3. Tax Expenditures: Spending Through Tax

Scope of the Materials

Governments spend money to carry out the policies and projects that their legislatures enact. Usually they do it simply by using some of their tax money (maybe they borrow but it will have to be paid back). This is called direct spending.  They also implement policies through the tax laws by reducing taxpayers's taxes if they meet certain requirements that further a government policy.This is called indirect spending. The provisions that lower taxes are called tax preferences, tax benefits or tax expenditures


Consider a government that wants to promote two energy policies: encourage more oil drilling and encourage the use of energy-efficient products.  It could implement the policies by giving money directly to oil drillers and users of energy-efficient products. Or it could do so indirectly by  reducing taxes for  taxpayers who engage in these activities by the same amount of money. Either way the taxpayers end up with more money in their pockets and the government with less.


This Unit explores the use of tax expenditures to implement public policies. It explains the basic mechanisms through examples and examines some of the equitable issues that occur with the use of tax expenditures. The activities include analyzing original documents as well as role-playing.


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