[JPRT 110-2-08]
[From the U.S. Government Publishing Office]


                                                               JCS-2-08

                        [JOINT COMMITTEE PRINT]
 
                              ESTIMATES OF

                        FEDERAL TAX EXPENDITURES

                       FOR FISCAL YEARS 2008-2012

                               __________

                            Prepared for the

                   HOUSE COMMITTEE ON WAYS AND MEANS

                                and the

                      SENATE COMMITTEE ON FINANCE

                               __________

                              By The Staff

                                 of the

                      JOINT COMMITTEE ON TAXATION

[GRAPHIC] [TIFF OMITTED] 


                            OCTOBER 31, 2008

                              -------

                     U.S. GOVERNMENT PRINTING OFFICE

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                            C O N T E N T S

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                                                                   Page
Introduction.....................................................     1
 I. The New Approach..................................................3
II. Tax Subsidies....................................................11
        A. Tax Transfers.........................................    11
        B. Social Spending Examples..............................    12
            1. Deduction for mortgage interest on owner-occupied 
                residences.......................................    12
            2. Exclusion of employer-provided health care 
                benefits.........................................    14
            3. Exclusion of interest on State and local bonds....    16
            4. Deduction for nonbusiness State and local 
                government income taxes, sales taxes, and 
                personal property taxes..........................    17
            5. Section 162(m)....................................    18
        C. Business Synthetic Spending Examples..................    19
            1. Last in First Out (``LIFO'') method of inventory 
                accounting.......................................    19
            2. Tax credits for electricity production from 
                renewable resources..............................    20
            3. Tax exemption for certain organizations...........    21
            4. Foreign investment in U.S. real estate............    23
III.Tax-Induced Structural Distortions...............................25

IV. Measurement of Tax Expenditures..................................35
 V. Tax Expenditure Tables...........................................48
                              INTRODUCTION

    Tax expenditure analysis can help both policymakers and the 
public to understand the actual size of government, the uses to 
which government resources are put, and the tax and economic 
policy consequences that follow from the implicit or explicit 
choices made in fashioning legislation. By developing a 
consistent, neutral and principled implementation of tax 
expenditure analysis, the Staff of the Joint Committee on 
Taxation (the ``JCT Staff'') therefore can provide Members of 
Congress with a vitally important analytical tool that they can 
employ in weighing the merits of both existing tax provisions 
and new legislative proposals.
    Earlier this year, the JCT Staff introduced a new paradigm 
for the identification and classification of tax 
expenditures.\1\ The new paradigm is designed to improve the 
utility of tax expenditure analysis and to reemphasize its 
neutrality. In particular, the new paradigm addresses the 
principal criticism of tax expenditure analysis as originally 
conceived and, by implication, as previously implemented by the 
JCT Staff--its reliance on a comparison of present law with a 
hypothetical and subjectively determined ``normal'' tax system.
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    \1\ See Joint Committee on Taxation, A Reconsideration of Tax 
Expenditure Analysis (JCX-37-08), May 12, 2008 (hereinafter cited as 
``JCT Reconsideration'').
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    In this pamphlet, we implement the new paradigm in 
presenting the annual list of tax expenditures required by the 
Congressional Budget and Impoundment Control Act of 1974.\2\ 
Section I reviews our new approach, including its division of 
tax expenditures into two principal categories: tax 
expenditures that can be identified as exceptions to the 
general rules of the existing Internal Revenue Code (``Tax 
Subsidies''), and a new category that we have termed ``Tax-
Induced Structural Distortions.'' Section I also describes 
three subcategories of Tax Subsidies designed to facilitate the 
comparison of similar tax expenditures to one another. Sections 
II and III illustrate the application of these categories and 
subcategories to particular tax expenditures. Section IV 
discusses the methodology used to quantify the magnitude of tax 
expenditures, and Section V presents a comprehensive list of 
tax expenditures, identified and categorized under our new 
approach.
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    \2\ Pub. L. No. 93-344 (herein, the ``Budget Act''). The Budget Act 
requires the Congressional Budget Office (``CBO'') and the United 
States Department of the Treasury (the ``Treasury Department'') 
annually to publish detailed lists of tax expenditures. In light of the 
traditional expertise of the JCT Staff in respect of revenue matters, 
and a separate statutory requirement that Congress rely on JCT Staff 
estimates when considering the revenue effects of proposed legislation, 
the CBO has always relied on the JCT Staff for the production of its 
annual tax expenditure publication. See P.L. 93-344 Sec. 201(g), 
codified at 2 USC 601(f); Joint Committee on Taxation, Estimates of 
Federal Tax Expenditures, October 4, 1972 (JCS-28-72), June 1, 1973 
(JCS-20-73), July 8, 1975 (JCS-11-75), March 15, 1976 (JCS-5-76), March 
15, 1977 (JCS-10-77), March 14, 1978 (JCS-9-78), March 15, 1979 (JCS-9-
79), March 6, 1980 (JCS-8-80), March 16, 1981 (JCS-7-81), March 8, 1982 
(JCS-4-82), March 7, 1983 (JCS-4-83), November 9, 1984 (JCS-39-84), 
April 12, 1985 (JCS-8-85), March 1, 1986 (JCS-7-86), February 27, 1987 
(JCS-3-87), March 8, 1988 (JCS-3-88), February 28, 1989 (JCS-4-89), 
March 9, 1990 (JCS-7-90), March 11, 1991 (JCS-4-91), April 24, 1992 
(JCS-8-92), April 22, 1993 (JCS-6-93), November 9, 1994 (JCS-6-94), 
September 1, 1995 (JCS-21-95), November 26, 1996 (JCS-11-96), December 
15, 1997 (JCS-22-97), December 14, 1998 (JCS-7-98), December 22, 1999 
(JCS-13-99), April 6, 2001 (JCS-1-01), January 17, 2002 (JCS-1-02), 
December 19, 2002 (JCS-5-02), December 22, 2003 (JCS-8-03), January 12, 
2005 (JCS-1-05), April 25, 2006 (JCS-2-06), September 24, 2007 (JCS-3-
07).
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    Tax expenditure analysis is (or should be) simply an 
analytical tool, not a criticism of current law or an 
expression of a normatively superior alternative tax system. By 
describing provisions of current law as Tax Subsidies or Tax-
Induced Structural Distortions, and by quantifying (in the 
former case) the forgone revenues associated with that tax 
expenditure, this pamphlet provides policymakers with an 
analytical framework and with quantitative data that they can 
employ in judging the merits of each such item. It should be 
emphasized that there is a reason behind every Tax Subsidy or 
Tax-Induced Structural Distortion in the tax law, and that 
there are many other modes of analysis besides tax expenditure 
analysis that are relevant to the Members of Congress and 
others in weighing the value of each provision of the tax law. 
The inclusion in this pamphlet of an item as a tax expenditure 
therefore is not meant to convey that the provision in any 
fashion is necessarily problematic in the context of the larger 
policy issues that Congress considers in fashioning every piece 
of legislation.

                          I. THE NEW APPROACH

Background
    The Budget Act defines tax expenditures as ``revenue losses 
attributable to provisions of the Federal tax laws which allow 
a special exclusion, exemption, or deduction from gross income 
or which provide a special credit, a preferential rate of tax, 
or a deferral of tax liability.'' \3\ Although the Budget Act 
does not specify the baseline from which tax expenditures are 
determined, the JCT Staff has traditionally followed an 
approach consistent with the concept originated by Assistant 
Secretary for Tax Policy Stanley Surrey and first implemented 
in the Treasury Department's annual financial report for the 
1968 fiscal year.\4\ That report, prepared under Surrey's 
guidance, implemented his earlier call for a ``tax expenditure 
budget'' that would encourage expenditure control and 
facilitate tax reform.\5\ Surrey hoped that a formal 
identification of tax expenditures as substitutes for direct 
spending would reveal them to be poorly targeted or inefficient 
when compared either to direct government spending or (in most 
cases) to no spending at all.\6\ He further believed that a 
more rigorous examination of tax expenditures, as if they were 
spending requests, would demonstrate that many of these 
provisions conflict with the goal of an equitable, efficient 
and administrable income tax system. The 1968 Treasury Report 
therefore sought to identify ``the major respects in which the 
current income tax bases deviate from widely accepted 
definitions of income and standards of business accounting and 
from the generally accepted structure of an income tax.'' \7\
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    \3\ Budget Act, sec. 3(3).
    \4\ United States Department of the Treasury, Annual Report of the 
Secretary of the Treasury on the State of the Finances for the Fiscal 
Year Ended June 30, 1968 (Washington, D.C., Government Printing Office, 
1969) (herein, the ``1968 Treasury Report''). For its reports on the 
1972 and 1974 fiscal years, the Treasury Department collaborated with 
the JCT Staff.
    \5\ Stanley S. Surrey, Excerpts from remarks before The Money 
Marketeers on The U.S. Income Tax System--the Need for a Full 
Accounting, November 15, 1967, in the 1968 Treasury Report, supra, at 
322; see also Stanley S. Surrey, Pathways to Tax Reform (Cambridge, 
Mass., Harvard University Press, 1973) at 30-49 (describing uses of a 
tax expenditure budget).
    \6\ Stanley S. Surrey and Paul R. McDaniel, Tax Expenditures, at 
32-37 (Cambridge, Mass., Harvard University Press, 1985).
    \7\ 1968 Treasury Report, supra, at 327. Consistent with Surrey's 
goal of expenditure control, both the 1968 and later Treasury Reports, 
and the JCT Staff Reports since 1975, have presented tax expenditures 
in the same functional categories under which direct expenditures are 
classified in the Federal budget.
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    The 1968 Treasury Report did not include a comprehensive 
description of the definitions and standards, or the 
``generally accepted structure of an income tax,'' that served 
as its baseline for the identification of tax expenditures. In 
fact, the only features that the 1968 Treasury Report 
explicitly included in the ``accepted structure'' of an income 
tax are the personal exemptions and graduated rates for 
individuals and the existence of a separate corporate tax. 
Surrey later observed that the early Treasury Reports had 
relied in part on the Haig-Simons definition of personal 
income,\8\ but this definition provides only a general 
framework for analysis and says nothing about most of the 
structural issues that must be decided under any income tax 
law, such as the rate structure, the proper taxpaying unit and 
the proper accounting period. Surrey therefore refined the 
Haig-Simons definition by incorporating what he described as 
``widely accepted'' definitions and standards and ``generally 
accepted'' structural features. Thus, he treated certain items, 
such as the failure to tax imputed rent from owner-occupied 
homes, as part of the normal tax baseline ``where the case for 
their inclusion in the income base stands on relatively 
technical or theoretical tax arguments.'' \9\ His baseline 
included the personal exemptions and graduated rates for 
individuals, on the grounds that those features were ``part of 
the structure of an income tax based on ability to pay,'' \10\ 
and he included a separate corporate income tax in the baseline 
on the grounds that U.S. tax policy had accepted the concept, 
notwithstanding strong arguments that integrated taxation of 
corporations and shareholders would better implement the Haig-
Simons ideal. Numerous other structural issues were revealed 
only through his choices for the list of tax expenditures.\11\
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    \8\ Under this definition, personal income is ``the algebraic sum 
of (1) the market value of rights exercised in consumption and (2) the 
change in the value of the store of property rights between the 
beginning and end of the period in question.'' Henry Simons, Personal 
Income Taxation (University of Chicago Press, 1938). Regarding Surrey's 
reliance on the Haig-Simons definition, see Stanley S. Surrey and Paul 
R. McDaniel, Tax Expenditures, supra, at 3 (``Tax expenditure analysis, 
as applied to a particular tax, requires an understanding of the 
normative structure of that tax in order to determine whether a 
provision is a part of the structural or the tax expenditure component. 
In the U.S. analysis of income tax expenditures, the normative concept 
of net income is based on the Schanz-Haig-Simons economic definition of 
income. . . .'').
    \9\ 1968 Treasury Report, supra, at 329.
    \10\ 1968 Treasury Report, supra, at 329.
    \11\ Some items were omitted from the list for practical reasons, 
such as the perceived difficulty of estimating the magnitude of the 
subsidy (e.g., accelerated depreciation) or the relatively small size 
of the subsidy.
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    Although the Treasury Department substantially abandoned 
this original approach during the Reagan Administration in 
favor of a ``reference law'' baseline, \12\ the JCT Staff has 
used a ``normal tax'' baseline similar to Surrey's since 1975. 
As explained in the JCT Staff's 2007 report, the determination 
of whether a provision is a tax expenditure has been made on 
the basis of a concept of income that is larger in scope than 
``income'' as defined under general U.S. Federal income tax 
principles. \13\ The features of that normal tax baseline have 
been described in detail in each annual report, and the JCT 
Staff has used its judgment in distinguishing between those 
income tax provisions (and regulations) that can be viewed as a 
part of normal income tax law and those special provisions that 
result in tax expenditures.
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    \12\ JCT Reconsideration, at 25.
    \13\ Joint Committee on Taxation, Estimates of Federal Tax 
Expenditures, September 24, 2007 (JCS-3-07).
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    The concept of a normal tax baseline as the underpinning of 
tax expenditure analysis has evoked serious and continuous 
criticism, however, since its introduction in the late 
1960s.\14\ Numerous tax academics and policy experts have 
rightly observed that the ideal ``normal'' tax system does not 
correspond to any generally accepted formal definition of net 
income. Instead, many observers view tax expenditure analysis, 
in the form envisioned by Stanley Surrey, as a thinly veiled 
agenda for a specific form of tax reform. Under this view, the 
normative tax system is not simply an analytical tool but is 
also an aspirational goal of the political process.
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    \14\ See, e.g., Boris I. Bittker, Accounting for Federal ``Tax 
Subsidies'' in the National Budget, 22 National Tax Journal 244 (1969); 
JCT Reconsideration at 29-33.
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    Tax expenditure analysis cannot serve as an effective and 
neutral analytical tool if the premise of the analysis (the 
validity of the ``normal'' tax base) is not universally 
accepted. The ``normal'' tax is admittedly a commonsense 
extension (and cleansing) of current tax policies, and not a 
rigorous framework developed from first principles. As a 
result, the normal tax cannot be defended from criticism as a 
series of ultimately subjective or pragmatic choices, and its 
use as a baseline has diminished the utility of tax expenditure 
analysis.
    The JCT Staff has therefore undertaken a reconsideration of 
the principles of tax expenditure analysis, in order to improve 
the doctrine's utility to policy makers and reemphasize its 
neutrality. In A Reconsideration of Tax Expenditure Analysis, 
we presented a new approach for the identification and 
classification of tax expenditures.\15\ Central to this new 
approach is our division of the universe of such provisions 
into two main categories: tax expenditures in a narrow sense 
(as explained below), which we label ``Tax Subsidies,'' and a 
new category that we have termed ``Tax-Induced Structural 
Distortions.'' The two categories together cover much the same 
ground as the current definition of tax expenditures and in 
some cases extend the application of the concept further. The 
revised approach does so, however, without relying on a 
hypothetical ``normal'' tax to determine what constitutes a tax 
expenditure, and without holding up that ``normal'' tax as an 
implicit criticism of present law. The result should be a more 
principled and neutral approach to the issues. The two 
categories of tax expenditures, Tax Subsidies and Tax-Induced 
Structural Distortions, are intended to be as transparent and 
objective as possible.
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    \15\ JCX-37-08, May 12, 2008.
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Tax Subsidies
    Our approach to Tax Subsidies (that is, tax expenditures in 
the narrow sense) builds loosely on the work of Seymour 
Fiekowsky and others, by defining a Tax Subsidy as a specific 
tax provision that is deliberately inconsistent with an 
identifiable general rule of the present tax law (not a 
hypothetical ``normal'' tax), and that collects less revenue 
than does the general rule.\16\ A negative Tax Subsidy is the 
converse case of an exception to the general rule that results 
in the collection of more revenue than does the general 
rule.\17\ In practice, our conception of the compilation of 
general rules that together comprise our baseline for 
identifying Tax Subsidies corresponds to the ``reference tax'' 
baseline that the Treasury Department currently uses in its tax 
expenditure analyses.
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    \16\ Fiekowsky, The Relation of Tax Expenditures to the 
Distribution of the ``Fiscal Burden,'' 2 Canadian Taxation 211, 215 
(1980); see also OMB, The Budget of the United States Government, 
Fiscal Year 1983--Special Analyses G-5 (1982).
    \17\ Although the Budget Act does not require the identification of 
negative tax expenditures, we have presented a number of negative Tax 
Subsidies in Section V for completeness and to facilitate understanding 
of the Tax Subsidy paradigm.
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    The Tax Subsidy paradigm is constructed by asking what 
constitutes the general rule, and what the exception, under 
actual present law. Our determination of Tax Subsidies thus is 
made, not by reference to an alternative and hypothetical 
``normal'' tax chosen by the JCT Staff, but rather by reference 
to the general rules of the Internal Revenue Code itself, along 
with its legislative history and similar straightforward tools 
for identifying legislative intent. This definition does not 
require the kinds of normative judgments required to construct 
the ``normal'' tax base. It is not, however, automatic in 
application. For example, there will be occasional uncertainty 
as to whether there is a clear general rule of current tax law.
    We have further divided the Tax Subsidy category into three 
subcategories with a view to facilitating consensus on the 
principles that are relevant to the evaluation of a particular 
Tax Subsidy. The first subcategory, Tax Transfers, generally 
includes payments made to persons without regard to their 
income tax liability, usually because there was no income tax 
liability to begin with, or because the person's income tax 
liability was eliminated by another Tax Subsidy. In contrast, 
Tax Subsidies other than Tax Transfers only reduce (or 
increase, in the case of negative Tax Subsidies) a taxpayer's 
income tax liability. Tax Transfers are the clearest examples 
of hybrid tax/spending programs, i.e., they are essentially 
direct government spending programs that use the tax system for 
distribution.
    The Social Spending subcategory includes both Tax Subsidies 
that often are intended to subsidize or induce behavior 
unrelated to the production of business income and Tax 
Subsidies related to the supply of labor. The charitable 
contribution deduction is an example of a provision in this 
subcategory.
    The third subcategory, Business Synthetic Spending, 
includes Tax Subsidies intended to subsidize or induce behavior 
directly related to the production of business or investment 
income, but excludes any Tax Subsidies related to the supply of 
labor. In cases where a provision has potentially both business 
and nonbusiness statutory incidence, we classify the provision 
based on a judgment about the effect and/or the intent of the 
provision. When legislative intent is not readily discernible, 
the item generally will be classified according to whether or 
not it is linked directly to production of business income.
    All Tax Subsidies raise questions of equity, efficiency and 
ease of administration. The three subcategories can be useful 
to suggest that these factors may have different weights across 
the different subcategories. For example, targeting and 
incentive effects are likely to be most important in the 
evaluation of a Tax Transfer intended to aid low-income 
persons. Effects on income distribution may be less important, 
however, to the evaluation of a Social Spending provision than 
is its efficacy in achieving a specific societal goal. For an 
item in the Business Synthetic Spending subcategory, concerns 
regarding certainty and economic efficiency may be more 
relevant than for items in the other two subcategories. 
Tradeoffs among competing goals are a necessity in the design 
of any tax provision. The subcategories of Tax Subsidies are 
intended simply to assist policymakers in making and 
understanding these tradeoffs.
    As a result of the new approach, new provisions are 
included as Tax Subsidies, such as the ``last in first out'' 
(LIFO) and ``lower of cost or market'' (LCM) methods of 
accounting, the section 164 deduction for foreign taxes, 
certain exceptions to the definition of unrelated business 
taxable income of exempt organizations, and the allowance of a 
deduction under section 212 for investment expenses incurred by 
individuals. Examples of negative tax expenditures include the 
taxation of gain realized by foreign persons on disposition of 
U.S. real property under section 897, and the phaseout of the 
personal exemption and disallowance of the personal exemption 
and standard deduction against the alternative minimum tax.
Tax-Induced Structural Distortions
    Some important provisions identified as tax expenditures 
under our old approach cannot easily be described as exceptions 
to a general rule of present law. This may be the case because 
the general rule is not clear. Alternatively, the provision 
itself may constitute the general rule, or at least a key 
element of the Code. In either case, such a provision cannot 
properly be classified as a Tax Subsidy in the narrower sense 
described above. Instead, we have created for these provisions 
a second major category of tax expenditures labeled Tax-Induced 
Structural Distortions.
    Tax-Induced Structural Distortions are structural elements 
of the Internal Revenue Code (not deviations from any clearly 
identifiable general tax rule and thus not Tax Subsidies) that 
materially affect economic decisions in a manner that imposes 
substantial economic efficiency costs. While both Tax Subsidies 
and Tax-Induced Structural Distortions result in economic 
inefficiencies, those distortions cannot be removed in the case 
of Tax-Induced Structural Distortions simply by reverting to 
the general rule of present law, because Tax-Induced Structural 
Distortions are too firmly embedded in the design of present 
law to be teased out in this manner.
    Importantly, the identification of Tax-Induced Structural 
Distortions does not depend simply on the magnitude of their 
efficiency costs or on the amount of revenue lost as a result 
of the provision. The deduction for home mortgage interest, 
discussed in Section II.B.1 below, is arguably one of the 
larger tax expenditures in terms of both its revenue cost and 
its economic inefficiency. The economic distortions associated 
with this provision could be reversed, however, by treating 
home mortgage interest in the same manner as other types of 
personal interest expense, i.e., as nondeductible under the 
general rule of section 163(h). As a result, we classify the 
home mortgage interest deduction as a Tax Subsidy, rather than 
a Tax-Induced Structural Distortion. (In analyzing the tax 
policy issues raised by the deduction, however, we would employ 
the same efficiency considerations as might be applied to a 
Tax-Induced Structural Distortion along with other relevant 
criteria.) \18\
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    \18\ See Joint Committee on Taxation, Tax Expenditures for Health 
Care (JCX-66-08), July 30, 2008.
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    In contrast, the ability to defer inclusion for income tax 
purposes of certain ``active'' earnings of foreign corporations 
owned by U.S. persons is an example of a provision that has 
been treated as a tax expenditure, but that is not classified 
as a Tax Subsidy under our new approach, because present law is 
ambiguous as to what constitutes the general rule for taxing 
foreign earnings. Instead, we classify the deferral rules as a 
Tax-Induced Structural Distortion. In June of this year, the 
JCT Staff published a pamphlet examining the efficiency costs 
posed by the current system of deferral and presenting two 
paradigmatic alternatives to address these concerns: a dividend 
exemption system and a system of full inclusion.\19\
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    \19\ Joint Committee on Taxation, Economic Efficiency and 
Structural Analyses of Alternative U.S. Tax Policies for Foreign Direct 
Investment (JCX-55-08), June 25, 2008.
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    A second example is the differential treatment of debt and 
equity. The distinction between debt and equity is a Tax-
Induced Structural Distortion, because it provides a tax 
incentive to business firms to leverage their capital 
structures, but it is not a Tax Subsidy because there is no 
clear consensus as to what general rule of tax law, if any, the 
debt-equity distinction might violate. Moreover, as is the case 
for the deferred taxation of the earnings of foreign 
corporations, the distortions introduced by the debt-equity 
distinction cannot be eliminated simply by reverting to a 
general rule; at present, there is no general rule in the Code 
for the treatment of the cost of capital.
    While tax expenditure analysis can be helpful in 
identifying efficiency, equity, ease of administration and 
design issues, our definition of Tax-Induced Structural 
Distortions focuses only on the substantive criterion of 
efficiency. There are at least three reasons for this decision. 
First, efficiency is an inherently more neutral construct than 
is equity (and possibly simplicity), and our overriding 
objective in rethinking tax expenditures is to move to an 
approach that most observers can accept as neutral and 
principled. Second, most tax expenditures that are particularly 
troubling for equity (or other) reasons will be described as 
Tax Subsidies. Finally, most of the important structural 
ambiguities in the Code today relate to the taxation of capital 
income (that is, business or investment income); efficiency 
goals loom largest in this context.
    In a few cases we have identified items as Social Spending 
or Business Synthetic Spending, in addition to discussing them 
as Tax-Induced Structural Distortions. We do so partly for 
consistency with prior presentations, and partly because 
changes that might be made to conform to a more general rule of 
the Code would not wholly eliminate the efficiency issues 
associated with the structural item. For example, the lower tax 
rates for certain capital gains and dividends earned by 
individuals could be conformed to the more generally applicable 
rates. However, such a change would not eliminate other 
structural distortions related to capital gain and loss 
recognition, such as deferral and the ability to elect to 
recognize losses without recognizing gains, and (pointing in 
the other direction) the inability to deduct net capital loss 
against ordinary income. Nor would it address certain other 
structural issues that have been said to relate in part to the 
treatment of capital gains and dividends, such as the lack of 
indexation for inflation, the bunching of income resulting from 
deferral, and the potential double taxation of corporate income 
in the case of dividends or gains with respect to corporate 
equity.
Negative tax expenditures vs. compliance or enforcement provisions
    As discussed in A Reconsideration of Tax Expenditure 
Analysis, special provisions of the tax law that increase the 
tax burden above what the general rules would impose constitute 
negative tax expenditures. One example of a negative tax 
expenditure is section 162(m), which generally disallows 
deductions by publicly traded corporations for applicable 
remuneration paid to covered employees in excess of $1 million. 
Because this provision is an exception to the general rule in 
section 162(a)(1), which permits a deduction for ``a reasonable 
allowance for salaries or other compensation for personal 
services actually rendered,'' and the provision increases the 
tax burden on certain publicly traded companies, it is treated 
as a negative tax expenditure.\20\
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    \20\ See Section II.B.5 of this pamphlet for a more complete 
discussion.
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    In contrast, special provisions of the law the principal 
purpose of which is to enforce general tax rules, or to prevent 
the violation of other laws, are not treated as negative tax 
expenditures even though they may increase the tax burden for 
certain taxpayers. For example, section 382, an exception to 
the general rule that allows corporate net operating loss 
carryforwards to offset current income, was enacted to 
``preserve the integrity of the carryover provisions.'' \21\ 
Section 382 is generally intended to enforce the principle that 
losses should not be transferred between taxpayers; thus, it is 
not treated as a negative tax expenditure, \21A\ even though it 
reduces an otherwise allowable deduction.\22\ Similarly, the 
wash sale rules in section 1091, which prevent taxpayers from 
recognizing losses when there has been no substantive change in 
their property holdings, exist for the purpose of supporting 
the integrity of the realization rules and, therefore, are not 
treated as a negative tax expenditure.
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    \21\ S. Rep. No. 99-313, 99th Cong. 2d. Sess. at 230 (1986); Joint 
Committee on Taxation, General Explanation of the Tax Reform Act of 
1986 (JCS-10-87), May 4, 1987, at 294.
    \21A\ Accordingly, the exceptions from the loss limitation rules 
for corporations in bankruptcy are not treated as tax expenditures 
under the new methodology; as they are merely exceptions to the 
compliance provision of section 382.
    \22\ When section 382 was enacted, the legislative history 
explained that the limitations imposed by section 382 apply when 
shareholders who bore the economic burden of a corporation's net 
operating losses no longer hold a controlling interest in the loss 
corporation. ``In such a case, the possibility arises that new 
shareholders will contribute income-producing assets (or divert income 
opportunities) to the loss corporation, and the corporation will obtain 
greater utilization of its carryforwards than it could have had there 
been no change in ownership.'' S. Rep. No. 99-313, supra, at 232; 
General Explanation of the Tax Reform Act of 1986, supra, at 295.
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    Likewise, tax rules designed to support the enforcement of 
other laws are not treated as negative tax expenditures. For 
example, section 1287, which denies capital gains treatment for 
certain obligations not in registered form, is not treated as a 
negative tax expenditure. Section 1287 was enacted (along with 
other provisions) to make bearer bonds less attractive and 
thereby reduce the volume of readily negotiable substitutes for 
cash available to persons engaged in illegal activities.\23\ 
Similarly, the section 162(f) disallowance of a deduction for 
fines and penalties, even those that might be viewed as 
ordinary and necessary business expenses, is not a negative tax 
expenditure. Permitting a deduction of a fine or penalty, 
effectively reducing the burden on the business on which such 
fine or penalty is imposed, would undermine the policy that led 
to the imposition of the fine or penalty; the disallowance of 
the deduction backstops the penalty policy and is not treated 
as a negative tax expenditure.
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    \23\ S. Rep. No. 97-494 (Vol. 1), at 242 (1982); Joint Committee on 
Taxation, General Explanation of the Revenue Provisions of the Tax 
Equity and Fiscal Responsibility Act of 1982 (JCS-38-82), December 31, 
1982, at 190.

