People often talk about controlling government spending, but they may not realize how the spending is classified and available for cuts as discretionary spending. For fiscal year 2015, mandatory spending on programs such as Social Security and Medicare make up 65% of the budget proposed by the President. Since another portion goes toward interest on the Federal Debt (6% in 2015), only 29% of government spending is discretionary.
That discretionary spending totals 1.16 trillion dollars in the 2015 budget. However, there is another form of discretionary spending that falls outside this budget category — tax breaks. Tax breaks bypass the budget approval process because they are written directly into the tax code and affect the income side of the ledger. Officially, a tax break is listed as a tax expenditure because from the government perspective, it results in less money in the government coffers.
For fiscal 2015, the U.S. government has approximately $1.24 trillion in tax breaks written in the tax code, according to the National Priorities Project (using data from the Office of Management and Budget). This surpasses the $1.16 trillion in discretionary spending outlined in the budget.
Tax breaks are even harder to control than traditional discretionary spending, because they do not always have to be approved each year. Some tax programs do have sunset dates or require periodic Congressional renewal, depending on how the legislation for the tax break was written. However, they do not require the yearly approval that the overall budget does.
It sounds outrageous to have a greater dollar amount in tax breaks than in discretionary spending, and perhaps it is — but consider that one person’s outrageous abuse of the tax system is another person’s well-deserved tax break. Let’s take a look at some of the largest typical tax breaks, using 2013 numbers gathered and presented by the National Priorities Project.
- Exclusion of Employer-Sponsored Health Care – This tax break was the largest component in 2013 at $191 billion in individual tax benefits. Employer payments for your employee health insurance are tax-exempt. If this were not the case, either you or your employer would be paying taxes on those provided benefits (and in the end, you would be paying most of it in some form).
- Capital Gains and Dividends – The lower rate on long-term capital gains is a tax break that accounted for $97 billion in potential Treasury revenue. In this case, the wealthiest 1% really do benefit far more. Whether or not you believe it is fair, it is a fact that 68% of the capital gains benefits went to the wealthiest 1% in 2013.
- Exclusion of Employer-Sponsored Retirement Programs – As with the healthcare plans above, the contributions to 401(k)s and similar programs are not taxed. We would argue that since they are taxed later upon withdrawal, calling this a “tax break” is a bit questionable. This exclusion accounted for $91 billion in 2013.
The other seven categories in the top ten largest tax breaks are: exclusion of imputed rental income, deduction of home mortgage interest, deferral of corporate income earned abroad, accelerated depreciation, deduction of charitable contributions, deduction of state and local taxes, and the capital gains exclusion for home sales. This is quite a mix of benefits — not all stereotypical fat cat benefits by any means.
We probably all agree that spending needs to be brought under control, and that there is unnecessary spending in the government budget — but we certainly do not all agree on the definition of unnecessary. However, it would be better if the tax break sources of “spending” were at least reviewed more often for effectiveness. Otherwise, how do we ever know if we are getting our money’s worth out of the tax break? That is the major point that the National Priorities Project is trying to make.