How Big Are Total Individual Income Tax Expenditures, and Who Benefits from Them?

Tax expenditures measure the cost of spend? ing programs run through the tax system. In preparing their annual lists, the Office of Management and Budget (OMB) and Congress's Joint Committee on Taxation (JCT) define tax expenditures as deviations from the "normal" individual and corporate income tax bases. OMB has recently also listed tax expenditures measured against consumption tax and compre? hensive income tax bases. Tax expenditures are "static," meaning that they assume no change in economic behavior if they are eliminated. Tax expenditure estimates may thus be much larger than revenue estimates for eliminating a par? ticular provision. The measurement of tax expenditures is controversial, mainly because there is no com? monly agreed tax baseline against which to measure departures. In spite of this and other measurement issues, most public finance econo? mists believe that measuring tax expenditures is an important part of good budget management because tax benefits can have the same effect on beneficiaries as direct spending programs, and impose similar opportunity costs in terms of higher taxes, reduced federal spending, and higher deficits. We should assess their effects on the federal budget and on achieving program objectives the same way we assess direct spend? ing programs. Non-business tax expenditures?the focus of this paper?are large relative to the size of the economy and to total tax revenues.1 They rose sharply between 1976 and 1985, from 4.2 to 6.4 percent of GDP. They dropped between 1985 and 1990 as a result of the Tax Reform Act of