View Research by Author - Lily L. Batchelder

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In 2011, the U.S. government will spend over $1 trillion on tax expenditures. These programs often fly under the radar of media and public opinion. This paper discusses obstacles to subjecting tax expenditures to the same scrutiny as direct outlays and offers some recommendations for incorporating them in the budget process. It then provides a framework of questions and principles policymakers should consider in evaluating these programs. We conclude that the size of tax subsidies should not be based on a claimant's marginal tax rate or itemizing status, implying that refundable credits are usually the best way to deliver them.

The federal tax code provides about $500 billion each year in incentives intended to encourage socially-valued activities, including homeownership, charitable contributions, health insurance, and education. Under our proposal, the default for all tax incentives intended to promote socially beneficial behavior would be a uniform refundable tax credit. These tax credits would provide a much more even and widespread motivation for socially-valued behavior than the current set of tax incentives, and could help smooth out fluctuations in household income and macroeconomic demand, all of which would improve economic efficiency.

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