                           II. TAX SUBSIDIES

                            A. Tax Transfers

    The Tax Transfer subcategory comprises the seven provisions 
in the Code that provide for refundable tax credits. In 
general, tax credits provide a dollar for dollar reduction in a 
taxpayer's tax liability, and the benefit of a tax credit 
typically is limited to tax liability. Thus, if the amount of 
tax credits available to a taxpayer exceeds the amount of such 
taxpayer's tax liability, the excess normally is not refunded 
to the taxpayer (although the excess sometimes may be carried 
to another year in which the taxpayer has tax liability). In 
the case of a ``refundable tax credit,'' that is, a tax credit 
that is refundable to a taxpayer in excess of such taxpayer's 
tax liability, the payment to the taxpayer of the amount by 
which the credit exceeds the taxpayer's tax liability is 
effectively a transfer payment from the government to the 
taxpayer.
    The Tax Transfer provisions are examples of hybrid tax/
spending programs; each is essentially a direct spending 
program that uses Code concepts to determine eligibility for 
the refund and tax system infrastructure to deliver funds. Five 
of the Tax Transfer items (the portions of the child tax 
credit, earned income tax credit, recovery rebate credit, 
credit for purchase of health insurance by certain displaced 
persons, and the first-time homebuyer credit that are 
refundable in excess of tax liability) are based on perceived 
needs of individuals as measured by income. In most cases, 
these credits are phased out for higher-income taxpayers. The 
other two Tax Transfer items (a provision enabling certain 
corporations to monetize AMT credits and research credits and 
the refund of the deemed tax payment to the allocatee of 
qualified forestry conservation bond limitation) are in effect 
transfer payments to businesses. To the extent a portion of a 
refundable tax credit offsets tax liability, that portion is 
not treated as a Tax Transfer but is treated as Social Spending 
or Business Synthetic Spending.
Tax transfers to individuals
    Section 24, the child tax credit, provides a tax credit of 
$1,000 for each qualifying child under the age of 17 of a 
taxpayer. Section 32, the earned income credit, provides a 
credit to certain low and moderate income workers. Eligibility 
for the earned income credit is based on earned income, 
adjusted gross income, investment income, filing status, and 
immigration and work status in the United States. The amount of 
the credit is based on the presence and number of qualifying 
children in the worker's family, as well as on adjusted gross 
income and earned income. Section 6428 provides for the taxable 
year beginning in 2008 a ``recovery rebate'' for individuals. 
The amount of the rebate is a function of several variables 
(e.g., filing status, number of children, and the amount of 
qualifying income). Section 35 provides a credit for 65 percent 
of the health insurance costs of eligible recipients of trade 
adjustment allowances under the Trade Act of 1974 and eligible 
Pension Benefit Guaranty Corporation pension recipients. 
Section 36 provides a credit of up to $7,500 to first-time 
homebuyers. The first-time homebuyer credit is recaptured over 
15 years and is effectively an interest-free, 15-year loan to 
the first-time homebuyer. All of the Tax Transfers to 
individuals are credits that are refundable in excess of the 
taxpayer's tax liability.
Tax transfers to businesses
    Section 168(k)(4) allows corporations to elect to increase 
the limitation under section 38(c) on the use of research 
credits or section 53(c) on the use of minimum tax credits in 
lieu of taking a special depreciation deduction for certain 
property. The increases in the allowable credits are refundable 
in excess of tax liability. In effect, this provision permits 
certain corporations to ``monetize'' AMT and research tax 
credits. The result is a transfer payment from the government 
to eligible corporations. Because all of the revenue loss from 
the provision is attributable to the monetization of research 
tax credits, the line item on Table 1 is labeled ``Refundable 
research tax credits,'' and there is no reference to AMT 
credits.\24\ Section 54B(h)(1) allows a qualified issuer that 
receives an allocation of qualified forestry conservation bond 
limitation to elect to be treated as if it had made a tax 
payment in the prior year equal to 50 percent of its allocation 
of such limitation. Section 54B(h)(2) provides that the 
Secretary may not use the deemed tax payment as an offset or 
credit against any tax liability of the qualified issuer and 
requires the Secretary to refund such deemed payment to the 
qualified issuer. In effect, the provision allows qualified 
issuers to elect to receive a transfer payment. Although 
businesses cannot be qualified issuers (only States, political 
subdivisions or instrumentalities of States, and section 
501(c)(3) organizations are qualified issuers), the transfers 
likely benefit businesses by facilitating the sale of land from 
businesses to qualified issuers.
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    \24\ In addition, the AMT portion of the provision represents a 
refund of previously paid taxes, and is distinguishable from the 
research and development credit acceleration in this respect.
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                      B. Social Spending Examples


1. Deduction for mortgage interest on owner-occupied residences

    The line item for ``deduction for mortgage interest on 
owner-occupied residences'' comprises the deductions permitted 
by section 163(h)(2)(D) and (h)(3) for ``qualified residence 
interest'' that is paid or accrued on ``acquisition 
indebtedness'' and ``home equity indebtedness.'' Acquisition 
indebtedness is indebtedness (up to a maximum of $1 million) 
that is incurred in acquiring, constructing, or substantially 
improving any qualified residence of the taxpayer, and is 
secured by such residence; home equity indebtedness includes 
any other indebtedness (up to a maximum of $100,000) that is 
secured by a qualified residence.\25\
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    \25\ Sec. 163(h)(3). Qualified residence interest also includes 
certain premiums paid for qualified mortgage insurance.
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    The deduction for mortgage interest on owner-occupied 
residences is an exception to the Code's general rule of non-
deductibility for personal interest, reflected in the section 
163(h) denial of a deduction for ``personal interest'' 
expense.\26\ Personal interest is defined in section 163(h)(2) 
to include any interest that would otherwise be allowable as a 
deduction, but to exclude (in addition to qualified residence 
interest) interest paid or accrued on indebtedness properly 
allocable to a trade or business (other than the trade or 
business of performing services as an employee), investment 
interest described in section 163(d), and interest taken into 
account under section 469 in computing income or loss from a 
passive activity. Thus, for individuals, sections 163(h)(1) and 
(h)(2) evidence a general rule under which interest expense is 
not deductible unless it is associated with the production of 
business or investment income. (More broadly, sections 163(h), 
212 and 262, among others, can be said to evidence a general 
rule for individuals that expenses associated with the 
production of income are deductible from gross income, while 
personal, living, and family expenses generally are not.) \27\ 
For that reason, the deduction for mortgage interest is treated 
as a tax expenditure under the revised tax expenditure 
definition.\28\ The deduction was also classified as a tax 
expenditure under the prior JCT Staff approach, but on the 
basis that it was an exception to the ``normal'' income tax 
principle that individuals may deduct only the interest on 
indebtedness incurred in connection with a trade or business or 
an investment.\29\
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    \26\ Exclusions are also provided for interest payable under 
section 6601 with respect to delayed payments of estate tax and 
interest allowable as a deduction under section 221 with respect to 
certain educational loans.
    \27\ See section 212 (allowing a deduction for ordinary and 
necessary expenses of an individual for the production or collection of 
income) and section 262 (denying deductions for personal, living, and 
family expenses except where expressly provided by the Code).
    \28\ The $1 million cap on acquisition indebtedness and the 
$100,000 cap on home equity indebtedness are considered reductions in 
the mortgage interest tax expenditure and are not treated as negative 
expenditures.
    \29\ Joint Committee on Taxation, Estimates of Federal Tax 
Expenditures for Fiscal Years 2007-2011 (JCS-3-07), September 24, 2007, 
at 5. Both the Code itself and the ``normal'' tax principles underlying 
the prior JCT approach to tax expenditures deviate from a pure Haig-
Simons definition of income by excluding imputed income from owner-
occupied housing (that is, an amount equal to the rent that the 
taxpayer would pay for the residence to a third party in an arm's-
length transaction). Under the Haig-Simons definition of taxable 
income, a deduction would also be permitted for interest on 
indebtedness incurred to acquire or carry the residence, as a cost of 
producing the imputed income. However, the exclusion of imputed income 
from owner-occupied housing has long been viewed as an administrative 
necessity, because it is too difficult to measure. The second-best 
solution (from the perspective of tax administration) is to both 
exclude the imputed income and deny any deduction for home mortgage 
interest. Both the general rules of the Code and the ``normal'' tax 
underlying the prior JCT Staff approach reflect this second-best 
solution.
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    As discussed in A Reconsideration of Tax Expenditure 
Analysis, owner-occupied housing preferences such as the 
mortgage interest deduction could rationally be categorized 
either as Social Spending or Business Synthetic Spending, 
depending on whether one views home ownership as primarily a 
consumption activity or as a substitute for an income-producing 
investment.\30\ On balance, we believe that they are better 
described as Social Spending. Because the Code ignores imputed 
income from owner-occupied housing, our categorization gives 
minimal weight to the substitutability of owner-occupied 
housing for an income-producing investment. Moreover, treating 
the home mortgage interest tax expenditure as Social Spending 
acknowledges that preferences for owner-occupied housing 
reflect a social policy agenda that transcends the tax law.\31\ 
Finally, while preferences such as the mortgage interest 
deduction undoubtedly provide a benefit to some types of 
businesses (home builders and real estate agents, for example), 
we believe that the benefits to these groups are a secondary 
result of a policy primarily intended to benefit individual 
homeowners.
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    \30\ JCT Reconsideration, at 45.
    \31\ See, e.g., H.R. Rep. 99-426, 99th Cong. 1st Sess. (December 7, 
1985), at 297 and S. Rep. 99-313, 99th Cong. 2nd Sess. (May 29, 1986), 
at 804 (``encouraging home ownership is an important policy goal, 
achieved in part by providing a deduction for residential mortgage 
interest'').
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    Owner-occupied housing preferences reflect social policies, 
but also raise very important economic efficiency concerns. We 
classify these preferences as Tax Subsidies, rather than Tax-
Induced Structural Distortions, solely because these items can 
be identified as exceptions to a clear general rule (the 
nondeductibility of expenses for personal consumption). This 
classification is not intended to detract from analysis of 
these preferences as having material economic efficiency 
consequences for the capital stock of the United States.

         2. Exclusion of employer-provided health care benefits

    The exclusion for employer-provided health care is the 
largest Tax Subsidy \32\ and represents by far the largest 
portion of total tax expenditures for health.\33\ In part, this 
is because there is no dollar limit on the amount of employer-
provided health coverage that is excludable from gross income. 
An employee can exclude from income both employer-provided 
accident or health insurance under section 106(a) and employer-
reimbursed medical expenses under section 105(b).\34\ The 
exclusion applies both where employers absorb the cost of their 
employees' medical expenses not covered by insurance (i.e., a 
self-insured plan) and where employers pay all or a portion of 
the health insurance premiums for their employees. Active 
employees participating in a cafeteria plan may also pay their 
share of premiums on a pre-tax basis through salary reductions, 
which are treated as employer contributions and are also 
excluded from gross income under section 106(a).
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    \32\ The line item for ``Exclusion of employer contributions for 
health care, health insurance premiums, and long-term care insurance 
premiums'' in Table 2 includes the exclusion of employer- provided 
accident or health insurance, the exclusion of employer-reimbursed 
medical expenses, health reimbursement arrangements and flexible 
spending arrangements. The JCT Staff method for measuring the tax 
expenditure for this exclusion differs from that of the Treasury 
Department, as the JCT Staff method includes the effects of ``tax form 
behavior.'' In particular, the JCT Staff method assumes that when 
taxpayers are denied an exclusion for employer-provided health care, 
they will deduct the expenses under section 213 to the extent that 
those expenses exceed 7.5 percent of adjusted gross income.
    \33\ See Joint Committee on Taxation, Tax Expenditures for Health 
Care (JCX-66-08), July 30, 2008, for a comprehensive discussion of 
these provisions.
    \34\ Section 7702B(a) specifies that long-term care contracts are 
treated as accident and health insurance contracts and are thus 
eligible for exclusion under section 106(a). Section 7702B(b) specifies 
that amounts received under eligible long-term care contracts are 
treated as amounts received for personal injuries and sickness and thus 
are eligible for exclusion under section 105(b).
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    The Tax Subsidy included in this line item also includes 
health reimbursement arrangements (``HRAs'') and flexible 
spending arrangements (``FSAs''). HRAs are employer-maintained 
arrangements that reimburse employees for medical expenses. 
Coverage under an HRA is excludable under 106(a), and benefits 
paid pursuant to an HRA are excludable under section 105(b). 
Flexible spending arrangements (``FSAs'') are typically funded 
on a salary reduction basis under a cafeteria plan that 
satisfies section 125. The compensation that is forgone as well 
as the reimbursements for medical care paid from FSAs are 
excluded from gross income.
    The exclusion from gross income for employer-provided 
health care benefits is an exception to the Code's general rule 
that all compensation for services constitutes gross 
income.\35\ The value of health care benefits that an employer 
provides to its employees constitutes gross income to each 
employee in this general sense. Fringe benefits are included in 
an employee's gross income unless specifically excluded under a 
provision in the Code.\36\ For this reason, the provisions that 
exclude employer-provided health care benefits from income are 
exceptions to the general rule and are Tax Subsidies under our 
revised classification.\37\
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    \35\ Under section 61(a)(1), gross income includes ``compensation 
for services, including fees, commissions, fringe benefits, and similar 
items.''
    \36\ See Treas. Reg. sec. 1.132-6(c) (``the value of any fringe 
benefit that would not be unreasonable or administratively 
impracticable to account for is includible in the employee's gross 
income'').
    \37\ This exclusion was also included as a tax expenditure under 
the prior JCT approach, but on the basis that it was an exception to 
the ``normal'' tax principle that all employee compensation is 
includable in gross income. Joint Committee on Taxation, Estimates of 
Federal Tax Expenditures for Fiscal Years 2007-2011 (JCS-3-07), 
September 24, 2007, at 3. Under the prior JCT methodology, the normal 
structure of the individual income tax included the assumption that 
``[a]ll employee compensation is subject to tax unless the tax code 
contains a specific exclusion for the income.'' Id. ``Under normal 
income tax law, the value of employer-provided accident and health 
coverage would be includable in the income of employees, but employers 
would not be subject to tax on the accident and health insurance 
benefits (reimbursements) that they might receive.'' Id. at 4, footnote 
7.
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    As discussed in A Reconsideration of Tax Expenditure 
Analysis, fringe benefits could rationally be categorized 
either as Social Spending or as Business Synthetic Spending. We 
have included the exclusion for employer-provided health care 
in the Social Spending category, however, rather than in the 
Business Synthetic Spending category, because the exclusion is 
generally viewed as affecting labor supply more than general 
business decisions.\38\ The exclusion of employer-provided 
health care can be traced back to the 1940's, when employers 
offered fringe benefits in order to attract labor in a period 
of tight wage controls. Legislative and executive branch 
histories of the enactment and implementation of these 
exclusion provisions support the argument that these provisions 
were adopted primarily to affect the price and supply of 
labor.\39\ In addition, the legislative history of more 
recently enacted health care related tax provisions supports 
the conclusion that Congressional intent is to assist in the 
provision of health coverage, rather than to subsidize or 
induce behavior directly related to the production of business 
income.\40\
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    \38\ See JCT Reconsideration at 45.
    \39\ Sections 105 and 106 were added with the 1954 revision of the 
Internal Revenue Code. Prior to the revision, payments made under a 
contract of insurance were exempt under the employer pension provisions 
of the Code. The addition of sections 105 and 106 granted ``equal tax 
treatment to sickness and accident benefits financed by employers 
whether paid under insured and noninsured plans.'' H.R. 8300, as 
reported by the House Committee on Ways and Means; H.R. Rep. 1337, 83d 
Cong. 2d Sess. (March 9, 1954), at 15.
    \40\ An example is the enactment of a deduction for self-employed 
health insurance in the Tax Reform Act of 1986. The Senate Finance 
Committee reported that ``Congress was aware that access to employer 
health plans is lowest with small employers. . . . The need for 
adequate health coverage is so important that Congress believed it was 
essential to encourage a narrowing of the gap in health coverage.'' 
H.R. 3838, as reported by the Senate Committee on Finance; S.Rep 99-
313, 99th Cong. 2d Sess. (May 29, 1986), at 666.
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3. Exclusion of interest on State and local bonds

    The exclusion from gross income provided in section 103 for 
interest on State and local bonds is a major exception to the 
general rule of section 61 that interest is includible in gross 
income. This exclusion is not required by the U.S. 
Constitution; \41\ instead, its principal purpose is to serve 
as a federal subsidy to State and local governments.\42\ By 
exempting interest on State and local bonds from Federal income 
tax, and thereby increasing the after-tax yield on such bonds, 
Congress enables the State and local issuers to pay lower 
interest rates to holders of the bonds. As a result, State and 
local governments can finance various projects at a reduced 
cost.
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    \41\ In 1988, the U.S. Supreme Court rejected the argument that the 
doctrine of intergovernmental tax immunity prevents Congress from 
taxing interest on State and local bonds. See South Carolina v. Baker, 
485 U.S. 505, 524-525 (1988) (``We see no constitutional reason for 
treating persons who receive interest on government bonds differently 
than persons who receive income from other types of contracts with the 
government, and no tenable rationale for distinguishing the costs 
imposed on States by a tax on state bond interest from the costs 
imposed by a tax on the income from any other state contract.'')
    \42\ In practice, the exclusion also subsidizes higher-bracket 
investors. See Joint Committee on Taxation, Present Law and Issues 
Relating to Infrastructure Finance (JCX-83-08), October 24, 2008, at 
21-27. To this extent, the Tax Subsidy might be characterized as 
Business Synthetic Spending. We believe it impractical, however, to 
divide the Tax Subsidy along these lines.
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    The exclusion for each type of tax exempt bond or tax 
credit bond is treated as a Tax Subsidy and is categorized as 
Social Spending or Business Synthetic Spending based on the 
purpose for which the exclusion was granted, as evidenced by 
the types of activities permitted to be financed through the 
issuance of that type of bond. Where a single type of bond can 
finance multiple kinds of activities or issuers, the 
classification is based on the predominate type of activity or 
issuer that is subsidized. Bonds that primarily finance 
governmental functions or benefit not-for-profit users are 
classified as Social Spending. Bonds that support borrowers 
that are in private, for-profit businesses are classified as 
Business Synthetic Spending.
    The Tax Subsidies for the following types of tax-exempt and 
tax credit bonds are classified as Social Spending:
           Clean renewable energy bonds (including New 
        CREBs); \43\
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    \43\ CREBs and New CREBs are treated as social spending because 
two-thirds of the allocation goes to government bodies and public 
power.
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           Qualified energy conservation bonds; \44\
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    \44\ In the case of qualified energy conservation bonds, 70 percent 
of the allocation is used for what would otherwise be governmental 
bonds.
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           Qualified private activity bonds for owner-
        occupied housing; \45\
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    \45\ Proceeds from the issuance of these bonds are used to finance 
loans to individual homeowners.
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           Qualified private activity bonds for student 
        loans;
           Qualified zone academy bonds; \46\
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    \46\ The proceeds from these bonds go to public schools.
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           Qualified private activity bonds for private 
        nonprofit and qualified public educational facilities; 
        \47\
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    \47\ The relevant provisions provide for the issuance of section 
501(c)(3) bonds for education (nonprofit) and section 142 bonds for 
qualified public educational facilities (part of a public school owned 
by a private, for-profit corporation). Because the bulk of the cost 
relates to nonprofits, we categorize the item as Social Spending 
(although a portion could be categorized as Business Synthetic 
Spending).
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           Qualified private activity bonds for private 
        nonprofit hospitals;
           Private activity bonds for veteran's 
        housing; and \48\
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    \48\ Proceeds from the issuance of these bonds are used to finance 
loans to individual homeowners.
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           Public purpose State and local governmental 
        bonds.
    The Tax Subsidies for the following types of tax exempt and 
tax credit bonds are classified as Business Synthetic Spending:
           Qualified private activity bonds for rental 
        housing;
           Small issue qualified private activity 
        bonds;
           Qualified private activity bonds for green 
        buildings and sustainable design projects;
           Qualified private activity bonds for highway 
        projects and rail-truck transfer facilities; \49\
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    \49\ While highway projects typically are governmental, the 
projects financed by these bonds are owned and/or operated by private 
entities.
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           Qualified private activity bonds for 
        airports, docks and mass-commuting facilities;
           Qualified private activity bonds for energy 
        production facilities; and
           Qualified private activity bonds for sewage, 
        water and hazardous waste facilities.

