They're called tax "expenditures" to distinguish them from actual federal spending, say, to buy tanks or stationery. But they do have an impact on revenue that would otherwise be received, and they thus do contribute to the federal deficit when the budget is not in balance. By giving selected groups favorable treatment under the tax code, they affect individuals' and corporate economic behavior and have an impact on the distribution of income.
The CBO reviewed the top 10 tax expenditures in four major categories. First, exclusions from taxable income—employer-sponsored health insurance, net pension contributions and earnings, capital gains on assets transferred at death, and a portion of Social Security and Railroad Retirement benefits. Second, itemized deductions—certain taxes paid to state and local governments, mortgage interest payments and charitable contributions. Third, preferential tax rates on capital gains and dividends; and, finally, tax credits—the earned income tax credit, and the child tax credit.
All told, these tax expenditures amount to $900 billion, about 5.7 percent of total U.S. economic output. As Derek Thompson points out, that's more than is spent on Medicare or Defense or Social Security. Whether any one of these expenditures is good or bad depends on ideology and personal preference as much as anything. They represent a wide array of interests that allows the federal government to promote everything from cheaper home ownership to oil drilling.
Rep. Chris Van Hollen (D-MD), the Democrats’ leader on budget issue, said the CBO study stresses the need to reduce the deficit by limiting the tax deductions and credits available to upper income earners. “If you look at the skewing of the tax preferences here,” he said, “it indicates very clearly that we could achieve a significant amount of deficit reduction by limiting these preferences for the highest income earners — the top 1 percent.”Many Republicans and economic libertarians have long argued for a simpler tax code, some of them in support of a flat tax that would eliminate most tax expenditures. This would, of course, work to increase the vast inequality in income and wealth that plagues the nation and increase poverty. When these "reformers" have actually gotten down to discussing the details, however, the tax breaks that go to making up these expenditures tend to creep back into the picture. It's not hard to figure out why. Dumping most of these breaks would mean raising almost everyone's tax bills.
Jon Perr has posted a diary on the subject here.