Tax Expenditure System In The United States

“The Congressional Budget and Impoundment Act of 1974 defines tax expenditures to be “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”. These provisions (oftentimes affectionately known as “loopholes”) are designed to give tax breaks or exclusions to intentional groups for certain actions/purchases, resulting in reduced taxable income. These tax expenditures allow taxpayers to pay tax and then are given a government grant of equal amount of said provision.

Tax expenditures come in a variety of ways including deductions, exclusions, credits and deferments. A widely-known example of tax expenditure in the form of a credit is the child tax credit (otherwise known as CTC). Ultimately, this tax credit gives the taxpayer $1,000 for every child under 17 that they claim as a dependent annually. Deferrals, on the other hand, allow taxpayers to “reduce the present value of taxes they pay, either because the taxes are paid later with no interest charge or because they are paid when the taxpayer is in a lower rate bracket”. One example of a deferred tax liability is a deferral of recognition of income on contributions to qualified retirement plans. According to research from the Tax Policy Center, “exclusions, deductions, and deferrals of income recognition will account for 77% of individual income tax expenditures in fiscal year 2018, special rates for 10%, nonrefundable credits for 1%, and refundable credits for 13%”.

Excise Tax “An excise tax is an indirect tax on the sale of a particular good or service such as fuel, tobacco and alcohol”. An indirect tax is an extra fee on the product/merchant who then will charge the tax on the product’s price. These taxes are imposed on every level of government including federal, state and local (or municipal). According to Investopedia’s data from the Internal Revenue Service, nearly $102 billion was collected two years ago in excise taxes.

There are two types of excise taxes: specific and ad valorem meaning “according to value.” Mikesell describes the differences as “specific tax (or unit tax) applies to the number of physical units bought or sold…and an ad valorem tax applies to the value (number of units times price per unit) of the transaction”. An example of a specific tax is an excise taxes placed on cigarettes from both the state and sometimes local level. In New York, the state added $4.35 specific tax to every pack in 2014; then, the city (NYC) added another excise tax of $1.50 totaling the tax for a consumer of $5.85. An example of ad valorem tax is when the Internal Revenue Service puts 10% excise tax on a tanning session; if the cost of a session is $200, the merchant will have to pay $20 (or 10%). There are also taxes on IRA contributions and 403(b) before retirement.

As bothersome as these taxes may seem, they are the lifeblood of the federal government, states and cities, helping to maintain the fiscal health of our nation.