A Review of Selected Corporate Tax Privileges

The US government uses the term tax expenditure to describe both privileges granted to politically favored special interests and patches to the tax system that address economic inefficiencies created by the income tax code. This use of the term confuses two very different phenomena and muddies policy discussions about tax reform.

A new study from the Mercatus Center at George Mason University examines the current accounting of tax expenditures and presents case studies of some corporate tax expenditures. Using this analysis the paper outlines three steps to help curb the problem.

The first is redefining the baseline. The current baseline for measuring tax expenditures rests on an inconsistent definition of income, rendering tax expenditure analysis subjective and 3 unreliable. To remedy this problem, Congress should amend the Congressional Budget and Impoundment Control Act of 1974 to redefine a common baseline around a consistent, broad-based consumption tax baseline.

Secondly there needs to be improved reporting. Even without legislative action, JCT and OMB could begin reporting a second list of tax expenditures using a consumption baseline—a strategy for sounder analysis that has historical precedent in past presidential budgets.

Finally Congress needs to remove special provisions. Congress should expand narrowly applied expenditures that aim to move the tax code toward a neutral base and eliminate expenditures that fail to perform this function. Until a more robust, broad-based consumption-tax system replaces the US income tax, policymakers must also resist adding additional privileges.

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