The Distribution of Tax Incentives

Abstract

Distribution of Tax Incentives Contrary to the general belief, the great bulk-over two-thirds-of the dollar value of Federal incentives or so-called (often also termed 11 loop-ho1es11 ) goes to personal taxpayers in their capacity as workers, consumers, and homeowners. In the fiscal year 1976, $61.4 billion out of a total of $91.8 billion of will be received by families and other personal taxpaying units. less than one•third of the expenditures, the remaining $30.4 billion, will be divided among corporations, unincorporated businesses, farmers, and private investors. An examination of the detail of the $91.8 billion of is also revealing. The largest items are not the ones that generally are brought up in public discussions of 1oophoJes 11 , such as the controversial depletion allowances. By far, the major item of tax expenditure Is the widely-used provision permit· ting federal taxpayers to deduct state and local taxes on their personal returns. The second largest incentive arises from the deductibility of tn• terest on home mortgages. These two items together exceed the grand total of all aids received by corporations in the United States ($22.6 billion versus $20.7 billion). Other Items included in the $91,8 billion of 11 expendltures which primarily benefit low and middle-income people are $3,8 billion arising from ex• cluding unemployment insurance payments from federal taxation, $3.7 billion from excluding social security benefits from taxable income, $835 million from ex• cluding veterans pensions and benefits, $620 million from excluding workmen 1 s compensation payments, and $90 million from excluding welfare payments. The $91.8 bi 11 ion of ••tax expendltures 11 does not represent an equivalent amount of 11 1oopholes11 that could readily be eliminated in order to provide additional funds for new government spending initiatives or general rate reduction, as many advocates of reform seem to indicate. Rather, the great bulk of federal incentives benefits the average consumer, worker, and homeowner. The remainder primarily serves as a spur to investment and economic growth. -THE DISTRIBUTION OF TAX INCENTIVES By Murray L. Weidenbaum, Director Center for the Study of American Business Washington University St. Louis, Missouri The distribution of Federal incentives has been a source of considerable controversy. To some these are merely tax expenditures and a subterfuge for direct appropriation of funds from the Treasury.ll For others, these provisions represent simply the use of the system to achieve important national purposes, varying from economic growth to equity among different categories of the population.!/ A particular concern has been the contention that the bulk of these benefits has been received by business and high-bracket Jnvestor taxpayers, in contrast to the ordinary citfzen.l/ Although ad hoc estimates have been made from time to time, an extremely comprehensive, official tabulation appears for the first time In the Special Analyses that accompany the Federal Budget for the Fiscal Year 1976.~/ As required by the Congressional Budget Act of 1974, the annual budget document now tabulates so-called expenditures. These items are defined as revenue losses attributable to a special exclusion, exemption, or deduction from gross income or to a special credit, preferential rate of tax, or deferral of liability.i/ Thus~~~ they are exceptions to the 11norma1 structure of the individual and corporate income tax. As the budget document notes, are one means by which public policy objectives are pursued by the Federal Government and, in most cases, can be viewed as alternatives to budget outlays, credit assistance~~~ or other instruments of public policy. Previous work of the author has classified these incentives or according to whether they are primarily aids to business, to farmers, to investors, or to individual consumers.~/ Table 1 draws on this earlier work as well as the data in the 1976 Budget to determine the current Aids Aids Aids Aids to 2 Table 1 Estimated Distr1bution of Tax Expenditures 2 Fiscal Year 1976 (do 11 a r s i n m i 11 ions) Category Amount Percent individuals $61 '365 66.8 to corporations 20,665 22.5 to investors and unincorporated business 8,775 9.6 to farmers 1,015 I • 1 Total 91,820 100.0 Source: u.s. Office of Management and Budget, Special Analyses, Budget of the United States Government, Fiscal Year 1976, Washington, Government Printing Office, 1975, pp. 108-109.