The Bizarre Economics of Tax Expenditures
If you follow discussions about tax policy that academics and politicians engage in, sooner or later you’ll come across the concept of a “tax expenditure.” The term seems internally contradictory. How could something be both a tax and an expenditure?
It can’t. The term is contradictory. And thinking in terms of tax expenditures can lead you to some strange conclusions.
These are the opening paragraphs of David R. Henderson, “The Bizarre Economics of ‘Tax Expenditures‘”, TaxBytes, Institute for Policy Innovation, August 29, 2023.
I use a numerical example with the deduction for home mortgages. I chose that on purpose because I think there should not be a deduction for interest on a home mortgage. But that doesn’t mean that using the term “tax expenditure” to refer to the deduction is a legitimate use of language.
I go on to point out some implications of using the term “tax expenditure” to describe the home mortgage deduction.
Similarly, raising his tax rate would increase the tax expenditure. And then tax policy wonks would say that he benefited hugely from the tax expenditure even though the higher tax rate made him worse off.
Read the whole thing, which is not long.