4. Deduction for nonbusiness State and local government income taxes, 
        sales taxes, and personal property taxes

    Section 164 provides a deduction for certain state and 
local personal property taxes, real property taxes, and sales 
taxes paid by both business and nonbusiness taxpayers. We treat 
only the deductions allowed to nonbusiness taxpayers as tax 
expenditures.\50\
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    \50\ The deduction for real property taxes by nonbusiness taxpayers 
is carried as a separate line item: ``deduction for property taxes on 
real property.''
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    Section 164 can be seen as providing both an explication of 
and an exception to the general rule of sections 162 and 212, 
under which expenses are deductible to the extent that they are 
ordinary and necessary expenses of a business or are directly 
related to the production of income. With respect to State and 
local taxes paid in connection with a trade or business or in 
connection with an income producing activity, section 164 
arguably provides duplicative authority for a deduction that is 
already authorized by section 162 or 212, respectively. The 
first sentence in the flush language in section 164(a) provides 
support for this reading by clarifying that taxes not 
enumerated in section 164 are deductible if they are an expense 
described in section 162 or 212: ``[i]n addition, there shall 
be allowed as a deduction State and local, and foreign, taxes 
not described in the preceding sentence which are paid or 
accrued within the taxable year in carrying on a trade or 
business or an activity described in section 212 (relating to 
expenses for production of income).'' Thus, the plain language 
of the Code acknowledges that business-related taxes do not 
necessarily require special enumeration in section 164 to be 
deductible. Nonbusiness taxes, however, are only deductible to 
the extent provided in section 164. Because nonbusiness taxes 
require a special rule authorizing their deductibility, the 
deductions are Tax Subsidies.\51\
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    \51\ The Treasury Department, using a reference law baseline, 
justifies treating the nondeductibility of nonbusiness State and local 
taxes other than on owner-occupied homes as a tax expenditure by noting 
that ``taxpayers may deduct State and local income taxes and property 
taxes even though these taxes primarily pay for services that, if 
purchased directly by taxpayers, would not be deductible.'' Analytical 
Perspectives, Budget of the United States Government, Fiscal Year 2009, 
at 316. Treasury acknowledges, however, that this analysis is 
undermined by the somewhat tenuous nature of the link between the 
amount of State and local taxes paid and State and local services 
consumed. See id. 
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    We classify the deduction for nonbusiness State and local 
income, sales, and personal property taxes as Social Spending, 
because it is not directly connected with the production of 
income. The deduction can also be viewed, however, as a means 
of sharing revenue with State and local governments, by 
enabling those governments to impose taxes at higher rates than 
might otherwise be acceptable if such taxes were not deductible 
for Federal income tax purposes.\52\ To the extent that State 
and local tax revenues are used to subsidize business 
activities (as opposed to providing services to persons other 
than businesses), we recognize that a deduction that makes such 
taxes more palatable might be seen as a subsidy for income 
producing activities. Nevertheless, because there is no direct 
link between the deduction in section 164 for nonbusiness State 
and local income, sales, and personal property taxes and State 
and local spending on businesses, we do not attempt to break 
out business-subsidy effects or to split the item between the 
Social Spending and Business Synthetic Spending categories.
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    \52\ A 1964 Senate Finance Committee Report notes that the 
deduction for State and local taxes is an important means of 
accommodation to take into account the fact that both State and local 
governments on one hand and the Federal government on the other hand 
tap the same important revenue source. See S. Rep. 88-830, 88th Cong., 
2d Sess., reprinted in 1964-1 C.B. (pt. 2) 505, 558. The report 
concludes that a failure to provide deductions for such taxes could 
mean a combined burden of income taxes which in some cases would be 
extremely heavy. Id. 
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5. Section 162(m)

    As noted in Section I, we treat section 162(m), which 
disallows deductions by publicly traded corporations for 
applicable remuneration paid to covered employees in excess of 
$1 million, as a negative tax expenditure. Section 162(m) is an 
exception to the general rule in section 162(a)(1), which 
permits a deduction for the ordinary and necessary expenses of 
a business, including ``a reasonable allowance for salaries or 
other compensation for personal services actually rendered.'' 
Because the special rule in section 162(m) may have the effect 
of increasing the tax burden on certain publicly traded 
companies, we treat it as a negative tax expenditure.
    The stated purpose of section 162(m) is to effect a 
reduction in executive compensation, a social policy related to 
the distribution of income and not to its production; 
accordingly, we classify section 162(m) as Social Spending.\53\ 
Other negative tax expenditures that impose limits on the 
deductibility of executive compensation, e.g., section 280G, 
denying a deduction for any ``excess parachute payment,'' 
evidence a similar social policy and are thus classified in the 
same manner.
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    \53\ See Reconciliation Recommendations of the Committee on Ways 
and Means, Ways and Means Committee Print 103-11 (May 18, 1993) 
(``Recently, the amount of compensation received by corporate 
executives has been the subject of scrutiny and criticism. The 
committee believes that excessive compensation will be reduced if the 
deduction for compensation (other than performance-based compensation) 
paid to the top executives of publicly held corporations is limited to 
$1 million per year.'')
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                C. Business Synthetic Spending Examples


1. Last in First Out (``LIFO'') method of inventory accounting

    The Code generally does not permit the indexing of income 
for inflation, or the deferral of income recognition, due to 
increases in the value of a taxpayer's assets, when property is 
in fact sold for cash.\54\ The allowance of the last in first 
out (``LIFO'') method of accounting for inventory is an 
exception to the general Code rules for tax accounting. We 
treat the allowance of the LIFO method as a Tax Subsidy because 
it is inconsistent with the Code's general implementation of 
the realization principle. Within the larger category of Tax 
Subsidies, we categorize the LIFO method as Business Synthetic 
Spending, because it benefits a select group of business 
taxpayers.
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    \54\ The indexing of rate brackets does not specifically allow the 
exclusion or deferral of income and is only an indirect method of 
addressing inflation. The allowance of a lower rate on certain capital 
gains has been described as a partial relief from inflation, but it is 
not targeted to that effect.
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    Treasury regulations under section 471 require businesses 
to use inventory accounting if the production, purchase, or 
sale of merchandise is an income producing factor.\55\ The 
purpose of inventory accounting is to match the costs of items 
purchased (or manufactured) at different times with the 
proceeds of items sold during the year, in order to determine 
taxable income for the year and determine the cost for tax 
purposes of the inventory on hand at the end of one year and 
start of the next. The regulations permit a number of different 
methods including the first in first out (``FIFO'') method that 
matches sales of items during the year with the cost of the 
earliest acquired (and typically least expensive) items of 
inventory. As a factual presumption, it is likely that firms 
endeavor to sell their earliest produced items of inventory, to 
minimize ``staleness'' and similar issues.
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    \55\ Section 471 authorizes the Secretary of the Treasury to 
``require the use of inventories when necessary to determine the income 
of any taxpayer, on such basis as the Secretary may prescribe 
conforming as nearly as may be to the best accounting practices in the 
trade or business, and as most clearly reflecting income.''
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    Section 472 of the Code authorizes the LIFO method of 
accounting.\56\ This method has the effect of treating the most 
recently purchased (or manufactured) goods as having been sold 
during the year, by matching sales revenue during the year with 
the cost of the most recently acquired (and typically the most 
expensive) items of inventory. A taxpayer takes into account 
the costs of earlier-acquired items only to the extent that it 
has reduced its inventory at year end below its inventory at 
the prior year end (resulting in greater gain, if those earlier 
costs were lower than the more recent costs). Among other 
requirements, the availability of the LIFO method is 
conditioned on a taxpayer employing that method for financial 
accounting purposes as well; Congress believed that the 
resulting tension between a taxpayer's desire to minimize tax 
liability and the taxpayer's desire to present its financial 
results in the most favorable light possible would serve to 
minimize the attractiveness of the LIFO method for tax 
purposes.\57\
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    \56\ The predecessor of Section 472, permitting the LIFO method to 
be used by any taxpayer, in accordance with regulations prescribed by 
the Secretary, was added to the Code in 1939. Prior to that time, the 
method was allowed under 1938 law only in limited industries. See S. 
Rep. No. 648, 76th Cong., 1st Sess., 1939-2 C.B. 524, 528; H.R. Rep. 
No. 2330, 75th Cong. 3d Sess., 1939-1 C.B. 817, 819. Even after the 
general provision was enacted, the rules under regulations evolved over 
time to expand the types of items and the nature of LIFO pools that are 
permitted. See, e.g., Tovig and Herndon, Inventories: General 
Principles; LIFO Method, BNA Tax Management Portfolios 578-3rd at A-47 
et seq. Section 473 provides additional rules for ``qualified 
liquidations'' of LIFO inventories, and section 473 provides a 
simplified dollar-value LIFO method for certain small businesses.
    \57\ Secs. 472(c) and 472(g); see S. Rep. No. 648, 76th Cong., 1st 
Sess., 1939-2 C.B. 524, 528; see also H.R. Rep. 98-432 (Part 2), 98th 
Cong., 2d Sess. (March 5, 1984) at 1381-1382; S. Rep. 98-169 (Vol. I). 
98th Cong., 2d Sess. (April 2, 1984) at 486-487; and H.R. Rep. 98-861, 
98th Cong., 2d Sess. (June 23, 1984) at 897-898.
---------------------------------------------------------------------------
    The LIFO method in effect allows the deferral of income 
attributable to any increase in the price of goods since the 
earliest inventory items were acquired. In practice, this 
deferral often extends for many decades.\58\ Moreover, this 
deferral is available only to taxpayers that maintain 
inventories, and that are not required to employ a different 
accounting method in respect of those inventories. (Dealers in 
securities, for example, maintain inventories but may not use 
the LIFO method.) The LIFO method deviates from the Code's norm 
of requiring an annual accounting for accretions in wealth, as 
measured by actual realization events. It has been said that 
the purpose of the LIFO method is to adjust for inflation, but 
the LIFO method also defers the recognition of income that is 
attributable to factors other than inflation, such as price 
increases due to increased demand or advances in product 
quality. The Code does not provide a similar adjustment for 
inflation or increased costs against the income of taxpayers 
that cannot keep inventories of tangible goods using the LIFO 
method. The LIFO method thus favors a relatively small segment 
of taxpayers in particular types of industries. Moreover, the 
use of this method may contribute to inefficient behavior by 
taxpayers who use LIFO, such as the retention of inventories at 
higher levels than they otherwise might choose, to avoid 
invading LIFO ``layers'' and matching lower, earlier years' 
incurred costs against current sale proceeds.\59\
---------------------------------------------------------------------------
    \58\ See, e.g., Leslie J. Schneider, Federal Income Taxation of 
Inventories, at section 10.01[1] (2007): ``Theoretically, use of the 
LIFO method results only in a deferral of taxes. However, as long as 
inflation continues and a taxpayer's LIFO inventories remain relatively 
constant or increase in size, the tax deferral is perpetual and tends 
to become `permanent.' ''
    \59\ See Edward D. Kleinbard, George A. Plesko, and Corey M. 
Goodman, Is it Time to Liquidate LIFO? 113 Tax Notes 237 (Oct. 16, 
2006); Micah Frankel and Robert Trezevant, The Year-End LIFO Inventory 
Purchasing Decision: An Empirical Test, 69 Accounting Review 382 
(1994). In certain extreme situations, such as purported acquisitions 
that did not amount to real ownership, or acquisitions of items that 
clearly were not intended for use in the business, courts have 
disallowed the addition of the items to inventory for LIFO purposes. 
However, those cases do not address less dramatic actions such as 
simply avoiding a shift to a more efficient inventory practice that 
might reduce ending inventory, such as ``just in time'' inventory 
management. For some of the cases and for arguments made in favor of 
the LIFO method, see The LIFO Coalition, Memorandum to Senators Charles 
E. Grassley and Max Baucus, June 26, 2006 (2006 TNT 125-18).
---------------------------------------------------------------------------

2. Tax credits for electricity production from renewable resources

    Section 45 provides a tax credit for the production of 
electricity at qualified facilities from certain renewable 
resources, including wind, closed-loop biomass, open-loop 
biomass, geothermal energy, solar energy, small irrigation 
power, municipal solid waste, and qualified hydropower 
production.\60\ Qualified facilities are, generally, facilities 
placed in service prior to a designated sunset date that 
generate electricity using qualified renewable resources. The 
amount of the credit varies depending on the type of renewable 
resource: electricity produced at wind, closed-loop biomass, 
geothermal, and solar facilities receives twice the credit rate 
relative to electricity produced at facilities using other 
renewable resources. Depending on the resource and the date a 
qualified facility was placed in service, the credit is 
available for five or ten years from the placed-in-service 
date. To be eligible for the credit, the taxpayer must sell the 
electricity to an unrelated person. The amount of the credit is 
phased out as the market price of electricity exceeds certain 
threshold levels.
---------------------------------------------------------------------------
    \60\ Section 45 also provides a credit for the production of coke 
feedstock and certain types of coal.
---------------------------------------------------------------------------
    We treat the tax credit for production of electricity from 
renewable resources (and virtually all other tax credits in the 
Code) as a Tax Subsidy.\61\ Section 45 credits arise in 
connection with the conduct of a taxpayer's trade or business, 
and are made available to the producer only where the taxpayer 
sells electricity to an unrelated party. To reflect the fact 
that the credit is made available to businesses to subsidize an 
income-producing activity, we place the credit in the Business 
Synthetic Spending subcategory. Energy Tax Subsidies that are 
claimed by consumers (e.g., the tax credits for energy 
efficiency improvements to existing homes and alternative 
technology vehicles) are treated as Social Spending.
---------------------------------------------------------------------------
    \61\ The foreign tax credit is the one exception to this rule. We 
treat the foreign tax credit, which is intended to eliminate double 
taxation of foreign-source income of U.S. taxpayers, as a provision 
that effectuates a general rule of the Code.
---------------------------------------------------------------------------
    Our categorization of section 45 production tax credits as 
Business Synthetic Spending, and, more generally, all of our 
categorizations of energy Tax Subsidies are not intended to 
suggest any conclusions as to the economic incidence of those 
Tax Subsidies, or their underlying policy goals. Arguments can 
be made, for example, that the section 45 credit ought to be 
treated as Social Spending, insofar as a policy subsidizing 
electricity production from renewable resources appears to help 
reduce the country's dependence on fossil fuels and thus might 
be viewed as desirable for national defense or environmental 
reasons (policies one might consider ``social'' as opposed to 
``business''). On the other hand, the energy credits that are 
claimed by consumers might be viewed as subsidies to businesses 
based strictly on their economic incidence; for example, a car 
maker might be able to charge a higher price for a hybrid 
vehicle because of the availability of a tax credit to the 
purchaser. In every case, the subcategories of Tax Subsidies 
that we employ are intended simply to assist the Congress in 
comparing like Tax Subsidies to one another.

3. Tax exemption for certain organizations

    Since the inception of the Federal income tax, Congress has 
exempted certain types of organizations from taxation. The 
benefit of tax exemption is extended under the Code to groups 
as diverse as charitable organizations, social welfare 
organizations, mutual or cooperative telephone and electric 
companies, small non-life insurance companies, cemetery 
companies, and credit unions. Section 501(a) is the operative 
provision of the Code providing tax exemption for organizations 
described in sections 401(a), 501(c), and 501(d).
    For governmental organizations and entities organized 
exclusively for charitable, religious, educational, or like 
purposes, the general rule of tax exemption may be explained 
based on the nature of the organization's activities. These 
organizations are not subject to tax under the general tax 
rules as they are engaged in activities that are not primarily 
intended to be income-producing. For example, charitable 
organizations may be viewed as serving the public or providing 
services that otherwise would be provided by the government 
and, for this reason, are not appropriate subjects of 
taxation.\62\ One example is a section 501(c)(3) public service 
organization the activities of which are directed exclusively 
at serving the poor, such as a tax-exempt soup kitchen or 
homeless shelter.\63\ The general rules relating to these 
organizations require that their activities primarily 
accomplish governmental or charitable purposes.\64\ To prevent 
unfair advantage of a tax-exempt organization over a taxable 
business, the Code generally taxes the income of otherwise tax-
exempt organizations that is derived from a trade or business 
unrelated to the organization's exempt purpose.\65\ However, 
there are numerous exceptions that allow for otherwise 
unrelated business taxable income to escape taxation. These 
exceptions include certain passive income that arguably may 
relate to business activities, such as royalties or rents 
received from licensing trade names or other assets typically 
used in a trade or business, as well as other passive income 
such as certain dividends and interest.\66\ Other exceptions 
include income derived from certain research activities,\67\ 
and income from certain trade show and fair activities.\68\ 
Because the general rule of the Code is to tax income derived 
from a trade or business unrelated to an organization's exempt 
purpose, these exceptions to the taxation rules for unrelated 
business taxable income are classified as Business Synthetic 
Spending.
---------------------------------------------------------------------------
    \62\ See, e.g., H.R. Rep. No. 1860, 75th Cong., 3d Sess. (1938) 
(``The exemption from taxation of money or property devoted to 
charitable and other purposes is based upon the theory that the 
Government is compensated for the loss of revenue by its relief from 
financial burdens which would otherwise have to be met by 
appropriations from other public funds, and by the benefits resulting 
from the promotion of general welfare.'')
    \63\ Although the legal meaning of the term charity has been 
broadened over time, even the earliest interpretations of the tax 
exemption for charitable organizations included organizations that 
provide for the relief of the poor. See, e.g., Nina J. Crimm, An 
Explanation of the Federal Income Tax Exemption for Charitable 
Organizations: A Theory of Risk Compensation, 50 Florida L. Rev. 419, 
429 N.30 (1998) (noting that the Treasury regulations interpreting the 
Revenue Acts of 1918, 1921, 1924, 1926, 1928, 1932, 1934, 1936, and 
1938 all construed charity in the ordinary and popular sense, providing 
that ``[c]orporations organized and operated exclusively for charitable 
purposes comprise, in general, organizations for the relief of the 
poor.'').
    \64\ Treas. Reg. sec. 1.501(c)(3)-1(b)(1)(iii) (providing that an 
organization is regarded as operating exclusively for exempt purposes 
``only if it engages primarily in activities which accomplish'' exempt 
purposes).
    \65\ Secs. 511-14.
    \66\ Secs. 512(b)(1)-(3).
    \67\ Secs. 512(b)(7)-(9).
    \68\ Sec. 513(d).
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    Other organizations exempt from tax under section 501(a) 
arguably have a direct business analog or compete with for-
profit organizations organized for similar purposes. These 
include small insurance companies,\69\ mutual or cooperative 
electric companies,\70\ State credit unions,\71\ and Federal 
credit unions.\72\ The tax exemption for these organizations 
represents a departure from the general rule that business 
income is subject to tax.\73\
---------------------------------------------------------------------------
    \69\ Sec. 501(c)(15).
    \70\ Sec. 501(c)(12).
    \71\ Sec. 501(c)(14).
    \72\ Sec. 501(c)(1).
    \73\ See sec. 61(a)(2) (gross income includes ``income derived from 
business'').
---------------------------------------------------------------------------
    For example, from the perspective of their customers, 
credit unions are engaged in activities that are functionally 
indistinguishable from business activities conducted by other 
participants in the financial services industry (that is, the 
financial services offered by a credit union are identical to 
the services that customers ordinarily would purchase from a 
taxable banking institution). The tax exemption for credit 
unions is intended to subsidize or induce the organization of 
credit unions in order to serve the credit and savings needs of 
their membership, a segment of the population that Congress 
concluded was underserviced by traditional financial services 
firms.\74\ That observation explains the rationale for the Tax 
Subsidy, but does not contradict the conclusion that exempting 
from tax the providers of these services that ordinarily are 
provided by participants in the private economy does constitute 
a Tax Subsidy.
---------------------------------------------------------------------------
    \74\ ``[C]redit unions, unlike many other participants in the 
financial services market, are exempt from Federal and most State taxes 
because they are member-owned, democratically operated, not-for-profit 
organizations generally managed by volunteer boards of directors and 
because they have the specified mission of meeting the credit and 
savings needs of consumers, especially persons of modest means.'' H.R. 
Rep. No. 105-472, sec. 2(4), at 1-2 (1998).
---------------------------------------------------------------------------
    Because the tax exemptions for Federal and State credit 
unions directly induce behavior related to the production of 
business income, these exemptions are treated as Tax Subsidies 
in the Business Synthetic Spending category. It could be argued 
that this Tax Subsidy should be classified as an item of Social 
Spending (because its ultimate purpose is to encourage that 
such services be made broadly available), but because the 
direct beneficiary of the exemption is the financial 
institution that enjoys the tax exemption, the stronger nexus 
appears to be with the Business Synthetic Spending category.

4. Foreign investment in U.S. real estate

    The Code generally excludes from taxable income any gain or 
loss on the sale or exchange of property by foreign 
persons,\75\ unless the gain or loss is effectively connected 
with the conduct of a trade or business in the United States. 
The requirement that foreign persons include gains and losses 
on dispositions of U.S. real property interests (``USRPIs'') 
under section 897 is an exception to this general rule of the 
Code and is treated as a negative tax expenditure.
---------------------------------------------------------------------------
    \75\ See sec. 871(a)(1) (applicable to nonresident alien 
individuals) and sec. 881(a) (applicable to foreign corporations). Sec. 
871(a)(2) imposes tax on capital gains of foreign individuals present 
in the United States for 183 or more days during a taxable year.
---------------------------------------------------------------------------
    Section 897(a) provides that gain or loss from the 
disposition of a USRPI by a nonresident alien individual or a 
foreign corporation is taken into account as if such person 
were engaged in a trade or business within the United States 
during the year of the disposition and as if such gain or loss 
were effectively connected with that trade or business.\76\ A 
USRPI generally includes an interest in real property,\77\ an 
interest in personal property associated with the use of the 
real property,\78\ and an interest in a domestic corporation 
that was a U.S. real property holding corporation (``USRPHC'') 
at any time during the shorter of the taxpayer's holding period 
or the five-year period preceding the disposition of the 
interest.\79\
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    \76\ A foreign person is generally subject to taxation under the 
same rules applicable to U.S. persons on income that is effectively 
connected with a trade or business conducted in the United States. See 
sec. 871(b) (applicable to nonresident alien individuals) and sec. 
882(a) (applicable to foreign corporations).
    \77\ Sec. 897(c)(6)(A) provides that an interest in real property 
includes fee ownership and co- ownership of land or improvements, 
leaseholds of land or improvements, and options to acquire land or 
improvements, and options to acquire leaseholds of land or 
improvements. Treas. Reg. sec. 1.897-1(c)(1) provides that a USRPI is 
``any interest, other than an interest solely as a creditor.''
    \78\ Sec. 897(c)(6)(B) provides that real property includes 
``movable walls, furnishings, and other personal property associated 
with the use of the real property.''
    \79\ Sec. 897(c)(2) provides that a USRPHC is any corporation that 
holds USRPIs if the fair market value of its USRPIs equals or exceeds 
50 percent or more of the aggregate fair market value of its USRPIs, 
its interests in real property located outside the United States, and 
its other assets that are used or held for use in a trade or business. 
Look-through rules apply in determining a corporation's USRPIs.
---------------------------------------------------------------------------
    Section 897 increases the tax burden on foreign investors 
in U.S. real property above that imposed by the general rules 
of the Code with respect to capital gains of nonresidents and, 
for that reason, is treated as a negative tax expenditure. For 
example, a foreign investor generally is not taxable on the 
sale of stock in a U.S. corporation. However, if the U.S. 
corporation was a USRPHC at any time during the shorter of the 
foreign investor's holding period or the five-year period 
preceding the sale of the stock, income from the sale of stock 
will be subject to tax as if the income were effectively 
connected with the conduct of a U.S. trade or business. We have 
included section 897 in the Business Synthetic Spending 
category, because it relates directly to the production of 
business or investment income, in this case by foreign 
investors in U.S. real property.

