YCW`s fiscal 2021 tax expense (including expenditure impacts) was $1.6 trillion. The combined loss of income for all provisions does not equal the sum of the losses for each provision because the provisions work together. For example, abolishing an exemption from taxable income would push taxpayers into higher tax brackets, thereby increasing the loss of income due to the remaining exemptions. Toder and Berger (2019) estimated that the actual combined revenue loss of all personal tax expenses in 2019 was approximately 5% greater than the amount calculated by the sum of personal tax expenses – although for one subcategory, the detailed deductions, the total revenue loss is less than the sum of the losses arising from the separate deductions. In general, both the decision to recognize a provision as a tax expense and the measurement of its size require OMB and JCT to define a normative or basic system to which certain provisions are exceptions. Both organizations have provisions in the basic system that allow tax rates to vary according to income and that are tailored to the size and composition of the family when determining taxable income. The OMB and JCT also provide for a separate corporate income tax. However, the two organizations` benchmarks differ on some details, contributing to minor differences in their lists of provisions and estimates of revenue losses. Exclusions, deductions and accrued liabilities from profit and loss recognition, excluding individual deductions, will represent 63 per cent of personal income tax expenses, refundable credits 18 per cent, special rates 11 per cent, individual deductions 7 per cent and non-refundable credits 1 per cent in fiscal 2021. (Figure 1). Tax burdens are a departure from “normal” tax legislation that reduces the tax burden on individuals or businesses through an exemption, deduction, credit or preferential rate. Expenses can result in significant revenue losses for the government and include provisions such as the income tax credit, the child tax credit, the deduction for employer health care contributions, and tax-efficient savings plans. This definition and the use of the term “special” can make it difficult to know what is an expense and what is not, without also knowing exactly what provisions are contained in the basic tax code.
Personal tax expenditures can become particularly confusing. For example, child tax credits are tax expenditures, but the standard deduction, which is another of the most common ways taxpayers reduce their bills, is not because it is considered a “normal” part of the code. Taxpayers are generally not familiar with this. Tax expenditures reduce the tax liabilities of individuals and businesses that engage in activities specifically promoted by Congress. For example, the charitable donation deduction reduces the tax payable for individuals who file their tax returns, rather than taking a standard deduction and donating to eligible not-for-profit organizations. Tax expenditures can also reduce the tax liability of the people Congress wants to help. For example, some Social Security benefits that retirees or people with disabilities receive are exempt from federal income tax. Some expenditures are aimed at influencing or rewarding certain economic activities or social behaviour, while others are an attempt to change tax legislation step by step. The latter is an easier way to reform the existing code and has been used to make the U.S. tax base more efficient or to align with that of other OECD countries. Recent examples include lower tax rates on dividends and long-term capital gains, as well as reforms to international tax rules designed to move the United States toward a territorial tax system.
The Tax Expenditures Budget shows estimated revenue losses resulting from special exclusions, exemptions, deductions, credits, deferrals and preferential tax rates under federal income tax legislation. Some tax expenditures do function as direct expenditures, although they appear to be tax relief because programs with similar effects could be structured as expenditures (Burman and Phaup 2011). One example is the Renewable Energy Investment Tax Credit, which could be structured as grants from the Ministry of Energy. Other expenditures do not have an analogy with direct expenditures, but can rather be considered as deviations from an income tax with an overall tax base. Marron and Toder (2013) estimate that provisions that could be considered reimbursement of expenses represented more than 4% of gross domestic product at the time. The Congressional Budget and Impoundment Control Act of 1974 requires that the budget include estimates for tax expenditures, but only for federal personal and business income tax provisions. The government could, but does not, provide lists of tax expenditures for payroll taxes, excise taxes and other taxes, although the OMB estimates (in footnotes) the impact of tax expenditures on payroll tax revenues. At one point, a budget for estate tax expenditures was prepared by the U.S.
Department of the Treasury and released by OMB.