Tax expenditures—revenue losses associated with targeted provisions outside the normal tax code—are a long-standing feature of the U.S. income tax code. In some ways, tax expenditures resemble direct spending. They both have similar budgetary effects and provide incentives that alter the allocation of resources. Tax expenditures, like direct spending, are one of the ways that the federal government plays a role in shaping the economy. Tax expenditures, however, do not regularly receive the same level of scrutiny as direct spending programs. Also, unlike direct spending programs, the revenue loss associated with most tax expenditures is only limited by eligibility—much like mandatory spending programs. A consequence of the limited oversight placed on tax expenditures is that activities may be supported by tax expenditures that have insufficient political support for funding through a direct spending program. Tax expenditures are a common target when base-broadening tax reform is pursued—like with the Tax Reform Act of 1986 ( P.L. 99-514 ). This may be the result of tax expenditures being defined as being outside the normal tax code—making them a clear source for base broadening. As congressional interest in tax reform intensifies, it is likely that tax expenditures will once again receive scrutiny as an avenue for broadening the tax base. Section 3(3) of the Congressional Budget and Impoundment Control Act of 1974 (Budget Act) defines tax expenditures 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. Tax expenditures can be categorized into the same set of budget functions as discretionary and mandatory spending and may be used to achieve similar policy outcomes. Common goals of tax expenditures include promoting the accurate measurement of income, altering the distribution of fiscal benefits and burdens to address differences in ability-to-pay, and promoting socially desirable activities. How tax expenditures are constructed and the structure of the income tax system affect both who will benefit from tax expenditures and how much they will reduce federal revenues. Exclusions, exemptions, and deductions indirectly reduce taxes owed by reducing taxable income. With a graduated rate structure, the value of an exclusion, exemption, or deduction increases as the taxpayer's income increases. For example, current individual income tax rates range from 10% to 39.6%, making the value of a $100 exclusion, exemption, or deduction range from $10 to almost $40. Tax credits directly reduce taxes owed. Some tax credits are refundable—meaning taxpayers who have no tax liability can receive the balance of the credit as a cash refund. Nonrefundable tax credits cannot in aggregate exceed the taxpayer's income tax liabilities and may be worth less to low-income taxpayers, who generally have little to no income tax liability. Preferential tax rates indirectly reduce taxes by taxing a portion or particular type of income at a lower rate. With a graduated rate structure, the value of a preferential tax rate may increase as the taxpayer's income increases. Deferral does not reduce taxes owed. Instead, deferral alters the timing of tax payments by delaying recognition of income or speeding up the recognition of costs that would otherwise occur in future years. The Budget Act indicates that tax expenditures are to be measured relative to the "normal" personal and corporate income tax system. The baseline "normal" tax system applies the current rate structure to a broader definition of income than is used by taxpayers to calculate their income tax. Specifically, the Joint Committee on Taxation (JCT) uses a modified Haig-Simons comprehensive income tax as its baseline. Under this baseline, income is roughly defined as consumption plus changes in net wealth in a given time period. As a result, tax expenditures are generally tax provisions that are not structural features of the income tax or necessary to measure income accurately. As defined in the Congressional Budget Act, the concept of tax expenditure refers to the corporate and individual income taxes. Other parts of the Internal Revenue Code—excise taxes, employment taxes, estate and gift taxes—may also have exceptions, exclusions, refunds, and credits (such as a gasoline tax exemption for non-highway uses) which are not included here because they are not part of the income tax. Tax expenditure budgets which list the estimated annual revenue losses associated with each tax expenditure were first required to be published in 1975 as part of the Administration's budget for FY1976, and have been required to be published by the Budget Committees since 1976. The tax expenditure concept is still being refined, and therefore the classification of certain provisions as tax expenditures continues to be discussed. It is important to note that listing a provision as a tax expenditure in no way implies any judgment about its desirability or effectiveness, whether by itself or relative to non-tax provisions that could address the same policy concern. Instead, listing tax expenditures increases the transparency of the tax system and allows Congress to examine all federal programs relating to the same policy goals. This full consideration of tax and non-tax programs allows federal budget decisions to be