                III. TAX-INDUCED STRUCTURAL DISTORTIONS

    Tax-Induced Structural Distortions are inseparable 
structural elements of the Code that materially affect economic 
decisions in a manner that imposes substantial economic 
efficiency costs.\80\ Like Tax-Induced Structural Distortions, 
Tax Subsidies also can result in economic inefficiencies, but 
in the case of Tax-Induced Structural Distortions, these 
inefficiencies cannot be removed simply by reverting to the 
general rule of present law. Instead, addressing the economic 
distortions attributable to Tax-Induced Structural Distortions 
requires a more fundamental reexamination and redesign of 
present law. We hope that our identification of Tax-Induced 
Structural Distortions as a distinct category of tax 
expenditures, and our focus on possible institutional responses 
that address their efficiency costs, will permit a neutral 
formulation of both the tax policy issues that they raise and 
the range of legislative alternatives that might be considered.
---------------------------------------------------------------------------
    \80\ As discussed in Section I, our definition of Tax-Induced 
Structural Distortions focuses on the substantive criterion of 
efficiency for several reasons. First, efficiency is an inherently more 
neutral construct than is equity (and possibly simplicity). Second, 
many tax expenditures that raise principally equity (or other) issues 
are classified as Tax Subsidies. And third, as described in this 
section, most of the important structural ambiguities in the Code today 
relate to the taxation of capital income (that is, business or 
investment income), and efficiency goals loom largest in this context.
---------------------------------------------------------------------------
    We briefly describe below some examples of Tax-Induced 
Structural Distortions. While these elements can be described 
as distinct features of the Code, their interaction is complex 
and the distortive effect of each element is difficult to 
isolate. For the same reason, addressing the distortion 
associated with one element requires consideration of its 
interaction with the others.
    The examples that follow all relate to the taxation of 
capital income (that is, business or investment income). This 
reflects the fact that a practical implementation of capital 
income taxation generally is thought to be more difficult than 
the development of a comprehensive labor income tax. 
Nonetheless, these examples will be expanded in our subsequent 
work to include some labor income structural distortions, in 
particular those relating to the tax treatment of education and 
similar investments in ``human capital.''
    Entity Classification and the Corporate Income Tax. 
Taxpayers who wish to conduct business through an entity 
(rather than as a sole proprietorship) choose either a taxable 
entity (generally a corporation) or a passthrough entity (such 
as a partnership). There is no general rule of entity taxation 
evident from the Code. To the contrary, two very different 
paradigms are offered, each with a number of variations.\81\ As 
a practical matter, businesses that expect to raise equity 
capital in the public markets must choose the corporate form. 
The economic consequences of this choice are distorted, 
however, by the substantial inefficiencies of the corporate tax 
regime--an inherently distortive element of the Code that also 
magnifies the distortions of other features, as discussed 
below.
---------------------------------------------------------------------------
    \81\ Passthrough entities include partnerships (including limited 
liability companies taxable as partnerships), subchapter S 
corporations, and certain entities that are entitled to deduct 
dividends paid to shareholders or are otherwise subject to special 
regimes under which they generally do not pay corporate tax (e.g., 
regulated investment companies (RICs), real estate investment trusts 
(REITs), real estate mortgage investment conduits (REMICs) and 
cooperatives). A description of the various types of business entities, 
some of their principal characteristics, and some considerations that 
relate to their differences can be found at Joint Committee on 
Taxation, Tax Reform: Selected Federal Tax Issues Relating to Small 
Business and Choice of Entity (JCX-48-08), June 4, 2008.
---------------------------------------------------------------------------
    In form, at least, business income earned through a 
corporation is taxable at two levels--first at the corporate 
level, when earned, and subsequently at the shareholder level, 
when distributed as a dividend. In practice, however, present 
law does not always result in the actual payment of two levels 
of tax on corporate earnings; instead, the tax at either or 
both levels may be eliminated or substantially reduced by other 
features of the Code. Thus, the shareholder-level tax is 
eliminated entirely for corporate income distributed as 
dividends to tax-exempt shareholders (such as charitable 
organizations), and may be substantially reduced even for 
amounts distributed to taxable shareholders by the lower rates 
applicable to dividends paid to individuals and to amounts 
treated as capital gains (e.g., amounts paid in certain stock 
redemptions).\82\ (The effects of these lower rates are 
discussed further below.)
---------------------------------------------------------------------------
    \82\ The dividends-received deduction available to corporate 
shareholders also reduces the effective tax rate on dividend income 
received by corporations, but its purpose is to avoid greater-than-
double taxation of corporate earnings by minimizing the effect of tax 
imposed at two or more corporate levels.
---------------------------------------------------------------------------
    Alternatively, the corporate-level tax may be eliminated 
entirely, where corporate earnings are paid as deductible 
interest to investors in corporate debt, or substantially 
reduced by other features of the Code, such as accelerated 
depreciation and the deferral of foreign earnings. (These 
elements are also discussed further below.) In fact, present 
law can result in no tax at all, at either level, where 
corporate earnings are paid as deductible interest to tax-
exempt investors in corporate debt.
    The differences in the treatment of capital income that are 
directly attendant on the corporate income tax--whether 
relating to the form of the investment or the characteristics 
of the investor--significantly distort the allocation of 
capital. To the extent that the corporate form actually results 
in two levels of tax, the increase in the cost of capital can 
lead to lower aggregate capital formation, reducing future 
output and productivity. At the same time, the desire to avoid 
double taxation leads businesses to seek opportunities to 
reduce one or both levels of tax. A business may choose to 
finance new investment by retaining earnings in the 
corporation, rather than distributing those earnings to 
shareholders, in order to take advantage of differences in the 
relative tax situations of the corporation and its 
shareholders; this behavior distorts the allocation of capital 
to the extent that a corporation's investment opportunities are 
more limited than those of its shareholders.\83\ Alternatively, 
businesses increasingly choose to organize in noncorporate 
rather than corporate form, notwithstanding potential 
restrictions on their access to the capital markets; \84\ or a 
business in corporate form may choose to raise capital by 
issuing debt rather than equity, with the distortions discussed 
further below.
---------------------------------------------------------------------------
    \83\ A shareholder may prefer earnings retention (subject to the 
effects of the accumulated earnings tax and personal holding company 
rules), if the shareholder expects to defer tax on capital gains for a 
substantial period or to hold his stock until death (so that 
appreciation can be passed to his heirs free of individual income tax). 
There may also be an incentive to retain earnings if the corporation's 
effective tax rate on reinvestment is lower than the shareholder tax 
rate on distributed earnings. On the other hand, if the shareholder's 
tax rate is significantly lower than the corporation's effective tax 
rate--for example, if the shareholder is a tax-exempt entity or is 
entitled to a corporate dividends-received deduction or to the lower 
rates on dividends paid to individuals, or if the distribution can be 
structured as a stock redemption eligible for capital gains rates and 
basis recovery--there may be a tax incentive to distribute earnings or 
a reduced incentive to retain earnings.
    \84\ See U.S. Department of the Treasury, Treasury Conference on 
Business Taxation and Global Competitiveness Background Paper, July 23, 
2007 (hereinafter ``Treasury Conference Background Paper''), Table 3.1, 
at 13, reporting that net business income earned through flowthrough 
entities represented 51 percent of all business net income in 2004 and 
noting that the importance of flow-through businesses to the U.S. 
economy has been growing steadily over the last several decades.
---------------------------------------------------------------------------
    There is no obvious solution to these problems. While the 
corporate tax could be eliminated entirely, it still would be 
necessary to choose from among the various passthrough 
alternatives; moreover, passthrough treatment may be unworkable 
for some types of businesses, such as publicly traded 
corporations with complex business operations. Alternatively, 
these distortions could be mitigated by making adjustments 
within the corporate tax regime to reduce or eliminate the 
separate corporate and shareholder levels of tax (referred to 
as ``corporate integration''), but this too involves 
significant policy decisions.\85\ Elimination of the corporate 
tax distortion thus requires careful consideration regarding 
the situations in which at least one level of tax should be 
collected and the level (corporate or shareholder) at which 
that tax should apply.
---------------------------------------------------------------------------
    \85\ For a more extensive discussion of the background, issues and 
alternatives with respect to corporate integration, see Organization 
for Economic Co-operation and Development, Fundamental Reform of 
Corporate Income Tax (OECD Tax Policy Studies No. 16, 2007); Edward D. 
Kleinbard, Designing an Income Tax on Capital in Taxing Capital Income 
165, 172 (Henry J. Aaron et al., eds. 2007); Joint Committee on 
Taxation, Present Law and Background Relating to Selected Business Tax 
Issues, JCS-41-06 (September 19, 2006); Michael J. Graetz and Alvin C. 
Warren, Jr., Integration of the U.S. Corporate and Individual Income 
Taxes: The Treasury Department and American Law Institute Reports (Tax 
Analysts, 1998); and Joint Committee on Taxation, Federal Income Tax 
Aspects of Corporate Financial Structures, JCS-1-89 (January 18, 1989).
---------------------------------------------------------------------------
    Differential Treatment of Debt and Equity Capital. As 
indicated above, the fact that interest is generally deductible 
while dividends are not encourages corporations to finance 
investments with debt rather than equity capital in order to 
reduce the corporate-level tax.\86\ This incentive is increased 
by the availability of tax-exempt and foreign investors; where 
corporate earnings are paid as deductible interest to tax-
exempt or foreign holders of corporate debt, no U.S. tax is 
paid at either the corporate or the investor level (although 
the investor may incur some foreign tax on the interest 
received).
---------------------------------------------------------------------------
    \86\ See Treasury Conference Background Paper, Table 4.1, at 24, 
(estimating that the effective marginal tax rate on new investment 
financed by debt is -2.2 percent, while the effective marginal tax rate 
on new investment financed by equity is 39.7 percent); and 
Congressional Budget Office, Taxing Capital Income: Effective Rates and 
Approaches to Reform (October 2005), (estimating that the effective tax 
rate on debt-financed corporate capital income is -6.4 percent, and the 
effective tax rate on equity-financed corporate capital income is 36.1 
percent).
---------------------------------------------------------------------------
    Clearly, there are non-tax reasons to finance investment at 
least partially with debt, including the potential to generate 
a higher rate of return on equity capital if the investment 
succeeds. However, the additional tax incentive to raise 
capital in the form of debt encourages higher leverage levels 
than would exist absent the tax inducement. The tax inducement 
to over-leverage increases both the risk of financial distress 
and the tolerance of corporate equity owners for operational 
risk (by reducing the extent to which their equity capital is 
at stake).
    The distortions introduced by the debt-equity distinction 
cannot be eliminated simply by reverting to a general rule; at 
present, there is no general rule in the Code for accounting 
for the cost of capital. While there is general agreement that 
a uniform approach to the cost of capital would be desirable, 
designing such an approach requires numerous decisions, 
including the amount and timing of any deduction for the cost 
of capital, the treatment of derivative instruments, and 
coordinating rules for taxing the return on capital to the 
investor.
    The Realization Principle. The imposition of tax under the 
Code is predicated in most cases on a realization event, such 
as the sale or exchange of an asset.\87\ The purpose of the 
realization requirement is to match the payment of tax with the 
taxpayer's receipt of funds. The effect, however, is that gains 
and losses are not taken into account as they economically 
accrue. Instead, taxpayers can determine when gains or losses 
are recognized, encouraging ``cherry-picking'' among assets and 
the timing of realizations to maximize tax benefits.
---------------------------------------------------------------------------
    \87\ The most notable exception to this general principle is the 
mark-to-market rule of section 475, which requires dealers in 
securities to recognize gain or loss on securities (other than 
securities held for investment) ``as if such security were sold for its 
fair market value on the business day of [the] taxable year.'' Section 
877A, which requires individuals who are relinquishing U.S. citizenship 
or residence to mark all of their assets to market upon expatriation, 
is the most comprehensive mark-to-market requirement of present law.
---------------------------------------------------------------------------
    More broadly, the ability to defer recognition of gain 
induces taxpayers to hold assets they otherwise would sell in 
order to defer (and effectively reduce) the tax associated with 
a realization event. (Losses, on the other hand, are more 
valuable when recognized currently.) This ``lock-in'' effect 
reduces capital flow to economically superior investments.\88\ 
As the economist Paul Samuelson observed over twenty years ago:
---------------------------------------------------------------------------
    \88\ See, generally, David B. Bradford, Fixing Realization 
Accounting: Symmetry, Consistency, and Correctness in the Taxation of 
Financial Instruments, 50 Tax Law Review 731 (1995); Alan J. Auerbach, 
Retrospective Capital Gains Taxation, 81 American Economic Review 167 
(1991).

          Taxes which people can and will avoid by changing 
        their behavior give an illusion of being unburdensome, 
        precisely because they can be avoided. The truth is 
        just the opposite: per dollar of revenue collected, 
        such ``voluntary taxes'' do the maximum harm and are to 
        be avoided; they occasion the greatest distortions and 
        do so without achieving the purpose of releasing to the 
        government real resources.\89\
---------------------------------------------------------------------------
    \89\ Paul A. Samuelson, Theory of Optimal Taxation, 30 Journal of 
Public Economics 137, 141 (1986).

