ESTIMATING THE WELFARE COST OF TAX PREFERENCES

This paper develops an estimate of the welfare cost of tax preferenees, or “loop-holes,” in the federal individual income tax. Items given preferential treatment are considered as a composite good with a distortion in its relative price due to exclusion from taxation. In 1974, the welfare cost is estimated to be $7.9 billion, or 6.7% of tax revenue. Most of this welfare cost is borne by the higher income classes; and when this cost is considered to be part of the tax burden, the degree of progressivity of the tax is increased. An estimate of the marginal welfare cost of tax preferences is also developed. © 1979, Sage Publications. All rights reserved.