a good discussion (pp. 1302-07) of how tax expenditures are enacted. 

(971140) 

76 
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