House Research Department November 2013
A Review of Selected Tax Expenditures Page 3
Allocative versus Distributive Features
Another way to distinguish between fundamental or
basic tax features and tax expenditures is to focus on
whether the purpose of the feature is “distributive” or
“allocative” in nature.*
Distributive features are intended to change the
distribution of the tax burden primarily for equity or
similar reasons—for example, to make the
distribution more in line with “ability to pay” or
some other concept of fairness. A distributive feature
(e.g., progressive rates or standard deduction) is a
feature of the reference tax.
By contrast, an allocative feature would divide or
allocate resources between private and public goods
or among different types of public goods—e.g.,
encouraging homeownership or reducing pollution.
Features that primarily serve allocative functions are
more likely tax expenditures than part of the
reference tax.
* This distinction is from Richard Musgrave’s classic
textbook, Public Finance in Theory and Practice; its
application to tax expenditures is suggested by Daniel N.
Shaviro, “Rethinking Tax Expenditures and Fiscal
Language,” Tax Law Review 57, no. 1 (2004).
The Tax Expenditure Concept
The primary purpose of any tax system (whether federal, state or local) is to raise revenue to pay
for the cost of providing government services. However, governments also commonly use their
tax systems for other purposes. One such use is to provide special tax reductions intended to
induce taxpayers to change their behavior or to provide government benefits to certain taxpayers
to achieve a public purpose. Often, the legislature could attempt to achieve these ends through a
direct spending program, rather than through a tax-based provision. In the 1960s and 1970s, tax
policy experts developed the concept of “tax expenditures” to describe the phenomenon of
substituting tax benefits for direct spending. It generally refers to the reductions in revenue
collections that result from deviations from a reference or normal tax of the type involved.
Identifying tax expenditures, thus,
requires agreeing upon a “reference or
normal tax”—that is, the features of the
tax (whether income, sales, property,
and so forth) that would be imposed
under generally accepted theory, if the
only purpose were to raise revenue.
Reductions in revenue collected from
this reference or normal tax—for
example, exclusions, exemptions,
deductions, preferential tax rates,
credits, deferrals, and similar—are
considered “tax expenditures.” Features
such as the regular tax rate structure,
family size adjustments (e.g., personal
and dependent exemptions for an
income tax), and exclusions that are
considered necessary for practical
reasons (e.g., the failure to tax
unrealized income) are not typically
considered tax expenditures. Since
there is not always agreement on the
theoretical basis for a tax or the practical
limits of tax administration, there may
be controversy or disagreement in
determining what is and isn’t a tax
expenditure.
A key notion underlying the tax expenditure concept is that the government is using tax-based
provisions not to raise revenues, but rather to change behavior or to distribute government
benefits to individuals or business firms. These are ends or purposes that could (and more
typically are) addressed through direct spending programs. The decision to use the tax system is