Policy Documents

A Trillion Little Subsidies: The Economic Impact of Tax Expenditures in the Federal Income Tax Code

Jeremy Horpedahl –
October 24, 2012

This study documents the economic distortions and inefficiencies that result from a tax system filled with tax expenditures.

Tax expenditures are provisions in the U.S. tax code through which individuals and corporations can lower their tax burden by behaving in specific ways. Total tax expenditures in the United States are currently around $1 trillion, with over 80 percent accruing to individuals and the remainder to corporations.

The study reviews each of the ten largest tax expenditures for individuals and corporations, focusing on the following distortions of economic activity: spending on goods and services, capital allocation, the distribution of income, and lobbying and rent-seeking.

The author shows benefits of tax expenditures accrue disproportionately to higher-income earners, because they are more likely to itemize deductions and can afford to hire accountants to minimize their tax burden. Eliminating tax expenditures would increase economic growth and allow for lower tax rates, further increasing growth, according to the study.