Document Type

Article

Disciplines

Taxation-Federal | Tax Law

Abstract

This article urges policymakers to cut down on ineffective and costly tax expenditures. Tax expenditures aim to incentivize beneficial economic outcomes; the tax jurisdiction surrenders the right to a portion of its tax base in anticipation of economic benefits. While tax expenditures are not inherently bad or good, many believe that most tax incentive programs would fail a cost-benefit analysis.

Ideally, tax incentives target economic activity that would not occur in the absence of the incentive. And to be considered a success, the benefit of the activity must outweigh the cost of the incentive. For example, if the goal of a tax incentive is job creation, the costs, such as loss in revenue, must be weighed against the precise nature of the jobs gained. If those jobs are merely temporary, for example, they are less beneficial.

The article draws attention to a critical failing of many tax incentive programs: their application is too broad. When incentives are poorly calibrated, they apply to unintentionally targeted taxpayers whose incentivized activity is not cost-beneficial. Broad incentives also benefit taxpayers that would have performed the beneficial activity regardless of the incentive, resulting in wasted money. Supporters of tax expenditures too often look only at the activity of the targeted group and not at the costs before determining that the policy was a success.

The article looks to the film industry, which has historically been benefitted by substantial tax incentives, as an example. Studies show that nonresident workers are often brought in to perform work on the film, and the jobs obtained by resident workers are temporary and low-paying.

The article concludes by urging an immediate moratorium on existing tax incentives. Tax incentives ought to survive a rigorous cost-benefit analysis from a commission composed of neutral politicians and impartial evaluators. Each analysis should proceed on a beneficiary-by-beneficiary basis to ensure that the benefits truly outweigh the costs.

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