    For financial instruments other than debt, a consequence of 
the realization principle is to defer taxation of (and thus 
systematically undertax) time value of money returns until 
disposition. For debt instruments, this return is appropriately 
taxed on an accrual basis, e.g., under the original issue 
discount rules. The disparity, however, between the treatment 
of debt and non-debt returns distorts the allocation of 
investment capital by discouraging taxable investors from 
purchasing debt and encouraging the proliferation of derivative 
instruments that provide debt-like returns without the higher 
tax burden.
    In theory, an accrual (or mark-to-market) system of 
taxation--under which taxpayers would value assets periodically 
and reflect accrued gains and losses in income--would reduce 
the inefficiencies associated with a realization-based system. 
In practice, however, a comprehensive mark-to-market regime is 
widely thought to be unadministrable, due to the difficulties 
associated with valuing assets for which there is no market 
trading (generally, nonfinancial assets). The values of 
financial assets, on the other hand, are more likely to be 
ascertainable, whether by virtue of market trading or through 
the use of valuation models. Moreover, imputing a time value 
return to non-debt financial instruments is both conceptually 
and practically feasible.\90\ As a consequence, proposals for 
eliminating the distortions attributable to the realization 
principle typically focus on financial assets.
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    \90\ See H.R. 4912, introduced on December 19, 2007 by Rep. Neal; 
Joint Committee on Taxation Present Law and Analysis Relating to the 
Tax Treatment of Derivatives (JCX-21-08), March 4, 2008 at 32-34.
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    Lack of Indexation for Inflation. The general rules of the 
Code do not account for the effect of inflation on the return 
on investment.\91\ The failure to index asset bases means that 
gain attributable solely to inflation is taxed when an asset is 
sold, and real economic gain is effectively overtaxed. 
Conversely, the failure to index debt (i.e., to reflect the 
fact that inflation benefits borrowers by permitting repayment 
with cheaper dollars) results in an overstatement of the cost 
of capital. The combination of these factors encourages 
underinvestment in capital assets and overleveraging of 
investments.
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    \91\ The indexation of the rate brackets, the personal exemption 
and the standard deduction does not specifically allow the exclusion or 
deferral of income and is only an indirect method of addressing 
inflation. The allowance of a lower rate on capital gains has been 
described as a partial relief from inflation, but is not targeted to 
that effect.
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    Indexation presents both conceptual and practical issues, 
however, for which there are no obvious solutions.\92\ For 
example, the indexation of asset bases would need to be 
considered in the larger context of the disparity between tax 
and economic depreciation (discussed further below).\93\ 
Indexation of debt is complicated by the difficulty of 
determining the extent to which nominal interest rates already 
anticipate or compensate for inflation; yet indexing asset 
bases without indexing debt could inappropriately benefit 
taxpayers who borrow to purchase indexed assets.\94\ Indexing 
also would be administratively complex, particularly in 
circumstances involving tiered entities or transactions that 
increase or decrease a taxpayer's basis at different points in 
time; the inclusion of parallel adjustments for deflation, 
while theoretically appropriate, could also add significantly 
to the complexity.
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    \92\ Some of these issues have been raised in connection with 
certain past proposals to adopt some forms of indexation. See, e.g., 
New York State Bar Association, Tax Section, Ad Hoc Committee on 
Indexation of Basis, Report on Inflation Adjustments to the Basis of 
Capital Assets (June 27, 1990) (hereafter New York State Bar Report on 
Inflation Adjustments).
    \93\ See discussion of accelerated depreciation, infra.
    \94\ While lenders may be overtaxed absent inflation adjustments, 
this result may be mitigated by a ``clientele effect'' in which tax 
exempt or low taxed persons disproportionately take such positions. 
See, e.g. Department of the Treasury, Tax Reform for Fairness, 
Simplicity, and Economic Growth (November 1984) Vol. II Chapter 9.03, 
at 194.
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    Asymmetrical Treatment of Losses. The treatment of income 
and loss under the Code is asymmetrical in the sense that 
income is taxed in full when realized, while losses are 
frequently limited, deferred or disallowed. Most importantly, a 
corporation generally pays tax currently on the net income from 
its operations, but a net operating loss will generate tax 
benefits only to the extent that it can be carried back or 
forward into years in which the corporation has taxable 
income.\95\ Numerous other loss limitations apply on a 
transactional basis or with respect to certain categories of 
losses, such as the limitations on use of capital losses under 
section 1211.\96\
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    \95\ Sec. 172(b) provides for carryback of losses to the two tax 
years preceding the year of loss, and carryforward of losses for up to 
20 years.
    \96\ For corporations, section 1211(a) allows capital losses only 
to the extent of capital gains. Section 1212(a) provides that corporate 
capital losses can be carried back three years and forward five years. 
For individuals, section 1211(b) allows capital losses to the extent of 
capital gains plus $3,000. Section 1212(b) provides that noncorporate 
taxpayers can carry capital losses forward indefinitely. Other loss 
limitations include section 382 (limiting corporate losses where there 
is an ownership change), section 262 (disallowing most personal 
losses), section 469 (limiting passive activity losses), section 267 
(limiting deductions with respect to transactions between related 
taxpayers), and section 165(d) (allowing gambling losses only to the 
extent of gambling gains).
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    A tax system that is not neutral between gains and losses 
effectively alters the expected payout of a given investment. 
The government shares in the gains of the investment (lowering 
the expected value of the upside), but limits its participation 
with respect to losses (increasing the expected cost of the 
downside). This problem in turn is exacerbated by a progressive 
rate structure, because in that case losses, even when 
deductible, typically will give rise to tax benefits (through 
offset or refund) at a lower tax rate than the tax rate imposed 
on highly successful investments.\97\
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    \97\ William M. Gentry and R. Glenn Hubbard, Tax Policy and 
Entrepreneurial Entry, American Economic Association Papers and 
Proceedings, Vol. 90, No. 2, 283 (May, 2000).
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    On the one hand, it may be unreasonable or undesirable to 
expect that the government would accept an unlimited risk of 
loss; the presence of a tax ``penalty'' for incurring losses 
can be viewed as a decision by the government not to 
participate fully in excessively risky behavior. On the other 
hand, loss limitations that are too severe may discourage risk 
taking (including entrepreneurial activities), raise the cost 
of capital for certain investments, and influence decisions 
regarding the mix of investment choices.\98\
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    \98\ A seminal paper on this issue is Evsey D. Domar and Richard A. 
Musgrave, Proportional Income Taxation and Risk-Taking, 58 Quarterly 
Journal of Economics 388 (1944). A recent paper is Rosanne Altshuler, 
Alan J. Auerbach, Michael Cooper, and Matthew Knittel, Understanding 
U.S. Corporate Tax Losses, NBER Working Paper Series 14405 (2008) at 1-
2. See also David A. Weisbach, The (Non)Taxation of Risk, 58 Tax. L. 
Rev. 1 (2004) (discussing various risk and payoff scenarios with and 
without taxation).
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    In theory, the distortion caused by the asymmetrical 
treatment of gains and losses could be mitigated by reducing or 
eliminating restrictions on the use of losses (and in the 
latter case, providing refunds where losses exceed gains in a 
given tax year). For the most part, however, the existing loss 
limitations serve an anti-avoidance purpose or prevent the 
losses themselves from becoming a tradable commodity.\99\ More 
broadly, loss limitations also serve to moderate other non-
economically neutral features of the Code, including some of 
the credits, deductions, and opportunities for deferral (and in 
particular the incentives for leveraging that move equity 
investments closer in economic consequence to options) that we 
have classified as tax expenditures because they are exceptions 
to the Code's general rules. Addressing the asymmetrical 
treatment of losses could require coordinating modifications to 
those provisions.
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    \99\ Section 382 limits the ability of new owners to benefit from 
pre-ownership change losses.
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    Preferential Rates for Capital Gains and Certain Dividends. 
The distortive effects of each of the foregoing elements (the 
corporate tax, the debt-equity distinction, the realization 
principle, the failure to index, and the asymmetrical treatment 
of losses) are complicated by the Code's provision of 
preferential rates for both capital gains and (since 2001) 
dividends derived by individuals. We treat these preferential 
rates as Tax Subsidies, because these incentives could be 
reversed by conforming the tax rates on capital gains and 
dividends to the more generally applicable rates. We classify 
these items as Business Synthetic Spending or Social Spending 
(in the case of the preferential treatment of capital gains on 
housing), because they encourage investment in the types of 
assets that can benefit from the preferential rates.
    Nonetheless, these preferential rates can fairly also be 
analyzed as Tax-Induced Structural Distortions, to the extent 
that these provisions can be presented as partial correctives 
to other problems in the taxation of capital income that would 
be exacerbated in their absence, which problems in turn are not 
so easily reversed by conforming them to a general rule. That 
is, these preferences both have substantial efficiency effects 
and interact directly with other distortive elements of the 
Code that are themselves Tax-Induced Structural Distortions.
    The efficiency costs associated with the taxation, and 
particularly the non-uniform taxation, of capital income are 
well documented.\100\ The distortions created by non-uniform 
taxation of capital income persist, even though the overall 
effective marginal tax rate on capital investment has been 
found to be relatively low, and capital gains taxes in 
particular can often be postponed indefinitely by virtue of the 
realization principle.\101\ This paradox of a major distortion 
in the context of a relatively low overall effective marginal 
tax rate is explained by (in addition to the use of debt 
financing and the choice of passthrough business entities, as 
discussed above) investors' ability to defer (and thus reduce) 
taxes on accrued capital gains and to recognize losses 
selectively, subject to loss limitations (see discussion of the 
realization principle above); dampened dividend payouts during 
periods when dividends are taxed similarly to ordinary income 
may also contribute to this result. This avoidance behavior, 
including the ``lock-in'' effect for asset holders and the 
artificially low payouts of dividends, is itself an indication 
of inefficiency as investors make decisions based on post-tax 
rather than pre-tax rates of return.
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    \100\ Three recent examinations of this subject are Congressional 
Budget Office, Taxing Capital Income: Effective Rates and Approaches to 
Reform (October, 2005); Jane G. Gravelle, Congressional Research 
Service, Capital Income Tax Provisions and Effective Tax Rates 
(January, 2005); and papers found in Henry J. Aaron, Leonard E. Burman, 
and C. Eugene Steuerle, editors, Taxing Capital Income, Urban Institute 
Press (2007).
    \101\ In addition to the marginal effective rate differentials 
cited in the Treasury Background Paper, the Congressional Budget 
Office, in Taxing Capital Income: Effective Rates and Approaches to 
Reform (2005), calculated the effective marginal tax rate on capital to 
be approximately 14 percent. The highest effective marginal rates on 
capital income apply to income derived from equity-financed corporate 
investment. The CBO found a wide dispersion for differences in debt 
versus equity financing in the corporate context, housing versus non-
housing investments, and corporate versus noncorporate investments.
---------------------------------------------------------------------------
    On the other hand, the preferential treatment of dividends 
and capital gains can be seen as mitigating the distortions 
resulting from the taxation of corporate earnings at both the 
corporate and shareholder levels; the matching of the rate for 
dividends with the rate for capital gains may also mitigate 
incentives for corporations to structure distributions in one 
form or the other. The lower rates for capital gains are 
sometimes defended on the basis that they mitigate the ``lock-
in'' effect of the realization principle and the failure of the 
Code to index gains for inflation. The policy issues implicated 
by the treatment of capital gain and dividend income, and the 
taxation of capital income generally, have been the subject of 
numerous incremental or comprehensive proposals.\102\
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    \102\ Comprehensive governmental reform proposals, some of which 
directly or indirectly have drawn from tax expenditure analyses, that 
have focused on the treatment of capital income include Department of 
the Treasury, Blueprints for Basic Tax Reform (January 17, 1977); 
Department of the Treasury, Tax Reform for Fairness, Simplicity, and 
Economic Growth (November, 1984); and President's Advisory Panel on 
Federal Tax Reform, Simple, Fair, and Pro-Growth: Proposals to Fix 
America's Tax System (2005). Recent comprehensive nongovernmental 
proposals include Edward D. Kleinbard, Rehabilitating the Business 
Income Tax (The Hamilton Project 2007).
---------------------------------------------------------------------------
    Accelerated Depreciation. The depreciation rules of the 
Code distort the allocation of capital by departing in several 
respects from real economic depreciation (meaning an asset's 
real useful life and rate of depreciation). On the one hand, a 
variety of special exceptions for particular types of 
property,\103\ and the failure to reflect accurately many 
assets' real economic lives,\104\ results in both different 
cost-recovery periods for assets with identical economic lives 
and different cost-recovery methods for assets that decline in 
value at the same rate. On the other hand, the Code's 
depreciation provisions include a number of rules of 
administrative convenience that group assets into a limited 
number of categories (for example, three-year property, five-
year property, and seven-year property) based on the class 
lives of those assets and provide uniform cost-recovery rules 
for the asset categories.\105\ These rules result in uniform 
cost-recovery periods for assets with different economic lives, 
and uniform cost-recovery methods for assets that decline in 
value at different rates.
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    \103\ We have identified these exceptions as Tax Subsidies, because 
they are exceptions from identifiable general rules that apply to 
otherwise similar properties. Examples include the special recovery 
periods for energy specific items, the 15-year recovery period for 
restaurant property, and the seven-year recovery period for motorsports 
entertainment complexes.
    \104\ Section 168 provides different cost-recovery periods for 
property based on the ``class life'' of such property. Most MACRS 
recovery periods originally were established through IRS administrative 
guidance (Rev. Proc. 87-56, 1987-2 C.B. 674). In November 1988, 
Congress revoked the Secretary's authority to modify the class lives of 
depreciable property as part of the Technical and Miscellaneous Revenue 
Act of 1988, Pub. L. No. 100-647, sec. 6253 (1988).
    \105\ Section 168(b)(1) provides as a general cost recovery rule 
the 200 percent declining balance method switching to the straight-line 
method for the first taxable year for which using the straight-line 
method with respect to the adjusted basis as of the beginning of such 
year will yield a larger allowance.
---------------------------------------------------------------------------
    The mismatch between tax depreciation and real economic 
depreciation contributes to the inefficient allocation of 
capital. For example, as between two assets with the same 
economic lives that provide the same pre-tax return on 
investment, a taxpayer will prefer to invest in the asset for 
which the Code (or a revenue procedure) provides a shorter 
cost-recovery period and, consequently, a lower effective tax 
rate. Similarly, as between two assets with different economic 
lives that provide the same pre-tax rate of return and for 
which the Code prescribes the same cost-recovery period, the 
asset with the longer economic life is tax-advantaged.\106\ As 
a result of these distortions, capital is drawn away from tax-
disfavored assets and toward tax-favored investments, even 
though the tax-favored investments may be less productive.\107\
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    \106\ For example, section 168 provides that property with a class 
life of more than four but less than 10 years is classified as ``5-year 
property'' and prescribes a five-year recovery period. The effective 
tax rate on the returns of an asset with a class life of nine years 
(which is depreciated in five years under the Code) is lower than the 
rate imposed on returns on assets with a five-year class life.
    \107\ While it is difficult to generalize about the consequences of 
the depreciation structural distortion, one consequence might be a 
systemic overinvestment in equipment. Cf. Jane Gravelle, Depreciation 
and the Taxation of Real Estate, CRS Report for Congress, at 10-11 
(May, 1999) (indicating that the depreciation rules result in lower 
effective tax rates for equipment as compared to structures).
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    Deferral of Tax on Foreign Earnings. For U.S.-owned 
multinational businesses, the deferral of tax on the earnings 
of foreign corporate subsidiaries can substantially reduce the 
effective rate of corporate-level tax. The United States 
employs a ``worldwide'' tax system, under which U.S. resident 
individuals and domestic corporations generally are taxed on 
all income, whether derived in the United States or abroad. 
Income earned directly or through a pass-through entity such as 
a partnership is taxed on a current basis; however, active 
foreign business income earned by a domestic parent corporation 
indirectly through a foreign corporate subsidiary generally is 
not subject to U.S. tax until the income is distributed as a 
dividend to the domestic corporation. The basic deferral rule 
in turn is circumscribed by the anti-deferral rules of subpart 
F of the Code, which provide that a domestic parent corporation 
is subject to U.S. tax on a current basis with respect to 
certain categories of passive or highly mobile income earned by 
its foreign subsidiaries.\108\
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    \108\ To mitigate double taxation of foreign source income, the 
United States allows a domestic corporation to claim a credit for 
foreign income taxes paid by it and by its foreign subsidiaries, 
subject to certain limitations. In addition, U.S. tax law imposes an 
exit tax when a U.S. company decides to sidestep U.S. taxation by 
migrating its tax residence from the United States to a foreign 
jurisdiction through a ``corporate inversion'' transaction.
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    As we have previously described,\109\ the taxation of 
domestic corporations on worldwide income, coupled with the 
deferral treatment of foreign subsidiary earnings, raises 
several important and related economic efficiency concerns. 
First, the differing treatment of domestic and foreign 
corporations creates an incentive for a multinational group to 
locate its parent company offshore. This distortion of the 
residency decision further affects countries' tax bases, 
necessitating higher or lower taxes than would otherwise occur, 
with the resulting distortions that such other taxes may 
create. Second, deferral implies a conditionally different tax 
rate on foreign active business income than the rate that 
applies to domestic income, and this difference may affect the 
type and location of business investment when compared either 
to a wholly domestic enterprise, or to a wholly foreign one. 
Taxpayers may choose lower-earning investments which benefit 
from deferral, at the expense of higher-earning investments on 
which income recognition cannot be deferred, with collateral 
effects on the domestic rate of growth of income. Third, and 
related to the foregoing, U.S. firms may have an incentive 
under present law not to repatriate certain ``active'' foreign 
earnings to the United States.\110\ In other words, the 
potentially lower effective tax rate available for investments 
offshore affects the location of both ``new'' investments and 
reinvestments of amounts previously earned offshore.\111\
---------------------------------------------------------------------------
    \109\ See Joint Committee on Taxation, Economic Efficiency and 
Structural Analyses of Alternative U.S. Tax Policies for Foreign Direct 
Investment (JCX-55-08), June 25, 2008.
    \110\ A taxpayer whose foreign tax credit position leaves it 
vulnerable to U.S. residual taxation may refrain from repatriating 
income back to the United States.
    \111\ In addition, deferral may create what may be called ``second 
order'' distortions of taxpayers' choices. Rules created to protect the 
policy of deferral for active income or the determination of taxpayers 
subject to the worldwide regime may result in economically inefficient 
business structures or investment decisions as taxpayers try to qualify 
their income as the result of an active business or qualify their 
investment as not resident in the United States.
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    There appear to be two possible--but polar opposite--
solutions to these distortions. The first possible solution is 
to move towards a ``territorial'' system in which active 
foreign income is fully exempt from U.S. taxation. The second 
is to move towards a ``full inclusion system'' in which all 
foreign source income is currently taxed, without regard to the 
active or passive character of the income. A territorial 
approach would exempt from U.S. tax those active foreign 
earnings that are repatriated as dividends. A full inclusion 
approach would tax all foreign earnings currently, regardless 
of whether the earnings are repatriated.
    Both of these alternatives would reduce the current 
disincentive to repatriate low-taxed foreign earnings, but 
would do so through vastly different mechanisms and would have 
different ancillary consequences. Under either approach, the 
repatriation tax is eliminated, and there is no longer any U.S. 
tax motivation to keep low-taxed foreign income offshore. The 
effects of the two alternatives on the initial locational 
decision are not clearly equivalent, however, and the two 
options differ materially in other respects. Moreover, the two 
may have different implications for the international 
competitiveness \112\ of different U.S. industries.\113\
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    \112\ The phrase ``international competitiveness'' has no technical 
meaning in economics and, consequently, is subject to a wide range of 
interpretations. See Joint Committee on Taxation, Factors Affecting the 
International Competitiveness of the United States (JCS-6-91), May 30, 
1991.
    \113\ In addition, there may be different implications for 
companies in the same industry. For example, some companies export 
goods and services from the United States without a presence, or 
substantial presence, overseas, while other companies export from the 
United States by relying heavily on foreign branches and/or controlled 
foreign entities. Businesses make this choice based on both 
institutional and tax factors, and companies within the same industry 
may choose very different structures for their overseas presence. The 
choice between full inclusion and a territorial system for the 
treatment of foreign source income would affect these companies very 
differently.

                  IV. MEASUREMENT OF TAX EXPENDITURES

Tax expenditure calculations generally
    A tax expenditure is measured by the difference between tax 
liability under present law and the tax liability that would 
result from a recomputation of tax without benefit of the tax 
expenditure provision. Taxpayer behavior is assumed to remain 
unchanged for tax expenditure calculation purposes.\114\ This 
assumption is made to simplify the calculation and conform to 
the presentation of government outlays. This approach to tax 
expenditure measurement is in contrast to the approach taken in 
revenue estimating; all of our revenue estimates do reflect 
anticipated taxpayer behavior.
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    \114\ An alternative way to measure tax expenditures is to express 
their values in terms of ``outlay equivalents.'' An outlay equivalent 
is the dollar size of a direct spending program that would provide 
taxpayers with net benefits that would equal what they now receive from 
a tax expenditure. For positive tax expenditures, the major difference 
between outlay equivalents and the tax expenditure calculations 
presented here is an accounting for whether a tax subsidy converted 
into an outlay payment would itself be taxable, so that a gross-up 
might be needed to deliver the equivalent after-tax benefits. Until 
recently, the Treasury Department presented estimates of outlay 
equivalents in the President's budget in addition to presenting 
estimates in the same manner as the JCT Staff.
---------------------------------------------------------------------------
    The tax expenditure calculations in this report are based 
on the January 2008 Congressional Budget Office revenue 
baseline and JCT Staff projections of the gross income, 
deductions, and other activities of individuals and 
corporations for calendar years 2008-2012, for both positive 
and negative tax expenditures. These projections are used to 
compute tax liabilities for the present-law revenue baseline 
and tax liabilities for the alternative baseline that assumes 
that the tax expenditure provision does not exist.
    Internal Revenue Service (``IRS'') statistics from recent 
tax returns are used to develop projections of the tax credits, 
deductions, and exclusions that will be claimed (or that will 
be denied in the case of negative tax expenditures) under the 
present-law baseline. These IRS statistics show the actual 
usage of the various tax expenditure provisions. In the case of 
some tax expenditures, such as the earned income credit, there 
is evidence that some taxpayers are not claiming all of the 
benefits to which they are entitled, while others are filing 
claims that exceed their entitlements. The tax expenditure 
calculations in this report are based on projections of actual 
claims under the various tax provisions, not the potential tax 
benefits to which taxpayers are entitled.
    Some tax expenditure calculations are based partly on 
statistics for income, deductions, and expenses for prior 
years. Selective accelerated depreciation is an example. 
Calculations for a number of tax expenditures are based on the 
difference between tax depreciation deductions under present 
law and the deductions that would have been claimed in the 
current year if various investments in the current year and all 
prior years had been depreciated using the Modified Accelerated 
Cost Recovery System (``MACRS'').\115\
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    \115\ These selective depreciation tax expenditures are in Table 3.
---------------------------------------------------------------------------
    Each tax expenditure is calculated separately, under the 
assumption that all other tax expenditures remain in the Code. 
If two or more tax expenditures were estimated simultaneously, 
the total change in tax liability could be smaller or larger 
than the sum of the amounts shown for each item separately, as 
a result of interactions among the tax expenditure provisions.
    Year-to-year differences in the calculations for each tax 
expenditure reflect changes in tax law, including phase outs of 
tax expenditure provisions and changes that alter the Code's 
general rules, such as the tax rate schedule, the personal 
exemption amount, and the standard deduction. Some of the 
calculations for this tax expenditure report may differ from 
estimates made in previous years because of change from a norm-
based approach to a Code-rule-based approach, changes in law 
and economic conditions, the availability of better data, and 
improved measurement techniques.
Tax expenditures versus revenue estimates
    A tax expenditure calculation is not the same as a revenue 
estimate for the repeal of the tax expenditure provision, for 
three reasons. First, unlike revenue estimates, tax expenditure 
calculations do not incorporate the effects of the behavioral 
changes that are anticipated to occur in response to the repeal 
of a tax expenditure provision.\116\ Second, tax expenditures 
are concerned with changes in the reported tax liabilities of 
taxpayers.\117\ Because tax expenditure analysis focuses on 
reported tax liabilities as opposed to Federal government tax 
receipts, there is no concern for the short-term timing of tax 
payments. Revenue estimates are concerned with changes in 
Federal tax receipts that are affected by the timing of all tax 
payments. Third, some of the tax provisions that provide an 
exclusion from income also apply to the Federal Insurance 
Contribution Act (``FICA'') tax base, and the repeal of the 
income tax provision would automatically increase FICA tax 
revenues as well as income tax revenues; this FICA effect would 
be reflected in revenue estimates, but is not considered in tax 
expenditure calculations. There also may be interactions 
between income tax provisions and other Federal taxes such as 
excise taxes and the estate and gift tax.
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    \116\ An exception to this absence of behavior in tax expenditure 
calculations is that a taxpayer is assumed to make simple additions or 
deletions in filing tax forms, what we refer to as ``tax form 
behavior.'' Thus a taxpayer that is eligible for one of two alternative 
credits is assumed to file for the second credit if the first credit is 
eliminated.
    \117\ As noted above, reported tax liabilities may reflect 
compliance issues, and thus calculations of tax expenditures reflect 
existing compliance issues.
---------------------------------------------------------------------------
    Our tax expenditure calculations assume that, if a tax 
expenditure provision were repealed, the repeal would take 
effect for taxable years beginning at the latest in the 
calendar year that precedes the first fiscal year for which we 
are making tax expenditure calculations. Thus in the case of 
this year's pamphlet, our projection for a given provision for 
fiscal years 2008 through 2012 compares present law to an 
alternative under which the respective tax expenditure is 
eliminated for calendar years 2007 through 2012. This approach 
tends to produce a full year effect in the first year (for this 
report, fiscal year 2008) for tax expenditures.\118\
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    \118\ Tax expenditures that expire early in the period covered by 
our report may have other timing effects that affect whether a full 
year's effect is shown for any given year.
---------------------------------------------------------------------------
    On the other hand, such full year effects in the first 
fiscal year are not common for revenue estimates. For example, 
because most individual taxpayers have taxable years that 
coincide with the calendar year, the actual repeal of a 
provision affecting income taxes most likely would be effective 
for taxable years beginning after December 31 of a certain 
year, say, 2007. However, the Federal government's 2008 fiscal 
year begins October 1, 2007. Thus, the revenue estimate for 
repeal of a provision at the end of calendar year 2007 would 
show a smaller revenue gain in the first year, fiscal 2008, 
than in subsequent fiscal years.
    A revenue estimate might also reflect some delay in the 
timing of the revenue gains as a result of the taxpayer 
tendency to postpone or forgo changes in tax withholding and 
estimated tax payments, and very often repeal or modification 
of a tax provision includes transition relief that would not be 
captured in a tax expenditure calculation.

Individual income tax

    Under the JCT Staff methodology, the Code's general rules 
governing the individual income tax include the following major 
components: one personal exemption for each taxpayer and one 
for each dependent, the standard deduction, the existing tax 
rate schedule, the opportunity to elect any filing status that 
the taxpayer is eligible for, and deductions for investment and 
certain employee business expenses. Most other tax benefits to 
individual taxpayers are classified as exceptions to the Code's 
general rules.
    We view the personal exemption and the standard deduction 
as defining the zero-rate bracket that is a part of the Code's 
general rules. An itemized deduction that is not necessary for 
the direct generation of income is classified as a positive tax 
expenditure, but only to the extent that it, when added to a 
taxpayer's other itemized deductions, exceeds the standard 
deduction. In addition, the phase out or disallowance of 
personal exemptions under both the regular income tax and the 
alternative minimum tax (``AMT''),\119\ (and the standard 
deduction under the AMT), as well as the denial of deduction 
for investment expenses not in excess of investment 
income,\120\ are presented as negative tax expenditures.
---------------------------------------------------------------------------
    \119\ Thus phase out of the personal exemption under the regular 
income tax, and disallowance of personal exemptions and the standard 
deduction under the AMT, are deemed negative tax expenditures. While in 
other contexts it may be reasonable for an analysis to view the 
exemption under the AMT as equivalent to personal exemptions plus the 
standard deduction, we do not make that equivalency judgment here 
because that would be a policy call, rather than the rule-based 
identification of tax expenditures presented in this pamphlet. Such a 
reconciliation may be helpful for policy analysis, and when such 
equivalency is invoked, the effect of disallowance of personal 
exemptions and the standard deduction under the AMT is attenuated.
    \120\ This item has two offsetting components: the denial (whether 
through an itemization requirement and/or an adjusted gross income 
floor test) of investment expenses (interest-related and other) not in 
excess of investment income is a negative tax expenditure, while 
present law's allowance of some non-interest related investment 
expenses without an investment income limitation is viewed as a 
positive tax expenditure. For other miscellaneous expenses that are 
deductible with itemization, the present law approach is viewed as the 
Code's general rule in reconciling expenses that do not have a direct 
link with income with the burden that such expenses may place on 
taxpayers.
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    All employee compensation is subject to tax unless the Code 
contains a specific exclusion for the income. Specific 
exclusions for employer-provided benefits include the 
following: coverage under accident and health plans,\121\ 
accident and disability insurance, group term life insurance, 
educational assistance, tuition reduction benefits, 
transportation benefits (parking, van pools, bicycles, and 
transit passes), dependent care assistance, adoption 
assistance, meals and lodging furnished for the convenience of 
the employer, employee awards, and other miscellaneous fringe 
benefits (e.g., employee discounts, services provided to 
employees at no additional cost to employers, and de minimis 
fringe benefits). Each of these exclusions is classified as a 
Social Spending tax expenditure in this report.
---------------------------------------------------------------------------
    \121\ Present law contains an exclusion for employer-provided 
coverage under accident and health plans (sec. 106) and an exclusion 
for benefits received by employees under employer-provided accident and 
health plans (sec. 105(b)). These two exclusions are viewed as a single 
tax expenditure. Under the general rules of the Code, the value of 
employer-provided accident and health coverage would be includable in 
the income of employees, but employees would not be subject to tax on 
the accident and health insurance benefits (reimbursements) that they 
might receive.
---------------------------------------------------------------------------
    Under the general rules of the Code, employer contributions 
to pension plans and income earned on pension assets would be 
taxable to employees as the contributions are made and as the 
income is earned, and employees would not receive any deduction 
or exclusion for their pension contributions. Under present 
law, employer contributions to qualified pension plans and 
employee contributions made at the election of the employee 
through salary reduction are not taxed until distributed to the 
employee, and income earned on pension assets is not taxed 
until distributed. The tax expenditure for ``net exclusion of 
pension contributions and earnings'' is computed as the income 
taxes forgone on current tax-excluded pension contributions and 
earnings less the income taxes paid on current pension 
distributions (including the 10-percent additional tax paid on 
early withdrawals from pension plans).
    Under present law, social security and tier 1 railroad 
retirement benefits are partially excluded or fully excluded 
from gross income.\122\ Under the general rules of the Code, 
retirees would be entitled to exclusion of only the portion of 
the retirement benefits that represents a return of the payroll 
taxes that they paid during their working years. Thus, the 
exclusion of social security and railroad retirement benefits 
in excess of payroll tax payments is classified as a Social 
Spending tax expenditure.
---------------------------------------------------------------------------
    \122\ For taxpayers with modified adjusted gross incomes above 
certain levels, up to 85 percent of social security and tier 1 railroad 
retirement benefits are includable in income.
---------------------------------------------------------------------------
    All Medicare benefits are excluded from taxation. The value 
of Medicare Part A insurance generally is greater than the 
Health Insurance (``HI'') tax contributions that enrollees made 
during their working years, the value of Medicare Part B 
insurance generally is greater than the Part B premium that 
enrollees must pay, and the value of Medicare Part D 
(prescription drug) insurance generally is greater than the 
Part D premium that enrollees must pay. The exclusion of the 
value of Medicare Part A insurance in excess of HI tax 
contributions is classified as a tax expenditure, as is the 
exclusion of the value of Medicare Part B insurance in excess 
of Part B premiums, and the exclusion of the value of Part D 
insurance in excess of Part D premiums.
    Public assistance benefits are excluded from gross income 
by statute or by IRS regulations. Table 2 contains Social 
Spending tax expenditure calculations for workers' compensation 
benefits, special benefits for disabled coal miners, and cash 
public assistance benefits (which include Supplemental Security 
Income benefits and Temporary Assistance for Needy Families 
benefits).
    The individual income tax does not include in gross income 
the imputed income that individuals receive from the services 
provided by owner-occupied homes and durable goods.\123\ 
Accordingly, we do not classify this exclusion as a tax 
expenditure.\124\ The measurement of imputed income for tax 
purposes presents administrative problems and its exclusion 
from taxable income may be regarded as an administrative 
necessity.\125\ Under the general rules of the Code, 
individuals would be allowed to deduct only the interest on 
indebtedness incurred in connection with a trade or business or 
an investment. Thus, as explained above in Section II.B.1, the 
deduction for mortgage interest on a principal or second 
residence is classified as a tax expenditure.
---------------------------------------------------------------------------
    \123\ The National Income and Product Accounts include estimates of 
this imputed income. The accounts appear in U.S. Department of 
Commerce, Bureau of Economic Analysis, Survey of Current Business, 
published monthly. However, a taxpayer-by-taxpayer accounting of 
imputed income would be necessary for a tax expenditure calculation.
    \124\ The Treasury Department provides a tax expenditure 
calculation for the exclusion of net rental income of homeowners that 
combines the positive tax expenditure for the failure to impute rental 
income with the negative tax expenditure for the failure to allow a 
deduction for depreciation and other costs.
    \125\ For a discussion of ease of administration, see Joint 
Committee on Taxation, A Reconsideration of Tax Expenditure Analysis 
(JCX-37-08), May 12, 2008. If the imputed income from owner-occupied 
homes were included in adjusted gross income, it would be proper to 
include all mortgage interest deductions and related property tax 
deductions as part of the normal income tax structure, because interest 
and property tax deductions would be allowable as a cost of producing 
imputed income. It also would be appropriate to allow deductions for 
depreciation and maintenance expenses for owner-occupied homes.
---------------------------------------------------------------------------
    For reasons of administrative feasibility, the general 
rules of the Code tax capital gains in full in the year the 
gains are realized through sale, exchange, gift, or transfer at 
death. Thus, the deferral of tax until realization is not 
classified as a tax expenditure, but reduced rates of tax, 
further deferrals of tax (beyond the year of sale, exchange, 
gift, or transfer at death), and exclusions of certain capital 
gains are classified as tax expenditures.\126\ Because of the 
same concern for ease of administration we also interpret the 
Code as not providing for any indexing of the basis of capital 
assets for changes in the general price level (although the 
indexing of the personal exemption, the standard deduction, and 
tax rate brackets applicable to individuals are regarded as 
part of the general rules of the Code, consistent with concerns 
about ability to pay and progressivity.) \127\ Thus under the 
general rules of the Code, the income tax is levied on nominal 
capital gains as opposed to real gains in asset values.
---------------------------------------------------------------------------
    \126\ The issue of deferral, as well as other distortions in the 
current system of taxing capital gains, is discussed in Section III on 
Tax-Induced Structural Distortions.
    \127\ A discussion of the complexity of indexing can be found in 
New York State Bar Association, Tax Section, Ad Hoc Committee on 
Indexation of Basis, Report on Inflation Adjustments to the Basis of 
Capital Assets, June 27, 1990. Also, for neutrality any indexing of 
business assets should be comprehensive and also apply to liabilities. 
Thus at a minimum both interest income and interest expense should be 
indexed, as described in Department of The Treasury, Tax Reform for 
Fairness, Simplicity, and Economic Growth, November 1984, Vol. I, 
Chapter 6, Section III.
---------------------------------------------------------------------------
    There are many types of State and local government bonds 
and private purpose bonds that qualify for tax-exempt status 
for Federal income tax purposes. Tables 2 and 3 contain a 
separate tax expenditure listing for each type of bond, and we 
classify these items as Social Spending or Business Synthetic 
Spending according to whether the provision primarily 
subsidizes bonds linked to for-profit business activity.\128\
---------------------------------------------------------------------------
    \128\ The classification of bond provisions is explained in Section 
II.B.3.
---------------------------------------------------------------------------
    Under our interpretation of the general rules of the Code, 
compensatory stock options are subject to regular income tax at 
the time the options are exercised and employers would receive 
a corresponding tax deduction.\129\ The employee's income would 
be equal to the difference between the purchase price of the 
stock and the market price on the day the option is exercised. 
Present law provides for special tax treatment for incentive 
stock options and options acquired under employee stock 
purchase plans. When certain requirements are satisfied, (1) 
the income that is received at the time the option is exercised 
is excluded for purposes of the regular income tax but, in the 
case of an incentive stock option, included for purposes of the 
AMT, (2) the gain from any subsequent sale of the stock is 
taxed as a capital gain, and (3) the employer does not receive 
a tax deduction with respect to the option.
---------------------------------------------------------------------------
    \129\ If the option has a readily ascertainable fair market value, 
the Code's general rules tax the option at the time it is granted and 
the employer would be entitled to a deduction at that time.
---------------------------------------------------------------------------
    We therefore view the special tax treatment provided to the 
employee as a tax expenditure, and a calculation of this Social 
Spending tax expenditure is contained in Table 2. However, it 
should be noted that the revenue loss from the special tax 
treatment provided to the employee is accompanied by a 
significant revenue gain from the denial of the deduction to 
the employer. The negative tax expenditure created by the 
denial of the deduction for employers is now incorporated in 
the calculation of the tax expenditure.
    The individual AMT and the passive activity loss rules 
reduce the magnitude of the positive tax expenditures to which 
they apply. For example, the AMT reduces the value of the 
deduction for State and local income taxes (for those taxpayers 
subject to the AMT) by not allowing the deductions to be 
claimed in the calculation of AMT liability. Similarly, the 
passive loss rules defer otherwise allowable deductions and 
credits from passive activities until a time when the taxpayer 
has passive income or disposes of the assets associated with 
the passive activity. In one case the restrictive effects of 
the AMT are presented separately because there are no 
underlying positive tax expenditures reflecting these effects: 
the negative tax expenditures for the AMT's disallowance of 
personal exemptions and the standard deduction. We do not 
classify exceptions to the individual AMT and the passive loss 
rules as tax expenditures because the effects of the exceptions 
already are incorporated in the calculations of related tax 
expenditures.

