Tax expenditure

Tax expenditures are government revenue losses from tax exclusions, exemptions, deductions, credits, deferrals, and preferential tax rates. They are a counterpart to direct expenditures, in that they both are forms of government spending.

Tax expenditures function as subsidies for certain activities, they effect both axis of equity of the basic tax system by giving preferential treatment to those activities. For instance, two people who have the same income can have different effective tax rates if one of the tax payers qualifies for certain tax expenditures by owning a home, having children, or receiving employer-provided health care and pension insurance.