made with the richest set of information available. Tax expenditures reduce the tax liability of any qualified taxpayer. As a result, they function more similarly to entitlement programs than to discretionary spending. If enacted on a permanent basis they may benefit from periodic consideration of whether they are efficiently meeting the national needs and goals for which they were established. Some, including the Government Accountability Office, have recommended that the executive branch develop and implement a framework for evaluating tax expenditures. Table 1 lists the 10 largest tax expenditures for both corporations and individuals. There are two main take-aways from Table 1 . One, the distribution of tax expenditures is skewed slightly away from corporations. That is, corporate tax expenditures are roughly 15% of individual tax expenditures, while corporate tax revenue is 23% of individual tax revenue. Second, most of the revenue lost comes from relatively few tax expenditures, with the top 10 individual tax expenditures accounting for roughly 66% of the forgone revenue from individual tax expenditures. Each tax expenditure is calculated separately, under the assumption that all other tax expenditures remain in the Code. If two or more tax expenditures were estimated simultaneously, the total change in tax liability could be smaller or larger than the sum of the amounts shown for each item separately, as a result of interactions among the tax expenditure provisions. A related question that may be asked is "Who benefits from tax expenditures?" This is a potentially complex question that can be answered from varying perspectives. The Congressional Budget Office (CBO) chose to answer this question most recently by examining selected major individual tax expenditures according to quintiles of the income distribution. The CBO analysis presented in Figure 1 details the distribution of these tax expenditures by tax expenditure type and income group. Overall, taxpayers in the top quintile claim 51% of the benefits of the tax expenditures included in the CBO analysis, with the remaining 49% going to taxpayers in the bottom four quintiles. The CBO analysis also allows for this information to be disaggregated by tax expenditure category. For all categories, except credits, the top quintile claims the plurality of the benefits. This skewness is most prominent for the preferential tax rates on capital gains and dividends (where the top quintile receives 93% of the benefits) and itemized deductions (where the top quintile receives 81% of the benefits). In contrast, the top quintile receives just 3% of tax credits—with the bottom two quintiles receiving 66% of the benefits. An alternative way to examine tax expenditures is to look for trends over an extended time period. Figure 2 shows the sum of revenue forgone from all tax expenditures scaled against total federal revenue and gross domestic product (GDP). Scaling against total federal revenue allows for both the effects of the economy and changes in tax law to be observed, while scaling against GDP omits the effects brought on by changes in the tax code. In both cases, the relative amount of tax expenditures grew rapidly from 1974 through the mid-1980s, before reverting to just less than the 1974 levels as a result of the Tax Reform Act of 1986 (TRA86, P.L. 99-514 ). After TRA86, the amount of tax expenditures grew modestly scaled against GDP and was relatively flat against total revenue until the enactment of the 2001/2003 tax cuts. The period after the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16 ) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA, P.L. 108-27 ) is characterized by higher levels of tax expenditures, versus both GDP and total revenue. The recent divergence of the two measures is likely a result of tax stimulus measures reducing revenue collections (leading to a higher scaled percentage). Tax expenditures are sometimes described as "spending through the tax code." Thus, the long-term trends in tax expenditures can also be viewed against the levels of federal spending. Figure 3 compares the total value of tax expenditures to the levels of mandatory spending, defense discretionary spending, and non-defense discretionary spending since 1974. Unlike Figure 2 , Figure 3 is reported using current dollars (not adjusted for inflation). As a result, comparisons using Figure 3 should be made based upon the relative distance between the levels of tax expenditures and spending over the time period. For example, in 1974 the levels of tax expenditures and discretionary defense spending were roughly comparable. In contrast, the same comparison in 2014 reveals the size of tax expenditures being roughly double the size of discretionary defense spending. A further way to examine trends in tax expenditures is to decompose them by budget function for selected years. In this manner, any changes in how tax expenditures have been dispersed can be observed. In Figure 4 and Figure 5 tax expenditures are presented as a percentage of federal revenue and GDP, respectively, by selected budget categories for the years 1974, 1984, 1994, 2004, and 2014. Over this time period, tax expenditures for health, international affairs, and education appear to have grown significantly.