Business income taxation

    Regardless of the legal form of organization (sole 
proprietorship, partnership, or S or C corporation), the same 
general principles are used in the computation of taxable 
business income. Thus, most business tax expenditures apply 
equally to unincorporated and incorporated businesses.
    One of the most difficult issues in defining tax 
expenditures for business income relates to the tax treatment 
of capital costs. Under present law, capital costs may be 
recovered under a variety of alternative methods, depending 
upon the nature of the costs and the status of the taxpayer. 
For example, investments in equipment and structures may 
qualify for tax credits, expensing, accelerated depreciation, 
or straight-line depreciation.
    The Code's general rules for capital cost recovery arguably 
are accelerated in many applications when compared to economic 
depreciation (particularly if the effects of inflation are 
ignored.) These outcomes are not identified as Tax Subsidies 
because such results reflect the Code's general rules, but the 
tax depreciation rules are separately analyzed as a Tax-Induced 
Structural Distortion.
    A Business Synthetic Spending tax expenditure has been 
measured for depreciation in those specific cases where the tax 
treatment of a certain type of asset deviates from the overall 
treatment of other similar types of assets. For example, the 
tax treatment of leasehold improvements of commercial buildings 
is depreciated using a recovery period of 15 years, while the 
general treatment of improvements to commercial buildings 
(e.g., owned commercial buildings) is a 39 year recovery 
period. In this case, the difference between depreciation (in 
this case straight line) using 15 years and 39 years for the 
recovery period represents Business Synthetic Spending. Thus, 
we generally classify as Business Synthetic Spending those 
cases where cost recovery allowances are more favorable than 
the allowances provided under MACRS.
    As indicated above, we do not view the Code's general rules 
as requiring indexing of the basis of capital assets. Thus, 
this tax expenditure analysis does not take into account the 
effects of inflation on tax depreciation. Again, present law's 
treatment of inflation is best analyzed as a Tax-Induced 
Structural Distortion.
    We follow several accounting standards noted in, or 
supporting, the Code's general rules in evaluating the 
provisions in the Code that govern the recognition of business 
receipts and expenses. The general rules of the Code are 
assumed to require the accrual method of accounting, the 
standard of ``economic performance'' (used in the Code to test 
whether liabilities are deductible), and the concept of 
matching income and expenses. Tax provisions that do not 
satisfy all three standards are viewed as tax expenditures. For 
example, the deduction for contributions to taxpayer-controlled 
mining reclamation reserve accounts is viewed as a tax 
expenditure because the contributions do not satisfy the 
economic performance standard. As another example, the 
deductions for contributions to nuclear decommissioning trust 
accounts and certain environmental settlement trust accounts 
are not viewed as tax expenditures because the contributions 
are irrevocable (i.e., they satisfy the economic performance 
standard). However, present law provides for a reduced rate of 
tax on the incomes of these two types of trust accounts, and 
these tax rate reductions are viewed as tax expenditures. In 
addition, the ad hoc indexing permitted by use of the LIFO and 
lower of cost or market accounting methods are viewed as 
exceptions to the general rule that the Code does not permit 
indexing of business income items.
    We accept as general rules of the Code the carryback and 
carryforward of net operating losses. The JCT Staff also 
assumes that the limits on the number of years that such losses 
may be carried back or forward were chosen for reasons of 
administrative convenience and compliance concerns and may be 
assumed to represent the Code's general rule. Exceptions to the 
general limits on carrybacks and carryforwards are viewed as 
tax expenditures.

Corporate income tax

    The income of corporations (other than S corporations) 
generally is subject to the corporate income tax. In the Code's 
realization-based system, the corporate tax is viewed as being 
part of the general rules in order to ensure comprehensive 
taxation of income and progressivity. The corporate income tax 
includes its own graduated tax rate schedule. We classify the 
lower tax rates in the schedule as a tax expenditure because 
they are intended to provide tax benefits to business with 
small profits and, unlike the graduated individual income tax 
rates, are not related directly to concerns about ability of 
individuals to pay taxes or progressivity.
    Exceptions to the corporate AMT are not viewed as tax 
expenditures because the effects of the AMT exceptions are 
already incorporated in the calculations of related tax 
expenditures.\130\
---------------------------------------------------------------------------
    \130\ See discussion of individual AMT above.
---------------------------------------------------------------------------
    Certain income of passthrough entities is exempt from the 
corporate income tax. The income of sole proprietorships, S 
corporations, and partnerships, is taxed only at the individual 
level. Certain other entities are entitled to deduct dividends 
paid to shareholders or are otherwise subject to special 
regimes under which they generally do not pay corporate tax 
(such as RICs, REITs, REMICS and cooperatives). The special tax 
rules for these passthrough entities are not classified as tax 
expenditures because the tax benefits are available to any 
entity that chooses to organize itself and operate in the 
required manner, although the general issue of entity choice is 
discussed in Section III as a Tax-Induced Structural 
Distortion.
    Nonprofit corporations that satisfy the requirements of 
Code section 501 also generally are exempt from corporate 
income tax. The tax exemption of certain nonprofit cooperative 
business organizations, such as trade associations, is not 
treated as a tax expenditure for the same reason applicable to 
for-profit pass-through business entities. With respect to 
other nonprofit organizations, such as charities, tax-exempt 
status is not classified as a tax expenditure because the 
nonbusiness activities of such organizations generally must 
predominate and their unrelated business activities are subject 
to tax. Imputed income derived from nonbusiness activities 
conducted by individuals or collectively by certain nonprofit 
organizations is judged to be outside the Code's general rules. 
However, the ability of donors to such nonprofit organizations 
to claim a charitable contribution deduction is a tax 
expenditure, as is the exclusion of income granted to holders 
of tax-exempt financing issued by charities. In addition, 
nonprofit entities are discussed as one of the Business 
Synthetic Spending areas in Section II.

Comparisons with Treasury Department

    The JCT Staff and Treasury Department lists of tax 
expenditures differ in four respects. First, the Treasury 
Department uses a different classification of those provisions 
that can be considered a part of what they refer to as 
``reference income tax law'' under both the individual and 
business income taxes. The JCT Staff methodology using the 
Code's general rules often involves a broader definition of 
what constitutes a tax expenditure. Thus, the JCT Staff list of 
tax expenditures includes some provisions that are not 
contained in the Treasury Department list. The cash method of 
accounting by certain businesses is an example. The Treasury 
Department considers the cash accounting option for certain 
businesses to be a part of reference income tax law, but the 
JCT Staff methodology treats it as a tax expenditure because it 
is viewed as a departure from the Code's general rule for 
matching income and expenses.
    Second, the JCT Staff and Treasury Department reports of 
tax expenditures span slightly different sets of years. The 
Treasury Department's report covers a seven-year period--the 
last fiscal year, the current fiscal year when the President's 
budget is submitted, and the next five fiscal years, i.e., 
fiscal years 2007-2013. The JCT Staff report covers a recent 
fiscal year and the succeeding four fiscal years, i.e., fiscal 
years 2008-2012 in the case of this pamphlet.
    Third, the JCT Staff list excludes those provisions that 
are projected to result in revenue changes below a de minimis 
amount, i.e., less than (plus or minus) $50 million over the 
five fiscal years 2008 through 2012. The Treasury Department 
rounds all yearly projections to the nearest $10 million and 
excludes those provisions that round to zero in each year, 
i.e., provisions that result in less than $5 million in revenue 
loss in each of the years in the period 2008 through 2012. 
Finally, the JCT Staff approach, unlike the Treasury Department 
report, now formally integrates negative tax expenditures into 
its standard presentation.\131\
---------------------------------------------------------------------------
    \131\ The Treasury Department analysis includes some tax 
expenditures that are negative, but the negativity seems to result from 
timing effects associated with expired or expiring provisions.
---------------------------------------------------------------------------
    In some cases, two or more of the tax expenditure items in 
the Treasury Department list have been combined into a single 
item in our list, and vice versa. The descriptions of some tax 
expenditures also may vary from the descriptions used by the 
Treasury Department.

Quantitatively de minimis tax expenditures

    The following tax provisions are viewed as tax expenditures 
by the JCT Staff but are not listed in Tables 1, 2, or 3 
because the projected revenue changes for fiscal years 2008 
through 2012 are below a de minimis amount, $50 million:

International affairs

           Miscellaneous exclusions (e.g., bond income 
        of residents of the Ryuku Islands, certain wagering 
        income, certain communication satellite earnings, 
        earnings from railroad rolling stock)

Energy

           Expensing of tertiary injectants
           Credit for production of electricity from 
        qualifying advanced nuclear power facilities
           Credit for producing oil and gas from 
        marginal wells
           Credit for the residential purchase of 
        qualified photovoltaic and solar water heating property
           Credit for the construction of energy-
        efficient new homes
           Partial expensing of investments in advanced 
        mine safety equipment
           Credit for costs incurred in training 
        qualified mine rescue team employees
           Credit and deduction for small refiners with 
        capital costs associated with EPA sulfur regulation 
        compliance
           Credits for biodiesel and renewable fuels
           Energy research credit
           Seven-year MACRS Alaska natural gas pipeline
           Seven-year MACRS natural gas gathering line

Natural resources and environment

           Timber mineral royalty and timber gain of 
        real estate investment trusts

Agriculture

           Cash accounting for agriculture
           Deferral of tax on gains from the sale of 
        stock in a qualified refiner or processor to an 
        eligible farmer's cooperative

Financial institutions

           Bad debt reserves of financial institutions
           Exclusion of investment income from 
        structured settlement arrangements

Other business and commerce

           Deferral of gain on sales of property to 
        comply with conflict-of-interest requirements
           Exclusion of income from discharge of 
        indebtedness incurred in connection with qualified real 
        property
           Reduced rates of tax on gains from the sale 
        of self-created musical works
           Amortization of expenses for the creation or 
        acquisition of musical compositions
           Alaska Native Corporation trusts

Community and regional development

           Five-year carryback period for certain net 
        operating losses of electric utility companies

Social services

           Exclusion of restitution payments received 
        by victims of the Nazi regime and the victims' heirs 
        and estates

Health

           Archer medical savings accounts

Income security

           Credit for the elderly and disabled
           Credit for new retirement plan expenses of 
        small businesses

Veterans' benefits and services

           Burial expenses for veterans

General purpose fiscal assistance

           American Samoa economic development credit

Tax expenditures for which quantification is not available

    The following tax provisions are viewed as tax expenditures 
by the JCT Staff but are not listed in Tables 1, 2, or 3 
because the projected revenue changes are unavailable (a 
provision that is a negative tax expenditure is indicated by an 
``*''):

International affairs

           Branch profits tax*
           Deduction for U.S. employment tax paid under 
        section 3121(l) agreements for employees of foreign 
        affiliates
           Doubling of tax rates on citizens and 
        corporations of certain foreign countries*

Energy

           50-percent expensing of cellulosic biofuel 
        plant property
           Accelerated deductions for nuclear 
        decommissioning costs
           IGCC and advanced coal credit

Natural resources and environment

           Exception to partial interest rule for 
        qualified conservation

Agriculture

           Deduction for distributions of non-member 
        sourced income by farmer's cooperative
           Agricultural security credit
           Exceptions from dealer disposition 
        definition
           Exception from interest calculation on 
        installment sales for small dispositions
           Single purpose agricultural or horticultural 
        structures

Commerce and housing

           Amortization of organizational expenditures
           Deferral of prepaid subscription income
           Deferral of prepaid dues income of certain 
        membership organizations
           Amortization of partnership organization and 
        syndication fees
           Unrecaptured section 1250 gain rate (section 
        1(h)): applies to depreciation taken on real property
           Nonrecognition of in-kind distributions by 
        regulated investment companies in redemption of their 
        stock
           Special discount rate rule for certain debt 
        instruments where stated principal amount is $2.8 
        million or less
           Deduction for investment expenses*\132\
---------------------------------------------------------------------------
    \132\ This item has two offsetting components: the denial (whether 
through an itemization requirement and/or an adjusted gross income 
floor test) of investment expenses (interest-related and other) not in 
excess of investment income is a negative tax expenditure, while 
present law's allowance of some non-interest related investment 
expenses without an investment income limitation is viewed as a 
positive tax expenditure. For other miscellaneous expenses that are 
deductible with itemization, the present law approach is viewed as the 
Code's general rule in reconciling expenses that do not have a direct 
link with income with the burden that such expenses may place on 
taxpayers.
---------------------------------------------------------------------------
           Tax treatment of convertible bonds
           Treatment of loans under life insurance and 
        annuity contracts and 401(k) plans
           Net operating loss--deviations from general 
        rule of two-year carryback/twenty-year carryforward
           Exemption for cemetery companies
           Certain exceptions to the UBTI rules:
                   Passive income gains
                   Income from certain research
                   Trade shows and fairs
                   Bingo games
                   Pole rentals
                   Sponsorship payments
                   Real estate exception to the debt-
                financed income rules
           Specific identification of sold equities

Community and regional development

           Exemption for electric and telephone 
        cooperatives
           Three-year carryback of small business' and 
        farmers' casualty losses attributable to Presidentially 
        declared disaster

Employment

           Allowance of 80-percent deduction for right 
        to purchase tickets or stadium seating
           Disallowance, limitation, and heightened 
        substantiation for certain business deductions (e.g., 
        entertainment, gift, cell phone expenses)

General purpose fiscal assistance

           Exclusion of Guam, American Samoa, and 
        Northern Mariana Islands income
           Exclusion of U.S. Virgin Islands income
           Exclusion of Puerto Rico income

Cross-reference of prior and current approaches

    This section cross-references all the items contained in 
last year's pamphlet.\133\ In general, bond items contained in 
last year's pamphlet have been categorized as Social Spending 
items in Table 2 if they predominantly benefit a governmental 
function or not-for-profit users; other bond items have been 
categorized as Business Synthetic Spending in Table 3. All 
National Defense items are classified here as Social Spending 
in Table 2; the two deferral items in International Affairs are 
no longer considered tax expenditures but are discussed as Tax-
Induced Structural Distortions in Section III of this pamphlet, 
while the foreign earned income exclusion and the allowance for 
Federal employees abroad are presented also in Table 2, and the 
inventory property sales provision is a Business Synthetic 
Spending item in Table 3. The General Science, Space, and 
Technology items are in Table 3, and the Energy items from last 
year's pamphlet are shown in Table 2, if they are statutorily 
targeted at consumers, with other items now located in Table 3.
---------------------------------------------------------------------------
    \133\ All items referred to in this section were presented in Joint 
Committee on Taxation, Estimates of Federal Tax Expenditure for Fiscal 
Years 2007-2011, (JCS-3-07), September 24, 2007.
---------------------------------------------------------------------------
    Previously presented Natural Resources and Environment 
items are now in Table 3, with one of the bond items now 
presented in the Community and Regional Development section of 
Table 3. All Agriculture items are presented as Business 
Synthetic Spending provisions in Table 3. Housing items from 
the Commerce and Housing area are classified as Social Spending 
items in Table 2, while the non-housing Commerce and Housing 
items are now in Table 3 with some exceptions.\134\ Fringe 
benefit and compensation items previously presented in the 
Transportation and Education, Training, Employment, and Social 
Services categories can be found in those same functional 
categories in Table 2. Other Transportation and Community and 
Regional Development items are now in Table 3. The work 
opportunity credit and the credit for orphan drug research are 
shown in Table 3; all other Education, Training, Employment, 
Social Services, and Health tax expenditures from last year's 
pamphlet are identified in the same functional categories as 
Social Spending in Table 2. All Medicare, Income Security, 
Social Security and Railroad Retirement, Veterans' Benefits and 
Services, and General Purpose Fiscal Assistance items are 
classified as Social Spending in Table 2. The refundable 
portions of the child tax credit and the earned income credit 
are now presented separately in Table 1, while the 
corresponding nonrefundable components are presented in Table 
2, with the items keeping their respective functional 
categories of Social Services and Income Security.
---------------------------------------------------------------------------
    \134\ Certain depreciation items, previously classified as tax 
expenditures, are not classified in this new approach as Tax Subsidies; 
to preserve continuity with prior presentations, they are shown 
separately in Table 4. Accelerated depreciation also is discussed in 
Section III as a Tax-Induced Structural Distortions.

                       V. TAX EXPENDITURE TABLES

    Tax expenditures are grouped in Tables 1-3 in the same 
functional categories as outlays in the Federal budget. 
Calculations are shown separately for individuals and 
corporations. Those tax expenditures that do not fit clearly 
into any single budget category have been placed in the most 
appropriate category.
    Table 1 contains Tax Transfer provisions. These are Tax 
Subsidies that effectively operate as hybrid tax/spending 
programs; each is essentially a direct spending program that 
uses Code concepts to determine eligibility for the refund and 
tax system infrastructure to deliver funds.
    Tables 2 and 3 identify Social Spending and Business 
Synthetic Spending tax expenditures, respectively.
    Table 4 presents major items previously classified as tax 
expenditures but not classified in this new approach as Tax 
Subsidies. Some of these items are discussed in Section III on 
Tax-Induced Structural Distortions.
    Table 5 presents projections of tax return information for 
each of nine income classes on the number of all returns 
(including filing and nonfiling units), the number of taxable 
returns, the number of returns with itemized deductions, and 
the amount of tax liability.
    Table 6 provides distributional estimates by income class 
for some of the tax expenditures that affect individual 
taxpayers, including for the first time this year the negative 
tax expenditure for the phase out and disallowance of personal 
exemptions and standard deductions. Not all tax expenditures 
that affect individuals are shown in this table because of the 
difficulty in making reliable estimates of the income 
distribution of items that do not appear on tax returns under 
present law.
?

