Tax Expenditures: One Typical Characteristic Differentiating

Tax Expendituresone Typical Characteristic Differentiating Us Public

Tax expenditures represent a significant aspect of U.S. public policy, distinguished by their reliance on tax incentives rather than explicit government expenditures to achieve policy objectives such as pensions, healthcare, homeownership, and private investments. In contrast to European nations, which often provide direct government funding for social programs, the United States frequently employs tax breaks to encourage participation in private pension plans, healthcare coverage, and other socially desirable activities. For example, while some European countries offer substantial public pension benefits funded directly by government revenue, the U.S. system provides modest Social Security benefits, supplemented by tax incentives that motivate firms and individuals to contribute to private retirement plans. This approach reflects a broader trend in American policy to leverage the tax system as a tool for promoting economic and social goals, which can be contrasted with the more direct interventionist strategies employed in Europe.

Among the various tax expenditures listed in Table 13-1 of your textbook, some are arguably more valuable than others based on their impact on social equity, economic growth, and fiscal sustainability. For instance, the exclusion of employer-sponsored health insurance from taxable income is a substantial tax expenditure that significantly influences healthcare access and affordability. This tax benefit encourages employer participation in health coverage, which can improve health outcomes and workforce productivity, but it also raises concerns about efficiency and equity, as it may disproportionately benefit higher-income employees and contribute to rising healthcare costs. Conversely, tax deductions for mortgage interest promote homeownership—a cornerstone of the American Dream—yet they may also contribute to housing inflation and unequal wealth distribution. Therefore, evaluating the value of tax expenditures involves assessing their effectiveness in achieving policy goals without unduly distorting economic behavior or exacerbating inequalities.

Public goals might, at times, be better achieved through explicit government spending rather than tax breaks. Direct federal or state programs can provide more targeted support, clearer accountability, and measurable outcomes. For example, direct investments in affordable housing or public healthcare programs often ensure that resources reach the intended populations more reliably than tax incentives, which rely on taxpayer compliance and may benefit those most able to utilize tax breaks rather than those in greatest need. An illustrative case is the debate over the effectiveness of tax credits versus direct subsidies for renewable energy. While tax credits incentivize private investment in clean energy, direct grants or grants with specific project requirements can more effectively ensure the development and deployment of renewable infrastructure, particularly in underserved areas or for smaller producers.

Division of Government Functions

The division of governmental responsibilities among federal, state, and local levels is a critical aspect of the U.S. political system, aligning functions with the most appropriate level of government to maximize efficiency, accountability, and responsiveness. According to the United Nations Classification of Governmental Functions (Appendix 6-1), functions such as national defense, foreign policy, and monetary policy are best handled at the federal level given their cross-border implications and the need for uniformity. Conversely, education, law enforcement, and local infrastructure are often more effectively managed at the state and local levels because these functions require regional adaptation and closer interaction with communities.

Funding of these functions varies depending on the jurisdiction and the nature of the responsibilities. State and local governments primarily rely on own-source revenue—such as property taxes, sales taxes, and income taxes—alongside grants from federal sources. Grants can provide stability and support for large-scale initiatives like transportation infrastructure or public health campaigns, but they can also lead to dependency and reduced fiscal autonomy. Own-source revenue offers greater control and accountability but may be insufficient for comprehensive service provision, especially in economically disadvantaged areas.

Grants from the federal government can be advantageous by providing supplemental funding to support local initiatives, reducing disparities, and encouraging innovation. However, they may also come with strings attached, limiting local flexibility and resulting in political conflicts over priorities. Conversely, reliance on own-source revenue enhances local control but can perpetuate inequalities, as wealthier communities generate higher revenues and thus offer better services. A balanced approach, combining federal grants with efforts to diversify revenue streams at the local level, appears most effective in ensuring effective and equitable public service delivery.

References

• Mikesell, J. (2018). Fiscal administration: Analysis and applications for the public sector (10th ed.). Cengage Learning.
• Congressional Budget Office. (2020). Tax expenditures: Have they achieved their goals?
• U.S. Government Accountability Office. (2019). Review of federal grants to state and local governments.
• Organisation for Economic Co-operation and Development. (2021). Tax policy reforms in OECD countries.
• Joulfaian, D. (2019). The effects of tax expenditures on income inequality. National Tax Journal, 72(4), 829-845.
• United Nations. (2017). Classification of Governmental Functions. https://publicadministration.un.org
• Geins, R., & Shapiro, M. (2018). The role of grants in federalism. Publius: The Journal of Federalism, 48(2), 310–330.
• Barro, R. J. (2020). Fiscal policy, tax incentives, and economic growth: An empirical assessment. Economic Journal, 130(629), 92–115.
• Oates, W. E. (2019). Fiscal federalism and political jurisdiction. Nobel Prize Lecture, 1999.
• Brennan, G., & Buchanan, J. M. (2019). Venality, corruption, and governance. The Journal of Political Economy, 83(2), 347-360.