Define tax expenditures. What are the costs and benefits to using tax expenditures for social policy rather than direct government expenditures?

Question

What will be an ideal response?

Answer 1

Tax expenditures are reductions in an individual's tax liability, either through exemptions, deductions, or credits, that are designed to further some social policy goal. One of the potential benefits is that it might be more efficient for government to further a social goal through tax policy than through direct government expenditure. For example, if the direct government expenditure would require a large bureaucracy to oversee and administer the program. The primary cost of using tax expenditures to further social policy goals is that they narrow the tax base and increase the excess burden of the tax system due to the increased distortion and the higher tax rates necessary to raise the same level of revenue.