  

                                                                      TAX TRANSFERS
                                     Table 1.--Tax Expenditure Estimates By Budget Function, Fiscal Years 2008-2012
                                                                  [Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Corporations                                   Individuals
                    Function                     ---------------------------------------------------------------------------------------------   Total
                                                    2008     2009     2010     2011    2012     2008      2009      2010      2011      2012    2008-12
--------------------------------------------------------------------------------------------------------------------------------------------------------
Natural Resources and Environment
    Refund of deemed tax payment to allocatee of  .......     0.3   .......  .......  ......  ........  ........  ........  ........  .......        0.3
     qualified forestry conservation bond
     limitation.................................
Commerce and Housing
    Housing:
        Refundable first-time homebuyer credit..  .......  .......  .......  .......  ......      (1)       (1)       (1)       (1)       (1)        (1)
    Other business and housing:
        Refundable research tax credits \2\ ....     (3)      0.5   .......  .......  ......  ........  ........  ........  ........  .......        0.4
Education, Training, Employment, and Social
 Services
    Social services:
        Refundable tax credit for children under  .......  .......  .......  .......  ......     20.3      18.8      18.0       7.3       3.9       68.3
         age 17 \4\.............................
Health
    Refundable credit for purchase of health      .......  .......  .......  .......  ......      (1)       (1)       (1)       (1)       (1)        (1)
     insurance by certain displaced workers.....
Income Security
    Refundable earned income credit \4\ ........  .......  .......  .......  .......  ......     42.4      44.3      45.3      41.7      41.0      214.7
    Refundable recovery rebate..................  .......  .......  .......  .......  ......      (1)       (1)       (1)       (1)       (1)        (1)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1 Refundable portion combined with nonrefundable portion for respective items and presented in Table 2.
2 Transfer is limited to research credits that would otherwise expire.
3 Positive tax expenditure of less than $50 million.
4 Nonrefundable amounts are included in Table 2.
 
Note.--Details may not add to totals due to rounding.
 
Source: Joint Committee on Taxation.


                                                                     SOCIAL SPENDING
                                     Table 2.--Tax Expenditure Estimates By Budget Function, Fiscal Years 2008-2012
                                                                  [Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Corporations                                   Individuals
                    Function                     ---------------------------------------------------------------------------------------------   Total
                                                    2008     2009     2010     2011    2012     2008      2009      2010      2011      2012    2008-12
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense
    Exclusion of benefits and allowances to       .......  .......  .......  .......  ......      3.6       3.9       4.1       4.4       4.5       20.5
     armed forces personnel.....................
    Exclusion of military disability benefits...  .......  .......  .......  .......  ......      0.2       0.2       0.2       0.2       0.2        1.0
    Deduction for overnight-travel expenses of    .......  .......  .......  .......  ......    (\1\)       0.1       0.1       0.1       0.1        0.3
     national guard and reserve members.........
    Exclusion of combat pay.....................  .......  .......  .......  .......  ......      1.4       1.3       1.1       0.9       0.9        5.6
International Affairs
    Exclusion of certain allowances for Federal   .......  .......  .......  .......  ......      0.9       0.9       1.0       1.0       1.1        4.9
     employees abroad...........................
    Exclusion of foreign earned income \2\:
        Housing.................................  .......  .......  .......  .......  ......      0.8       0.9       0.9       1.0       1.1        4.7
        Salary..................................  .......  .......  .......  .......  ......      4.1       4.3       4.5       4.7       4.9       22.5
Energy
    Credit for energy efficiency improvements to  .......  .......  .......  .......  ......      0.8       0.3       1.0   ........  .......        2.1
     existing homes.............................
    Credits for alternative technology vehicles.     0.1    (\1\)    (\1\)    (\1\)    (\1\)      0.2       0.2       0.2     (\1\)     (\1\)        1.0
    Credit for holders of clean renewable energy   (\1\)      0.1      0.1      0.1      0.1    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.5
     bonds......................................
    Exclusion of energy conservation subsidies    .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
     provided by public utilities...............
    Credit for holder of qualified energy          (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
     conservation bonds.........................
Commerce and Housing
    Housing:
        Deduction for mortgage interest on owner- .......  .......  .......  .......  ......     67.0      80.1      89.4      99.8     107.3      443.6
         occupied residences....................
        Deduction for property taxes on real      .......  .......  .......  .......  ......     24.6      15.9      13.4      26.6      31.6      112.0
         property...............................
        Increased standard deduction for real     .......  .......  .......  .......  ......      0.9       2.5       0.4   ........  .......        3.7
         property taxes.........................
        Exclusion of capital gains on sales of    .......  .......  .......  .......  ......     16.8      15.8      16.9      19.3      20.9       89.9
         principal residences...................
        Exclusion of interest on State and local     0.4      0.4      0.4      0.4      0.5      0.9       0.9       1.0       1.1       1.2        7.1
         government qualified private activity
         bonds for owner-occupied housing.......
        Deduction for premiums for qualified      .......  .......  .......  .......  ......    (\1\)       0.1       0.2       0.2   .......        0.5
         mortgage insurance.....................
        Exclusion of income attributable to the   .......  .......  .......  .......  ......      0.2       0.3       0.2       0.2       0.1        1.1
         discharge of principal residence
         acquisition indebtedness...............
        First-time homebuyer credit \3\.........  .......  .......  .......  .......  ......      0.3      13.6      -0.5      -1.9      -1.7        9.9
Transportation
    Exclusion of employer-paid transportation     .......  .......  .......  .......  ......      4.0       4.1       4.3       4.9       5.2       22.4
     benefits...................................
Community and Regional Development
    Empowerment zone tax incentives.............     0.4      0.4      0.2    (\1\)    (\1\)      0.4       0.4       0.2       0.1       0.1        2.2
    Renewal community tax incentives............     0.3      0.2      0.1      0.1      0.1      0.4       0.3       0.1       0.1       0.1        1.8
    New markets tax credit......................     0.4      0.4      0.4      0.4      0.4      0.5       0.6       0.6       0.5       0.5        4.8
    Expensing of environmental remediation costs     0.1      0.1    (\1\)     -0.1     -0.2      0.1       0.1     (\1\)      -0.1      -0.1        0.2
     (``brownfields'')..........................
    District of Columbia tax incentives.........   (\1\)      0.1    (\1\)    (\1\)    (\1\)      0.1       0.2       0.1       0.1       0.1        0.8
        Disaster relief:
            Katrina emergency act...............     0.1    (\1\)    (\1\)    (\1\)    (\1\)      0.1     (\1\)     (\1\)     (\1\)     (\1\)        0.2
            Gulf opportunity zone...............     0.3    (\1\)      0.1    (\1\)    (\1\)      1.3       0.6       0.4       0.3       0.2        3.3
            Kansas disaster relief..............  .......   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
            Midwest disaster relief.............  .......     0.3      0.2      0.2      0.3  ........      0.9       0.1       0.1       0.1        2.2
            National disaster relief............  .......     0.8      1.1      0.7      0.2  ........      1.2       0.8       0.5       0.1        5.3
Education, Training, Employment, and Social
 Services
    Education and training:
        Deduction for interest on student loans.  .......  .......  .......  .......  ......      0.8       0.9       1.0       0.5       0.4        3.7
        Deduction for higher education expenses.  .......  .......  .......  .......  ......      1.2       2.5       0.7   ........  .......        4.5
        Exclusion of earnings of Coverdell        .......  .......  .......  .......  ......      0.1       0.1       0.1       0.2       0.2        0.6
         education savings accounts.............
        Exclusion of interest on educational      .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)      (\1\)
         savings bonds..........................
        Exclusion of scholarship and fellowship   .......  .......  .......  .......  ......      1.8       1.9       2.0       2.1       2.2       10.1
         income.................................
        Exclusion of income attributable to the   .......  .......  .......  .......  ......      0.1       0.1       0.1       0.1       0.1        0.4
         discharge of certain student loan debt
         and NHSC educational loan repayments...
        Exclusion of employer-provided education  .......  .......  .......  .......  ......      0.8       0.8       0.9       0.9       0.9        4.3
         assistance benefits....................
        Exclusion of employer-provided tuition    .......  .......  .......  .......  ......      0.2       0.2       0.2       0.2       0.2        1.0
         reduction benefits.....................
        Parental personal exemption for students  .......  .......  .......  .......  ......      1.3       0.4     (\1\)       0.3       0.4        2.4
         aged 19 to 23..........................
        Exclusion of interest on State and local     0.1      0.2      0.2      0.2      0.2      0.4       0.4       0.4       0.5       0.5        3.0
         government qualified private activity
         bonds for student loans................
        Exclusion of interest on State and local     0.8      0.8      0.9      1.0      1.0      2.0       2.1       2.2       2.5       2.6       16.0
         government qualified private activity
         bonds for private nonprofit and
         qualified public educational facilities
        Credit for holders of qualified zone         0.1      0.2      0.2      0.2      0.2  ........  ........  ........  ........  .......        1.0
         academy bonds..........................
        Deduction for charitable contributions       0.4      0.4      0.5      0.5      0.5      6.0       6.3       6.6       7.0       7.7       35.9
         to educational institutions............
        Above-the-line deduction for teacher      .......  .......  .......  .......  ......      0.2     (\1\)   ........  ........  .......        0.2
         classroom expenses.....................
        Credits for tuition for post-secondary
         education \2\:
            Hope credit.........................  .......  .......  .......  .......  ......      2.7       1.8       2.0       2.6       2.7       11.8
            Lifetime learning credit............  .......  .......  .......  .......  ......      1.9       1.2       2.0       2.8       2.9       10.8
        Exclusion of tax on earnings of
         qualified tuition programs \2\:
            Prepaid tuition programs............  .......  .......  .......  .......  ......      0.1       0.1       0.1       0.2       0.2        0.6
            Savings account programs............  .......  .......  .......  .......  ......      0.5       0.5       0.8       1.1       1.3        4.1
    Employment:
        Exclusion of employee meals and lodging   .......  .......  .......  .......  ......      0.9       1.0       1.0       1.0       1.1        5.1
         (other than military)..................
        Exclusion of benefits provided under      .......  .......  .......  .......  ......     33.6      36.8      40.3      44.8      45.9      201.4
         cafeteria plans \4\....................
        Exclusion of housing allowances for       .......  .......  .......  .......  ......      0.6       0.6       0.7       0.7       0.7        3.3
         ministers..............................
        Exclusion of miscellaneous fringe         .......  .......  .......  .......  ......      6.3       6.4       6.6       7.5       8.0       34.8
         benefits...............................
        Exclusion of employee awards............  .......  .......  .......  .......  ......      0.2       0.2       0.2       0.2       0.2        0.9
        Exclusion of income earned by voluntary   .......  .......  .......  .......  ......      2.0       2.1       2.1       2.2       2.3       10.7
         employees' beneficiary associations....
        Special tax provisions for employee          0.9      1.0      1.1      1.2      1.2      0.5       0.5       0.5       0.5       0.5        6.9
         stock ownership plans (ESOPs)..........
        Deferral of taxation on spread on
         acquisition of stock under incentive
         stock option plans and employee stock
         purchase plans \2\:
            Deferral of taxation on spread on       -0.9     -0.9     -0.9     -1.0     -1.0      0.3       0.3       0.3       0.3       0.2       -3.3
             acquisition of stock under
             incentive stock option plans*......
            Deferral of taxation on spread on       -0.2     -0.2     -0.2     -0.3     -0.3      0.1       0.1       0.1       0.1       0.1       -0.6
             employee stock purchase plans*.....
        Disallowance of deduction for excess        -0.2     -0.2     -0.2     -0.2     -0.2  ........  ........  ........  ........  .......       -1.0
         parachute payments (applicable if
         payments to a disqualified individual
         are contingent on a change of control
         of a corporation and are equal to or
         greater than three times the
         individual's annualized includible
         compensation) \5\*.....................
        One million dollar cap on deductible        -0.5     -0.5     -0.5     -0.5     -0.5  ........  ........  ........  ........  .......       -2.6
         compensation for covered employees of
         publicly held corporations \5\*........
    Social services:
        Nonrefundable tax credit for children     .......  .......  .......  .......  ......     27.3      27.1      27.2      14.1       9.4      105.1
         under age 17 \6,7\.....................
        Credit for child and dependent care and   .......  .......  .......  .......  ......      3.1       2.6       2.6       2.5       2.4       13.2
         exclusion of employer-provided child
         care \8\...............................
        Credit for employer-provided dependent    .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
         care...................................
        Exclusion of certain foster care          .......  .......  .......  .......  ......      0.7       0.7       0.8       0.8       0.9        3.9
         payments...............................
        Adoption credit and employee adoption     .......  .......  .......  .......  ......      0.4       0.4       0.4       0.1     (\1\)        1.3
         benefits exclusion.....................
        Deduction for charitable contributions,      2.4      2.5      2.6      2.6      2.7     34.4      35.9      37.7      40.2      43.9      204.9
         other than for education and health \9\
        Credit for disabled access expenditures.   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.3
Health
    Exclusion of employer contributions for       .......  .......  .......  .......  ......    116.8     127.4     136.9     145.0     154.2      680.3
     health care, health insurance premiums, and
     long-term care insurance premiums \10\.....
    Exclusion of medical care and TRICARE         .......  .......  .......  .......  ......      2.1       2.2       2.3       2.5       2.6       11.7
     medical insurance for military dependents,
     retirees, and retiree dependents not
     enrolled in Medicare.......................
    Exclusion of health insurance benefits for    .......  .......  .......  .......  ......      1.2       1.3       1.4       1.7       1.9        7.5
     military retirees and retiree dependents
     enrolled in Medicare.......................
    Deduction for health insurance premiums and   .......  .......  .......  .......  ......      4.4       4.8       5.2       5.8       6.3       26.4
     long-term care insurance premiums by the
     self-employed..............................
    Deduction for medical expenses and long-term  .......  .......  .......  .......  ......      9.2      10.6      12.2      16.4      19.4       67.9
     care expenses..............................
    Exclusion of workers' compensation benefits   .......  .......  .......  .......  ......      8.1       8.8       9.5      10.3      11.2       47.8
     (medical benefits).........................
    Health savings accounts.....................  .......  .......  .......  .......  ......      0.5       0.7       0.9       1.2       1.6        4.9
    Exclusion of interest on State and local         0.6      0.6      0.7      0.7      0.8      1.5       1.6       1.7       1.9       2.0       12.1
     government qualified private activity bonds
     for private nonprofit hospital facilities..
    Deduction for charitable contributions to        0.3      0.3      0.3      0.3      0.3      3.9       4.0       4.3       4.6       5.0       23.2
     health organizations.......................
    Credit for purchase of health insurance by    .......  .......  .......  .......  ......      0.1       0.1       0.2       0.2       0.2        0.7
     certain displaced persons \3\..............
Medicare
    Exclusion of Medicare benefits:
        Hospital insurance (Part A).............  .......  .......  .......  .......  ......     21.9      23.7      25.7      30.1      33.1      134.4
        Supplementary medical insurance (Part B)  .......  .......  .......  .......  ......     14.6      16.0      17.7      21.1      23.5       92.9
        Prescription drug insurance (Part D)....  .......  .......  .......  .......  ......      4.5       5.3       5.9       6.9       6.8       29.3
        Exclusion of certain subsidies to            1.1      1.1      1.1      1.1      1.1  ........  ........  ........  ........  .......        5.4
         employers who maintain prescription
         drug plans for Medicare enrollees......
Income Security
    Exclusion of workers' compensation benefits   .......  .......  .......  .......  ......      2.7       2.7       2.7       3.0       3.1       14.2
     (disability and survivors payments)........
    Exclusion of damages on account of personal   .......  .......  .......  .......  ......      1.5       1.5       1.5       1.6       1.6        7.7
     physical injuries or physical sickness.....
    Exclusion of special benefits for disabled    .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
     coal miners................................
    Exclusion of cash public assistance benefits  .......  .......  .......  .......  ......      3.0       3.0       3.1       3.4       4.4       16.9
    Net exclusion of pension contributions and
     earnings:
        Plans covering partners and sole          .......  .......  .......  .......  ......      9.7       9.8      13.9      18.1      19.9       71.4
         proprietors (sometimes referred to as
         ``Keogh plans'').......................
        Defined benefit plans...................  .......  .......  .......  .......  ......     42.4      42.8      42.7      42.6      42.4      212.9
        Defined contribution plans..............  .......  .......  .......  .......  ......     51.2      55.2      68.1      77.8      89.1      341.4
    Individual retirement arrangements \2\:
        Traditional IRAs........................  .......  .......  .......  .......  ......     13.8      15.6      17.0      15.5      16.2       78.0
        Roth IRAs...............................  .......  .......  .......  .......  ......      2.5       3.1       3.8       4.9       6.0       20.3
        Credit for certain individuals for        .......  .......  .......  .......  ......      0.8       0.8       0.8       0.8       0.8        4.1
         elective deferrals and IRA
         contributions..........................
    Exclusion of other employee benefits:
        Premiums on group term life insurance...  .......  .......  .......  .......  ......      2.6       2.7       2.7       2.7       2.7       13.4
        Premiums on accident and disability       .......  .......  .......  .......  ......      2.9       3.0       3.1       3.3       3.5       15.8
         insurance..............................
    Additional standard deduction for the blind   .......  .......  .......  .......  ......      2.0       1.9       1.8       2.2       2.6       10.5
     and the elderly............................
    Deduction for casualty and theft losses.....  .......  .......  .......  .......  ......      0.2       0.2       0.2       0.2       0.3        1.2
    Nonrefundable earned income credit \7\......  .......  .......  .......  .......  ......      6.2       6.3       6.4       7.9       8.7       35.4
    Recovery rebate \3\.........................  .......  .......  .......  .......  ......     95.0      20.4   ........  ........  .......      115.4
    Phase out of the personal exemption and       .......  .......  .......  .......  ......    -11.1     -35.7     -64.5     -54.8     -44.2     -210.2
     disallowance of the personal exemption and
     the standard deduction against the
     alternative minimum tax*...................
    Exclusion of survivor annuities paid to       .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
     families of public safety officers killed
     in the line of duty........................
    Exclusion of disaster mitigation payments...   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
Social Security and Railroad Retirement
    Exclusion of untaxed social security and      .......  .......  .......  .......  ......     24.2      25.7      27.8      34.1      35.3      147.1
     railroad retirement benefits...............
Veterans' Benefits and Services
    Exclusion of veterans' disability             .......  .......  .......  .......  ......      3.6       3.7       3.8       4.1       4.2       19.4
     compensation...............................
    Exclusion of veterans' pensions.............  .......  .......  .......  .......  ......      0.1       0.1       0.1       0.1       0.1        0.6
    Exclusion of veterans' readjustment benefits  .......  .......  .......  .......  ......      0.4       0.5       0.8       1.0       1.2        3.9
    Exclusion of interest on State and local       (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1       0.1       0.1       0.1       0.1        0.4
     government qualified private activity bonds
     for veterans' housing......................
General Purpose Fiscal Assistance
    Exclusion of interest on public purpose          7.4      7.7      8.0      8.4      8.8     19.0      19.7      20.4      23.2      24.0      146.6
     State and local government bonds...........
    Deducation of nonbusiness State and local     .......  .......  .......  .......  ......     48.0      37.0      33.8      57.0      66.4      242.1
     government income taxes, sales taxes, and
     personal property taxes....................
Interest
    Deferral of interest on savings bonds.......  .......  .......  .......  .......  ......      1.2       1.2       1.2       1.3       1.3        6.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Positive tax expenditure of less than $50 million.
\2\ In prior tables, this provision was presented on a consolidated basis.
\3\ Includes both refundable and nonrefundable amounts.
\4\ Estimate includes amounts of employer-provided health insurance purchased through cafeteria plans and employer-provided child care purchased through
  dependent care flexible spending accounts. These amounts are also included in other line items in this table.
\5\ Estimate does not include effects of changes made by the Emergency Economic Stabilization Act of 2008.
\6\ Tax expenditure estimate includes amounts used to offset income taxes and amounts used to offset other taxes.
\7\ Refundable amounts are in Table 1.
\8\ Estimate includes employer-provided child care purchased through dependent care flexible spending accounts.
\9\ In addition to the general charitable deduction, the tax expenditure accounts for the higher percentage limitation for public charities, the fair
  market value deduction for related-used tangible personal property, the enhanced deduction for inventory, the fair market value deduction for publicly
  traded stock and exceptions to the partial interest rules.
\10\ Estimate includes employer-provided health insurance purchased through cafeteria plans.
 
Note.--Details may not add to totals due to rounding. An ``*'' indicates a negative tax expenditure for the 2008-12 period.
 
Source: Joint Committee on Taxation.


