Task: Assessment of Effectiveness of Deductions as Tax Expenditure

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Task: Assessment of Effectiveness of Deductions as Tax Expenditure

Tax expenditures such as deductions, exclusions, tax rates, deferrals, and special credits, are considered to be the provisions that minimize or reduce the tax liability of the taxpayer (Ippolito, 45). The amount of income subject to tax is reduced by deductions and exclusions while credits reduce tax liability dollar for dollar according to the credit amount (James, 96). Therefore, this paper offers an assessment of the effectiveness of the tax expenditure.

The deductions generally reduce the income amount subject to tax. Examples of this deduction are mortgage income deductions on personal residential places as well as the exclusion of local bonds and state interest (Smith & Adam, 25). The taxpayers that have rates on marginal income benefit more from deductions and exclusion than lower-income taxpayers in the lower rate brackets because their tax liability is reduced. Itemized deductions are significantly valuable to taxpayers whose total sum of itemized deductions is more than the standard deduction amount available to all the tax filers. Charitable contributions and home mortgage interests are the largest itemized deductions.

Merits

An itemized deduction saves money for taxpayers with home equity loans or mortgages (Walker, 5). Higher-income taxpayers benefit most from deductions since their tax liability is reduced to a minimum level (Zelinsky, 12). The deduction medical and any other health benefits are transferred on a pre-tax thus the taxpayers do not pay any taxes on them hence reducing their taxable income. In addition, a deduction reduces gross income due to the expenditure incurred by the taxpayers (Aaron, 34). The deductions on taxpayers' income increase their spending which creates the economic drive of the country (Walker, 3).

Recommendation and Conclusion

 It is recommended for taxpayers with home equity loans or home mortgages to itemize to develop and adopt the trends of saving money through this expenditure approach. In addition, the taxpayers can also be able to deduct their mortgage interest for those homes that are occupied by their owners. The taxpayers should have a comparative analysis of both itemized deductions and standard deductions to choose the best between the two.

Works Cited

Aaron, Henry J., et al., eds. Taxing Capital Income. The Urban Insitute, (2017):34-42.

Ippolito, Dennis S. Deficits, Debt, and the New Politics of Tax Policy. Cambridge University Press, (2014): 45-47.

James, R. White. Tax Expenditure: Background and Evaluation Criteria. ed, U.S.GAO-Executive Guide: Effectively Implementing the Government Performance and Results Act.GGD (2016):96-118.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations... T. Nelson and Sons, (2017):25-30.

Walker, David M. Government Performance and Accountability: Tax Expenditures Represent a Substantial Federal Commitment and Need to Be Reexamined. DIANE Publishing, (2016): 1-5.

Zelinsky, Edward A. "The Counterproductive Nature of Tax Expenditure Budgets." Tax Notes 137.12 (2012).