The Case for Tax Credits

Abstract

Despite perennial calls from politicians, policy analysts, and populists for a major individual income tax overhaul that would cleanse the tax system by eliminating its eclectic collection of tax incentives and preferences, the ideal of tax base purity has yet to be realized and seems unlikely to find its way to fruition in the foreseeable future. Middle-class Americans appear to be simply too fond of their tax preferences for expenses such as home mortgage interest, health insurance, and charitable contributions to let go, as evidenced by the reluctance of savvy politicians to put forward a serious reform package that eliminates those tax benefits. For the 2007 fiscal year, the largest 25 tax expenditures reported in the President’s Budget were expected to have a total value of over $750 billion in terms of foregone revenue. By comparison, the entire amount of revenue raised by the federal individual income tax during the same period was only $1.096 trillion, meaning that total revenue would be over 70 percent higher without these tax preferences if current tax rates were unchanged.