                                                               BUSINESS SYNTHETIC SPENDING
                                     Table 3.--Tax Expenditure Estimates By Budget Function, Fiscal Years 2008-2012
                                                                  [Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Corporations                                   Individuals                      Total
                    Function                     -------------------------------------------------------------------------------------------------------
                                                    2008     2009     2010     2011    2012     2008      2009      2010      2011      2012    2008-12
--------------------------------------------------------------------------------------------------------------------------------------------------------
International Affairs
    Inventory property sales source rule             6.8      7.0      7.2      7.4      7.6  ........  ........  ........  ........  .......       36.0
     exception..................................
    Deduction for foreign taxes instead of a         0.2      0.2      0.2      0.2      0.3    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        1.3
     credit.....................................
    Interest expense allocation:
        Unavailability of symmetric worldwide       -2.2     -2.5     -2.7     -2.9     -0.5  ........  ........  ........  ........  .......      -10.8
         method*................................
        Separate grouping of affiliated              1.0      1.1      1.2      1.3      1.4  ........  ........  ........  ........  .......        6.0
         financial companies....................
    Apportionment of research and development        0.3      0.3      0.3      0.3      0.4  ........  ........  ........  ........  .......        1.6
     expenses for determination of foreign tax
     credits....................................
    Special rules for interest-charge domestic       0.4      0.5      0.5      0.1      0.1  ........  ........  ........  ........  .......        1.6
     international sales corporations...........
    Taxation of real property gains of foreign     (\2\)    (\2\)    (\2\)    (\2\)    (\2\)    (\2\)     (\2\)     (\2\)     (\2\)     (\2\)       -0.3
     persons*...................................
    Tonnage tax.................................     0.1      0.1      0.1      0.1      0.1  ........  ........  ........  ........  .......        0.5
General Science, Space, and Technology
    Credit for increasing research activities...     4.9      5.6      3.6      2.8      2.2      0.1       0.1     (\1\)     (\1\)     (\1\)       19.5
    Expensing of research and experimental           3.1      4.8      5.6      6.7      7.8      0.1       0.1       0.1       0.1       0.2       28.3
     expenditures...............................
Energy
    Energy related credits:
        Credit for enhanced oil recovery costs..   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
        Credit for producing fuels from a non-       0.1      0.1    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.6
         conventional source....................
        Credits for alcohol fuels \3\...........     0.1      0.1      0.1    (\1\)   ......  ........  ........  ........  ........  .......        0.3
        Energy credit (section 48):
            Solar...............................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)      (\1\)
            Geothermal..........................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)      (\1\)
            Fuel cells..........................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)      (\1\)
            Microturbines.......................  .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)      (\1\)
        Credits for electricity production from
         renewable resources (section 45):
            Wind................................     0.6      0.8      0.9      0.9      0.9    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        4.1
            Closed-loop biomass.................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......      (\1\)
            Geothermal..........................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.2
            Qualified hydropower................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
            Solar (limited to facilities placed    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
             in service before 1/1/06)..........
            Small irrigation power..............   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
            Municipal solid waste...............   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.2
            Open-loop biomass...................     0.3      0.4      0.3      0.2      0.2    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        1.5
        Credits for investments in clean coal        0.2      0.2      0.2      0.1      0.1  ........  ........  ........  ........  .......        0.8
         facilities.............................
        Coal production credits:
            Refined coal........................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
            Indian coal.........................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
        Credit for the production of energy-         0.1      0.1      0.1    (\1\)   ......  ........  ........  ........  ........  .......        0.3
         efficient appliances...................
        Credits for alternative technology
         vehicles:
            Hybrid vehicles.....................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.2       0.2       0.2       0.1     (\1\)        0.9
            Other alternative fuel vehicles.....   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
        Credit for clean-fuel vehicle refueling    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
         property...............................
        Residential energy efficient property     .......  .......  .......  .......  ......    (\1\)     (\1\)   ........  ........  .......        0.1
         credit.................................
        New energy efficient home credit........   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
    Energy-related exclusions from income:
        Exclusion of interest on State and local   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1       0.1       0.1       0.1       0.1        0.6
         government qualified private activity
         bonds for energy production facilities.
    Energy-related deductions:
        Deduction for expenditures on energy-      (\1\)      0.1      0.1      0.1      0.1    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
         efficient commercial building property.
        Eight-year inclusion from sale of            0.3      0.2    (\1\)     -0.1     -0.1    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.3
         electric transmission assets to
         independent utilities..................
        Expensing of exploration and development
         costs:
            Oil and gas.........................     2.1      3.0      1.7      0.4      0.4    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        7.2
            Other fuels.........................   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.3
        Excess of percentage over cost
         depletion:
            Oil and gas.........................     1.3      1.4      1.4      1.4      1.4    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        7.1
            Other fuels.........................     0.1      0.1      0.1      0.1      0.1    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.8
        Amortization of geological and               0.1      0.2      0.2      0.2      0.2    (\1\)       0.1       0.1       0.1       0.1        1.3
         geophysical expenditures associated
         with oil and gas exploration...........
        Amortization of air pollution control        0.1      0.1      0.1      0.2      0.2    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.6
         facilities.............................
        Depreciation recovery periods for energy
         specific items:
            Five-year MACRS for certain energy       0.2      0.1      0.1      0.1      0.1    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.5
             property (solar, wind, etc.).......
            10-year MACRS for smart electric       (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1     (\1\)     (\1\)     (\1\)     (\1\)        0.1
             distribution property..............
            15-year MACRS for certain electric     (\1\)      0.1      0.1      0.2      0.2    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.6
             transmission property..............
            15-year MACRS for natural gas            0.1      0.1      0.1      0.1      0.1    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.6
             distribution line..................
        Election to expense 50 percent of            0.4      1.1      0.9      0.8      0.6    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        3.8
         qualified property used to refine
         liquid fuels...........................
        Exceptions for publicly traded            .......  .......  .......  .......  ......      0.4       0.4       0.5       0.6       0.6        2.6
         partnership with qualified income
         derived from certain energy-related
         activities.............................
Natural Resources and Environment
    Special depreciation allowance for certain     (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
     reuse and recycling property...............
    Expensing of exploration and development         0.1      0.1      0.1      0.1      0.1    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.5
     costs, nonfuel minerals....................
    Excess of percentage over cost depletion,        0.1      0.1      0.1      0.1      0.1      0.1       0.1       0.1       0.1       0.1        1.2
     nonfuel minerals...........................
    Expensing of timber-growing costs...........     0.2      0.2      0.2      0.2      0.2    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        1.1
    Special rules for mining reclamation           (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
     reserves...................................
    Special tax rate for nuclear decommissioning     0.7      0.8      0.8      0.9      1.0  ........  ........  ........  ........  .......        4.2
     reserve funds..............................
    Exclusion of contributions in aid of           (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.2
     construction for water and sewer utilities.
    Exclusion of earnings of certain               (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
     environmental settlement funds.............
    Amortization and expensing of reforestation    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1       0.1       0.1       0.1       0.1        0.5
     expenditures...............................
    Gain or loss in the case of timber, coal, or  .......  .......  .......  .......  ......      0.4       0.4       0.4       0.4       0.4        2.1
     domestic iron ore..........................
    Special tax rate for qualified timber gain..   (\1\)      0.1    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
    Treatment of income from exploration and      .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
     mining of natural resources as qualifying
     income under the publicly-traded
     partnership rules..........................
Agriculture
    Expensing of soil and water conservation       (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
     expenditures...............................
    Expensing of the costs of raising dairy and    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1       0.1       0.1       0.1       0.1        0.5
     breeding cattle............................
    Exclusion of cost-sharing payments..........   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        1.0
    Exclusion of cancellation of indebtedness     .......  .......  .......  .......  ......      0.1       0.1       0.1       0.1       0.1        0.5
     income of farmers..........................
    Income averaging for farmers and fishermen..  .......  .......  .......  .......  ......    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
    Five-year carryback period for net operating   (\1\)      0.1      0.1      0.1      0.1    (\1\)       0.1       0.1       0.1       0.1        0.7
     losses attributable to farming.............
    Expensing by farmers for fertilizer and soil   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.2       0.1       0.1       0.1       0.1        0.6
     conditioner costs..........................
Commerce and Housing
    Financial institutions:
        Exemption of credit union income........     1.4      1.5      1.6      1.7      1.8  ........  ........  ........  ........  .......        7.9
    Insurance companies:
        Exclusion of investment income on life       2.6      2.7      2.7      2.8      2.9     26.8      27.5      28.2      28.9      29.7      154.8
         insurance and annuity contracts........
        Small life insurance company taxable         0.1      0.1      0.1      0.1      0.1  ........  ........  ........  ........  .......        0.3
         income adjustment......................
        Special treatment of life insurance          2.0      2.1      2.2      2.3      2.4  ........  ........  ........  ........  .......       11.0
         company reserves.......................
        Special deduction for Blue Cross and         1.0      1.0      1.1      1.1      1.1  ........  ........  ........  ........  .......        5.3
         Blue Shield companies..................
        Tax-exempt status and election to be         0.1      0.1      0.1      0.1      0.1  ........  ........  ........  ........  .......        0.3
         taxed only on investment income for
         certain small property and casualty
         insurance companies....................
        Interest rate and discounting period         0.6      0.6      0.7      0.7      0.7  ........  ........  ........  ........  .......        3.2
         assumptions for reserves of property
         and casualty insurance companies.......
        15-percent proration for property and        0.3      0.3      0.3      0.4      0.4  ........  ........  ........  ........  .......        1.7
         casualty insurance companies...........
    Housing:
        Credit for low-income housing...........     4.8      5.1      5.5      5.9      6.3      0.6       0.6       0.7       0.7       0.7       30.9
        Credit for rehabilitation of historic        0.3      0.3      0.3      0.4      0.4      0.1       0.1       0.1       0.2       0.2        2.4
         structures.............................
        Credit for rehabilitation of structures,   (\1\)    (\1\)    (\1\)      1.0      1.0      0.1       0.1       0.2       0.2       0.2        2.8
         other than historic structures.........
        Exclusion of interest on State and local     0.2      0.2      0.2      0.3      0.3      0.6       0.6       0.6       0.7       0.7        4.5
         government qualified private activity
         bonds for rental housing...............
    Other business and commerce:
        Exclusion of interest on State and local     0.1      0.1      0.1      0.1      0.2      0.3       0.3       0.3       0.4       0.4        2.4
         government small-issue qualified
         private activity bonds.................
        Carryover basis of capital gains on       .......  .......  .......  .......  ......      2.5       1.8      14.3      14.6       3.5       36.7
         gifts..................................
        15-year recovery period for:
            Leasehold improvement property......     0.4      1.0      1.0      0.6      0.5      0.5       1.2       1.2       0.7       0.7        7.7
            Restaurant property.................     0.1      0.1      0.1      0.1      0.1      0.1       0.1       0.1       0.1       0.1        1.2
            Retail improvements.................   (\1\)    (\1\)    (\1\)      0.1      0.1    (\1\)     (\1\)     (\1\)       0.1       0.1        0.4
            Retail motor fuels outlets..........     0.1      0.2      0.1      0.1      0.1      0.1       0.2       0.2       0.1       0.1        1.5
        Seven-year recovery period for             (\1\)      0.1    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
         motorsports entertainment complexes....
        Deferral of gain on non-dealer               1.1      1.2      1.3      1.4      1.5      0.5       0.5       0.6       0.7       0.7        9.5
         installment sales......................
        Deferral of gain on like-kind exchanges.     3.0      3.0      3.1      3.2      3.3      1.1       1.1       1.2       1.1       1.1       21.2
        Expensing under section 179 of               1.0      1.0      0.5     -0.1     -1.4      4.4       4.1       2.0      -0.5      -5.8        5.2
         depreciable business property..........
        Amortization of business startup costs..   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.8       0.9       0.9       1.0       1.0        4.6
        Reduced rates on first $10,000,000 of        3.3      3.3      3.2      3.2      3.2    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)       16.3
         corporate taxable income...............
        Exemptions from imputed interest rules..   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.5       0.5       0.5       0.5       0.6        2.6
        Expensing of magazine circulation          (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
         expenditures...........................
        Special rules for magazines, paperback     (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
         book, and record returns...............
        Completed contract rules................     0.5      0.5      0.6      0.6      0.7    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        3.0
        Cash accounting, other than agriculture.   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.9       0.9       1.0       1.0       1.1        5.0
        Credit for employer-paid FICA taxes on       0.3      0.3      0.3      0.3      0.4      0.2       0.2       0.2       0.2       0.2        2.6
         tips...................................
        Deduction for certain film and               0.2      0.2    (\2\)    (\2\)    (\2\)    (\1\)     (\1\)     (\2\)     (\2\)     (\2\)        0.1
         television production costs............
        Deduction for income attributable to         5.5      6.0      7.3      8.6      9.4      1.8       2.0       2.7       3.5       3.9       50.7
         domestic production activities.........
        Credit for the cost of carrying tax-paid   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
         distilled spirits in wholesale
         inventories............................
        Reduced rates of tax on dividends and     .......  .......  .......  .......  ......    150.2     148.1     161.6     107.5     100.6      668.1
         long-term capital gains................
        Exclusion of capital gains at death.....  .......  .......  .......  .......  ......     26.5      28.3      30.4      37.6      45.2      168.0
        Expensing of costs to remove               (\1\)    (\1\)    (\1\)    (\1\)    (\1\)      0.1       0.1       0.1       0.1       0.1        0.6
         architectural and transportation
         barriers to the handicapped and elderly
        Reduced tax rate on small business stock  .......  .......  .......  .......  ......      0.5       0.5       0.5       0.5       0.4        2.4
         gains..................................
        Distributions in redemption of stock to   .......  .......  .......  .......  ......      0.3       0.3       0.3     (\1\)       0.5        1.3
         pay death taxes........................
        Ordinary gain or loss treatment for sale  .......     2.6      0.4      0.2      0.1  ........      0.1     (\1\)     (\1\)     (\1\)        3.4
         or exchange of Fannie Mae and Freddie
         Mac preferred stock by certain
         financial institutions.................
        Inventory methods and valuation:
            Last in first out...................     3.5      3.7      3.9      4.1      4.3      0.5       0.5       0.5       0.6       0.6       22.2
            Lower of cost or market.............     2.2      0.3      0.4      0.4      0.5      0.6       0.1       0.1       0.1       0.1        4.8
            Specific identification for            (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.2
             homogeneous products...............
        Exclusion of gain or loss on sale or       (\1\)    (\1\)    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.1
         exchange of brownfield property........
        60-40 rule for gain or loss from section     0.1      0.1      0.1      0.1      0.1      2.2       2.1       2.4       1.8       1.9       10.8
         1256 contracts.........................
        Net alternative minimum tax attributable    -0.7     -0.7     -0.6     -0.6     -0.6     -0.1      -0.1      -0.1      -0.1      -0.1       -3.6
         to depreciation adjustment and net
         operating loss limitation*.............
        Exclusion of interest on State and local   (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
         qualified private activity bonds for
         green buildings and sustainable design
         projects...............................
Transportation
    Credit for certain expenditures on railroad      0.1      0.1    (\1\)    (\1\)    (\1\)  ........  ........  ........  ........  .......        0.2
     track maintenance..........................
    Deferral of tax on capital construction          0.1      0.1      0.1      0.1      0.1  ........  ........  ........  ........  .......        0.5
     funds of shipping companies................
    Exclusion of interest on State and local       (\1\)    (\1\)    (\1\)    (\1\)    (\1\)    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)        0.1
     government qualified private activity bonds
     for highway projects and rail-truck
     transfer facilities........................
Community and Regional Development
    Accelerated depreciation for business            0.2      0.2      0.1     -0.1     -0.2      0.1       0.1     (\1\)      -0.1      -0.1        0.2
     property on Indian reservations............
    Credit for Indian reservation employment....   (\1\)    (\1\)    (\1\)   .......  ......    (\1\)     (\1\)     (\1\)   ........  .......        0.2
    Exclusion of interest on State and local         0.3      0.3      0.3      0.3      0.3      0.7       0.7       0.7       0.8       0.9        5.4
     government qualified private activity bonds
     for private airports, docks, and mass-
     commuting facilities.......................
    Exclusion of interest on State and local         0.2      0.2      0.2      0.2      0.2      0.4       0.4       0.4       0.5       0.5        3.1
     government qualified private activity bonds
     for sewage, water, and hazardous waste
     facilities.................................
Education, Training, Employment, and Social
 Services
    Employment:
        Work opportunity tax credit.............     0.5      0.5      0.6      0.5      0.4      0.1       0.1       0.1       0.1       0.1        3.1
Health
    Credit for orphan drug research.............     0.3      0.3      0.3      0.4      0.4    (\1\)     (\1\)     (\1\)     (\1\)     (\1\)       1.7
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Positive tax expenditure of less than $50 million.
\2\ Negative tax expenditure of less than $50 million.
\3\ In addition, the credit from excise tax for alcohol fuels results in a reduction in excise tax receipts, net of income tax effect, of $13.6 billion
  over the fiscal years 2008 through 2012.
 
Note.--Details may not add to totals due to rounding. An ``*'' indicates a negative tax expenditure for the 2008-12 period.
 
Source: Joint Committee on Taxation.


                                                    MAJOR PROVISIONS NOT CLASSIFIED AS TAX SUBSIDIES
                                   Table 4.--Tax Expenditure Estimates By Budget Function, Fiscal Years 2008-2012 \1\
                                                                  [Billions of dollars]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Corporations                                   Individuals
                    Function                     ---------------------------------------------------------------------------------------------   Total
                                                    2008     2009     2010     2011    2012     2008      2009      2010      2011      2012    2008-12
--------------------------------------------------------------------------------------------------------------------------------------------------------
International Affairs
    Deferral of active income of controlled          9.6     10.5     11.3     12.1     12.9  ........  ........  ........  ........  .......       56.4
     foreign corporations.......................
    Deferral of active financing income of           2.6      2.9      1.0   .......  ......  ........  ........  ........  ........  .......        6.5
     controlled foreign corporations............
Commerce and Housing
    Housing:
        Depreciation of rental housing in excess     0.4      0.5      0.5      0.5      0.5      3.8       4.1       4.8       4.9       4.8       24.9
         of alternative depreciation system.....
    Other business and commerce:
        Depreciation of buildings other than         0.9      1.7      1.7      1.1      1.1      0.7       1.4       1.4       0.9       0.9       12.1
         rental housing in excess of alternative
         depreciation system....................
        Depreciation of equipment in excess of      32.6     20.7      6.3     13.5     18.6      6.9       4.4       1.3       2.9       3.9     111.1
         the alternative depreciation system....
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ These calculations are provided for historical comparison. The deferral calculations use full inclusion of the income of controlled foreign
  corporations as the standard, and the depreciation calculations use straight-line depreciation as the standard.
 
Note.--Details may not add to totals due to rounding.
 
Source: Joint Committee on Taxation.


 Table 5.--Distribution by Income Class of All Returns, Taxable Returns, Itemized Returns, and Tax Liability at
                               2007 Rates and 2007 Law and 2007 Income Levels \1\
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                              All Returns    Taxable      Itemized       Tax
                      Income Class \2\                            \3\        Returns      Returns     Liability
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................................       28,213          164          427      -$7,010
$10,000 to $20,000..........................................       22,240        4,997        1,059      -16,542
$20,000 to $30,000..........................................       16,542        7,845        1,815       -8,413
$30,000 to $40,000..........................................       14,599        9,180        2,904        6,349
$40,000 to $50,000..........................................       12,532        9,211        3,599       18,889
$50,000 to $75,000..........................................       21,923       19,210        9,307       77,056
$75,000 to $100,000.........................................       13,976       13,498        8,265       87,698
$100,000 to $200,000........................................       19,207       19,066       15,529      259,101
$200,000 and over...........................................        5,566        5,554        5,143      625,936
                                                             ---------------------------------------------------
      Total.................................................      154,798       88,723       48,046  $1,043,065
----------------------------------------------------------------------------------------------------------------
\1\ Tax law as in effect on December 31, 2007 is applied to the 2008 level and sources of income and their
  distribution among taxpayers.
\2\ The income concept used to place tax returns into classes is adjusted gross income (``AGI'') plus: (a) tax-
  exempt interest, (b) employer contributions for health plans and life insurance, (c) employer share of FICA
  tax, (d) workers' compensation, (e) nontaxable Social Security benefits, (f) insurance value of Medicare
  benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens living
  abroad.
\3\ Includes filing and non-filing units. Filing units include all taxable and nontaxable returns. Non-filing
  units include individuals with income that is exempt from Federal income taxation (e.g., transfer payments,
  interest from tax-exempt bonds, etc.). Excludes individuals who are dependents of other taxpayers and
  taxpayers with negative income.
 
Note.--Details may not add to totals due to rounding.
 
Source: Joint Committee on Taxation.


   Table 6.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2007 Rates and 2007
                                                Income Levels \1\
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                  Medical Deduction          Real Estate Tax
                                                             --------------------------         Deduction
                      Income Class \2\                                                 -------------------------
                                                                Returns       Amount      Returns       Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................................          853           $8            3        (\3\)
$10,000 to $20,000..........................................        1,329       11,308          211           27
$20,000 to $30,000..........................................        1,433       11,221          709          129
$30,000 to $40,000..........................................        1,352        9,316        1,635          357
$40,000 to $50,000..........................................        1,219        8,551        2,406          636
$50,000 to $75,000..........................................        2,296       15,760        7,339        2,880
$75,000 to $100,000.........................................        1,204       10,311        7,160        3,364
$100,000 to $200,000........................................          923       10,237       13,998       11,583
$200,000 and over...........................................           93          719        2,843        5,434
                                                             ---------------------------------------------------
      Total.................................................       10,702      $77,431       36,304     $24,411
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


   Table 6.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2007 Rates and 2007
                                          Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                               State and Local Income,  Charitable Contributions
                                                                 Sales and Personal             Deduction
                      Income Class \2\                         Property Tax Deduction  -------------------------
                                                             --------------------------
                                                                Returns       Amount      Returns       Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................................           13        (\3\)           11           $1
$10,000 to $20,000..........................................          305          $12          219           22
$20,000 to $30,000..........................................          992           77          771          113
$30,000 to $40,000..........................................        2,248          255        1,791          338
$40,000 to $50,000..........................................        3,149          520        2,541          651
$50,000 to $75,000..........................................        8,985        2,805        7,538        2,706
$75,000 to $100,000.........................................        8,321        3,693        7,269        3,254
$100,000 to $200,000........................................       15,304       15,307       14,401       11,236
$200,000 and over...........................................        4,037       24,468        4,903       22,580
                                                             ---------------------------------------------------
      Total.................................................       43,354      $47,137       39,442     $40,902
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


   Table 6.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2007 Rates and 2007
                                          Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                  Child Care Credit     Earned Income Credit \4\
                      Income Class \2\                       ---------------------------------------------------
                                                                Returns       Amount      Returns       Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................................  ...........  ...........        5,795       $6,660
$10,000 to $20,000..........................................          215          $57        6,575       17,091
$20,000 to $30,000..........................................          817          453        4,767       12,631
$30,000 to $40,000..........................................          812          511        3,937        7,100
$40,000 to $50,000..........................................          563          308        2,167        2,867
$50,000 to $75,000..........................................        1,274          686          827          738
$75,000 to $100,000.........................................        1,007          538            9           13
$100,000 to $200,000........................................        1,316          701        (\5\)            1
$200,000 and over...........................................          264          138  ...........  ...........
                                                             ---------------------------------------------------
      Total.................................................        6,269       $3,391       24,076     $47,102
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


   Table 6.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2007 Rates and 2007
                                          Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                               Untaxed Social Security   Child  Tax  Credit \4\
                                                               and Railroad Retirement -------------------------
                      Income Class \2\                                Benefits
                                                             --------------------------   Returns       Amount
                                                                Returns       Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................................           73           $2          215         $296
$10,000 to $20,000..........................................        7,663        2,613        2,894        1,519
$20,000 to $30,000..........................................        4,506        4,980        4,033        4,517
$30,000 to $40,000..........................................        3,168        4,333        3,984        5,794
$40,000 to $50,000..........................................        2,724        3,902        3,373        5,409
$50,000 to $75,000..........................................        4,829        5,562        6,087       10,202
$75,000 to $100,000.........................................        2,571        1,008        4,708        8,105
$100,000 to $200,000........................................        2,577          757        6,242        9,546
$200,000 and over...........................................          842          300           17           11
                                                             ---------------------------------------------------
      Total.................................................       28,952      $23,456       31,553     $45,402
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


   Table 6.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2007 Rates and 2007
                                          Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                 Education  Credits       Student Loan Interest
                                                             --------------------------         Deduction
                      Income Class \2\                                                 -------------------------
                                                                Returns       Amount      Returns       Amount
----------------------------------------------------------------------------------------------------------------
 Below $10,000..............................................            1        (\3\)           13           $1
 $10,000 to $20,000.........................................          492         $103          212           13
 $20,000 to $30,000.........................................          901          379          433           33
 $30,000 to $40,000.........................................          894          456          700           61
 $40,000 to $50,000.........................................          819          459          745           85
 $50,000 to $75,000.........................................        1,487          914        1,593          213
 $75,000 to $100,000........................................        1,370        1,040        1,166          127
 $100,000 to $200,000.......................................        1,217          899        1,679          271
 $200,000 and over..........................................        (\5\)        (\3\)        (\5\)        (\3\)
                                                             ---------------------------------------------------
      Total.................................................        7,180       $4,250        6,541         $804
----------------------------------------------------------------------------------------------------------------
Footnotes appear at the end of the table.


 
   Table 6.--Distribution by Income Class of Selected Individual Tax Expenditure Items, at 2007 Rates and 2007
                                          Income Levels \1\--Continued
                          [Money amounts in millions of dollars, returns in thousands]
----------------------------------------------------------------------------------------------------------------
                                                                  Mortgage  Interest        Phase Out of the
                                                                      Deduction          Personal Exemption and
                                                             --------------------------  AMT Disallowance of the
                      Income Class \2\                                                   Personal Exemption and
                                                                                         the Standard Deduction
                                                                Returns       Amount   -------------------------
                                                                                          Returns       Amount
----------------------------------------------------------------------------------------------------------------
Below $10,000...............................................            5        (\3\)            1        (\6\)
$10,000 to $20,000..........................................          266          $73            9          -$4
$20,000 to $30,000..........................................          736          321            5           -3
$30,000 to $40,000..........................................        1,566          842        (\5\)        (\6\)
$40,000 to $50,000..........................................        2,307        1,513        (\5\)        (\6\)
$50,000 to $75,000..........................................        6,998        7,062           37          -25
$75,000 to $100,000.........................................        6,821        8,150           95          -82
$100,000 to $200,000........................................       13,510       28,868          984       -1,028
$200,000 and over...........................................        4,059       19,771        4,359      -10,168
                                                             ---------------------------------------------------
      Total.................................................       36,269      $66,600        5,491    -$11,310
----------------------------------------------------------------------------------------------------------------
\1\ Excludes individuals who are dependents of other taxpayers and taxpayers with negative income.
\2\ The income concept used to place tax returns into classes is adjusted gross income (``AGI'') plus: (a) tax-
  exempt interest, (b) employer contributions for health plans and life insurance, (c) employer share of FICA
  tax, (d) workers' compensation, (e) nontaxable Social Security benefits, (f) insurance value of Medicare
  benefits, (g) alternative minimum tax preference items, and (h) excluded income of U.S. citizens living
  abroad.
\3\ Positive tax expenditure of less than $500,000.
\4\ Includes the refundable portion.
\5\ Less than 500 returns.
\6\ Negative tax expenditure of less than $500,000.
Note.--Details may not add to totals due to rounding.
Source: Joint Committee on Taxation.

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