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Federal Spending vs. Tax Expenditures: Total tax expenditures are greater than many critical spending programs

Any replication of this chart should be credited to The Hamilton Project at the Brookings Institution.

Federal Spending vs. Tax Expenditures: Total tax expenditures are greater than many critical spending programs

One of the primary reasons America’s tax revenues remain low relative to other industrialized countries is our use of special tax preferences, or “tax expenditures,” that provide individuals and businesses with opportunities to reduce their tax bills by undertaking certain actions. The magnitude of tax expenditures is comparable to the largest government spending programs; in total, they are about 8 percent of GDP. The mortgage interest deduction and similar tax breaks are referred to as “tax expenditures” because they add to the deficit to subsidize certain activities, just as some spending programs do. Eliminating or limiting tax expenditures could raise revenues to reduce the federal deficit or to facilitate lower tax rates. However, reining in tax expenditures will not be easy. First, many tax expenditures serve important purposes, such as offsetting the tax burden on working families or promoting health insurance coverage. Additionally, the largest tax expenditures—such as the tax breaks for mortgage interest, health care, and retirement savings, and reduced rates for capital gains—are also the most entrenched tax expenditures, and are defended by a broad base of vocal stakeholders.


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