Tax breaks "cost" more than Social Security

Investment Analysis Clubs Macro Economic Trends and Risks
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Budget Basics: Tax Expenditures

Peter G. Peterson Foundation, January 13, 2025

Tax expenditures are a significant part of America’s tax code, playing a major role in the country’s economy. Sometimes referred to broadly as “loopholes” or “tax breaks”, tax expenditures are preferences built into the code for certain individuals and businesses. Tax expenditures come in a variety of forms including:

  • Tax exclusions allow certain categories of income to go untaxed (e.g., active duty pay earned by military personnel in a combat zone is not subject to taxation).
  • Tax exemptions shield certain assets, or the income taxpayers earn from certain assets, from taxation (e.g., individuals can exempt interest earned from some state or local bonds, and some charitable organizations are exempt from paying income and property taxes).
  • Tax deductions allow taxpayers to deduct expenses from their taxable income (e.g., deduction on medical expenses in excess of 7.5 percent of individual income).
  • Tax credits reduce the amount of taxes owed. Refundable credits provide cash back to the taxpayer when taxes owed are less than the credit due…

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In 2024 tax expenditures totaled nearly $1.9 trillion. That amount equals about 65 percent of the revenues that the federal government actually collected in income taxes and exceeds what was spent by any single agency or spending program, including Social Security and the Department of Defense.

In 2024, just five tax provisions accounted for over $1.1 trillion – which is more than the government spent on Medicare or defense that year. Those tax expenditures include:

Exclusion of pension contributions and earnings ($395 billion)

Exclusions of and reductions on dividends and long-term capital gains ($283 billion)
Exclusion of employer contributions for medical insurance and care ($218 billion)

Child Tax Credit ($127 billion)

Subsidies for insurance purchased through health benefit exchanges [Obamacare - ACA] ($114 billion)

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I’m sure that many, if not most, METARs take advantage of at least one of these tax breaks. @intercst has written many times about his clever use of the tax code to minimize his taxes on dividends and capital gains while at the same time maximizing his ACA benefit.

A recent post mentioned the cost of government benefits. Actually, the technical term is “transfer payments” which was $3.45 Trillion in 1Q2025.

In Fiscal Year (FY) 2024, the U.S. federal government collected approximately $5 trillion in revenue according to the U.S. Treasury Fiscal Data. This revenue primarily comes from individual income taxes (49%), payroll taxes (35%), corporate income taxes (11%), and other sources like excise, estate, and customs duties.
Government revenue is currently 33% of GDP.

The tax code would be dramatically simplified by eliminating every single tax break.

But…Dream on…

Any attempt to close any of these tax breaks, which favor mostly the rich, would lead to intense political pressure to keep them.

Wendy

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Weren’t the tax rate cuts of the 80s sold on the narrative that a lot of specific tax breaks were being eliminated in exchange for the lower overall rates? Cynical Steve said “yeah, the pols eliminate the breaks, so they can be sold, again. Eventually, the “JCs” will have all the breaks restored, and the lower overall tax rates”.

Steve

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Who is going to propose that combat pay should be taxed?
<crickets?>

Let’s just say we did that. Military pay would probably need to go up, for everyone, in order to attract enough recruits and may it would cost more.

And I’m sure that not taxing 401k contributions would save some money…and then we might need higher SS benefits since some would take SS earlier, etc. (Need an actuary to do the math on this). Same deal for Roth distributions – paying the taxes when you contribute allows the IRS to collect more now. And kick the can down the road on SS funding.

Mike

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One of the biggest and most expensive tax breaks is the “Stepped Up Cost Basis at Death”.

It’s the bedrock of large, multi-generational wealth in America and the primary reason that most of the taxes are paid by working people taxed up the wazoo on wage & salary income.

intercst

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I doubt it. No one joins the military for the tax-free combat pay. I imagine the vast majority of us hoped to never get combat pay.

Hawkwin
Also never desired to be “awarded” the “I moved too slow” medal, AKA the Purple Heart.

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Hi Wendy,

I’m confused. The total government revenue is about $5 trillion. You then say government revenue is currently 33% of GDP. However, the GDP is about $30 trillion, according to this FRED chart, which is the number I’m used to seeing. That would make the government revenue about 17% of GDP:

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I agree. But when someone is deciding to re-up or not after a tour and they looking at their finances *it could play a part.

Mike

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@nttconductor now I’m also confused. I don’t know why these numbers don’t match.

Federal Government Current Receipts = Q1 2025: 5,342.350 billion

In 2025, the US GDP is projected to reach around $31 trillion.

General Government Revenue for United States, Percent of Fiscal Year GDP,

Not Seasonally Adjusted , 2024: 31%

Wendy

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That’s why I don’t use macroeconomic data to make investment decisions.

Even if we take “General Government Revenue” to include state and local Gov’t revenue, not just Federal, that only gets you to about $8 Trillion/year for 2024.

31.7% of $31 Trillion is $9.8 Trillion

Maybe you need to throw in transit fares and municipal water and sewer bills to reach 31.7%. {{ LOL }}

intercst

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Which is why you follow the METAR board? :grin:

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Absolutely! You want to study the attraction of underperforming investment strategies and learn from the mistakes of others rather than repeating it.

For example, after 20 years of buying individual stocks (1981-2001), (and beating the S&P 500 by a healthy margin due to big winners like Dell and Pfizer), I figured out that I’d make just about as much money with less time & effort simply buying and holding an S&P 500 index fund. Everyone with outsized returns is doomed to “revert to the mean” – even Warren Buffet.

I just finished reading a NY Times story on investing your money in a Dicky’s BBQ franchise. Of course, I already knew it was far less risky to invest your money in an S&P 500 index fund rather than a restaurant franchise. But a refresher course is always appreciated, and the stories make for gripping reading – what were they thinking ???

free link:

intercst

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I’ve always found it incredible that ANYONE would ever open a restaurant. They almost all fail, and they almost all fail very quickly. Not only that, but with multiple layers of regulation (safety, health, etc) the capital required is HUGE. Installing a 12 ft hood can be $50k alone, and more in places where permitting costs/delays are high. Also, while building out your restaurant, you’re going to be paying rent and many other expenses many months before you have a penny of revenue coming in. I knew a guy in CA who opened a brewpub about 8 years ago - took 18 months from start to finish (grand opening day), and ended up costing nearly $500k more than expected when he started. He used to be a doctor but was more interested in brewing beer. Opening a restaurant means that you LOVE IT … or you’re insane (90+% of restaurants fail in the first 5 years, so you’re essentially trying to do something that keeps failing again and again).

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“I’ve always found it incredible that ANYONE would ever open a restaurant.”

I think it’s because they see a hot, everyone wants to go there, restaurant overflowing with customers. They start running numbers in their head, thinking that most nights are packed like that, and that the appeal will last for years and years. But the attraction almost always fades.

Had a friend who was a great chef. Went to a chef school as a young adult. Italian heritage, and was a really good cook growing up. Must have learned it from his Mom or Dad. He failed hard in both of his attempts, and he just tried Deli’s catering to the lunch crowd. And his food offerings were good. So he gave up on that, and became a teacher at the local skill center for high school students, and then taught the same trade at local community college, when the funding for the HS program was cut. He did well for himself, smart guy, hard worker, great cook. But that is a very, very tough business to make a go at.

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And there you have it.

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