Tax expenditures are subsidy programs implemented in the form of tax deductions, exclusions, credits, or favorable rates. They have long been targets for tax reformers, but the subsidies have powerful political constituencies and are hard to eliminate. Thus, policymakers have proposed indirect approaches, analogous to direct spending caps, to limit the costs of tax expenditures without targeting single provisions.

This chapter examines the effects of alternative ways of imposing global limitations on groups of tax expenditures that benefit individual taxpayers. It summarizes the adverse effects of tax expenditures and reviews existing limits on them such as the alternative minimum tax. It then estimates the effects of alternative global limitations on federal revenues, the distribution of tax burdens, marginal tax rates on capital and labor income, and incentives to engage in tax-subsidized activities.