As the incoming administration makes its policy priorities clear, Donald Trump has appointed Elon Musk to lead the “Department of Government Efficiency” or DOGE. In a Wall Street Journal op-ed coauthored by Musk, the stated goal for DOGE is “to cut the federal government down to size,” focusing on regulations, spending cuts, and administrative issues. If that’s the case, though, it could end up missing some of the largest government programs—because they’re hidden in the tax code and run by the Internal Revenue Service.
If DOGE applied the same scrutiny to so-called “tax expenditures” that it plans for regulations and spending, it could shrink the government and reduce the deficit. And it might find some easier pickings, politically, than cutting into core government spending programs.
Tax expenditures work by cutting taxes for businesses and individuals instead of cutting them checks. They can take the form of deductions, credits, preferred tax rates, or elimination of taxes entirely by excluding profits or receipts from taxable income. Like the more visible government spending programs, they can go on for years with no public attention or review.
The Treasury Department counts a total of 171 tax expenditures in the income and corporate taxes. Summing the costs is not a precise exercise because of interaction effects, but it provides a rough idea of the enormous size of tax expenditures—$1.54 trillion in 2023. This represents about 5.6 percent of gross domestic product (GDP) and is about 60 percent as large as total revenues from the income and corporate taxes in that year.
Tax expenditure reform would have several auspicious economic effects. It would reduce the federal deficit in a progressive manner, an approach that could appeal to conservatives and liberals alike. On the whole, tax expenditures are tilted toward wealthier individuals, who are more likely to use them and who receive more benefit per exemption or deduction because they face higher tax rates.
Broadening the tax base and taxing all forms of income at the same rate—exactly what closing tax expenditures would do—should be a guiding principle of effective tax reform. It would raise efficiency by eliminating the need to choose based on tax considerations. It would improve fairness by not picking favorites across different sources or uses of income. And it would simplify taxes by reducing the number of artificial distinctions between taxpayers or types of income.
Trump’s signature tax policy, the Tax Cut and Jobs Act of 2017, showed that tax expenditure reform can have political legs as well. The law reduced the benefits of deductions for state and local taxes and mortgage interest, two items formerly thought to be politically sacrosanct.
There are two general approaches to tax expenditure reform. One, proposed by Mitt Romney and others, would limit the overall deductions that any taxpayer could take. This would curtail the subsidies, but it risks throwing out the baby with the bath water. After all, some tax expenditures help society achieve auspicious goals, such as encouraging charitable giving or providing resources to parents.
The other approach to tax expenditure reform goes item by item. The tax code is riddled with narrowly carved-out subsidies—for NASCAR, coal royalties, timber sales, owners of dead citrus trees, private jets, sports stadiums, film and television production, and so on. Larger tax expenditures should also be in play. Capital gains on assets that are held until the owner dies are never taxed under the income tax. The exclusion of employer-provided health insurance subsidizes the purchase of excessive health insurance plans at a time when controlling health costs is a key priority. The mortgage interest deduction has little effect on home ownership, contrary to popular belief, and instead encourages the construction of larger, more expensive houses, which leads to higher energy costs, urban sprawl, and fewer investment funds available for businesses. The deduction for pass-through businesses has proven to be expensive, regressive, and ineffective in stimulating new investment.
Whether through broad reforms, narrow changes, or a combination of the two, tax expenditures present opportunities for the kinds of change DOGE leaders have been tasked with. The incoming Trump administration and the Republican majority in Congress would be wise to give them an overhaul.
