Who Benefits from Tax Preferences? You Do.

By :: May 30th, 2013

The Congressional Budget Office report on the distribution of tax expenditures is getting lots of buzz, nearly all of it positive. This is a gratifying and somewhat surprising outcome. The paper confirms many of the findings of my Tax Policy Center colleagues who have done similar analyses in recent years.

The basic story is pretty simple: Just about everyone benefits from these tax preferences (which, for the most part, look like government spending). The highest income households get the biggest share of these tax breaks. But when looked at through a somewhat different lens—how much these subsidies increase after-tax income--the lowest income households are the big winners. And middle-income households do pretty well too.

But to me the most interesting results are in the details. Who benefits from which preferences? Or, to put it another way, who would lose if Congress trimmed or even eliminated some of these provisions as part of a broad-based tax reform.

And make no mistake, CBO was looking at the big commonly used tax preferences that politicians often dismiss as loopholes or special interest tax breaks. When pols talk about cutting rates by getting rid of loopholes, this is what they are talking about.

Note that CBO is looking at a broader universe of tax preferences than the Congressional Research Service did recently. CRS looked only at a handful of big deductions—such as mortgage interest, state and local taxes, and charitable giving. CBO cast a much wider net that captures exclusions from taxable income for employer sponsored health insurance, Social Security benefits, and pension contributions and earnings; low-income refundable credits; and preferential rates on capital gains and dividends.

It is probably no surprise that the biggest beneficiaries of the Earned Income Credit and the Child Tax Credit are low-income households. That was the intent, and indeed, 80 Percent of the EITC and 51 percent of the CTC go to the lowest-income 40 percent.

Similarly, you won’t be shocked to read that preferential rates on investment income overwhelmingly benefit the highest income households.  Many analysts argue that these low rates are not subsidies in the same way most deductions and credits are, but they still show up in the list of tax expenditures.

Ninety-three percent of the benefit goes to the highest income 20 percent, and 68 percent goes to the top 1 percent. The low rates on gains and dividends represent 5.3 percent of the 1 percent’s after-tax income.

The story is very different for the exclusions. For the most part, the big winners are not the rich or the poor, but the middle-class. For instance, households in the fourth quintile (by CBO’s reckoning, two-person households making between $77,900 and $115,100) get about 26 percent of the benefit of the exclusion for health insurance, equal to 3.1 percent of their after-tax income. That group also gets about one-third of the benefit of the partial exclusion for Social Security benefits.

Bottom line: When it comes to tax preferences, Pogo was right. “We have met the enemy and he is us.”

10Comments

  1. AMTbuff  ::  12:28 am on May 31st, 2013:

    “CBO was looking at the big commonly used tax preferences that politicians often dismiss as loopholes or special interest tax breaks. When pols talk about cutting rates by getting rid of loopholes, this is what they are talking about.”

    I contend that the more widely used a tax break, the more it resembles a rate reduction and the less it resembles a “tax expenditure”. The most extreme case is a deduction available to everyone, like the personal exemption. Calling the personal exemption a “loophole” would be absurd. Calling the mortgage interest deduction or the charitable deduction a “loophole” is a half-truth at best.

    During our entire lifetimes tax rates have been set based on the fact that these deductions exist. Tax rates would have been set lower had those deductions been absent all these many decades.

    There’s no doubt that anyone who successfully claims significant tax deductions today will be a loser under any change that Congress calls tax reform. Tax reform will only benefit those who are overpaying now by not taking advantage of existing tax breaks.

  2. Tax Roundup, 5/31/2013: Obama and Shulman, buddies. And the hidden path to world domination. « Roth & Company, P.C  ::  9:30 am on May 31st, 2013:

    […] Gleckman,  Who Benefits from Tax Preferences? You Do. (TaxVox): “When it comes to tax preferences, Pogo was right. “We have me the enemy and he […]

  3. Farhan  ::  11:54 am on May 31st, 2013:

    I every time emailed this blog post page to all my contacts, since if like to read it afterward my contacts will too.

  4. TaxVox » Blog Archive » Who Benefits from Tax Preferences? You Do. – Let You Know Everything  ::  8:06 pm on June 1st, 2013:

    […] View article: TaxVox » Blog Archive » Who Benefits from Tax Preferences? You Do. […]

  5. Ralph H  ::  3:56 pm on June 2nd, 2013:

    Spot on AMT. In the new order instead of giving a partial subsidy for say health care or housing based on tax free health insurance, mortgage and property tax deduction, we will GIVE housing vouchers and healthcare to those deserving. Unfortunately the definition of deserving is poor, under educated or less motivated people. Don’t be surprised if our labor participation rate continues to drop, and more people join the shadow economy by working under the table.

    The middle and upper middle class will be fooled if they give up deductions for supposed lower rates.

  6. buddyglass  ::  9:20 am on June 3rd, 2013:

    I would most certainly lose big. My taxable income (as a percentage of AGI) was 49.6% in 2012 and 56.2% in 2011, yielding tax rates (as a percentage of AGI) in the 6.0-6.5% range. This is on household income around the 15th percentile (counting from the top). Those two years are atypical in that I deducted medical expenses, but even during prior years my taxable income was only about 2/3 of AGI.

  7. Michael Bindner  ::  12:30 am on June 26th, 2013:

    Not good news for Simpson – Bowles, Rivlin – Domenici, the Pete Peterson Foundation, the New America Foundation, its Center for a Responsible Federal Budget or its chair, Maya MacGuiness. Comprehensive tax reform should have some impact, like providing more money to families with more children (and less to those with less children). Without such major changes, it is too much effort for no reward – especially because the Tax Act passed in January solved the issue of higher taxes on the wealthy in a satisfactory manner – at least in the short run. Of course, early revenue figures may be an artifact of people cashing in capital gains, so they may not be sustained. The question I have is why has no one explored that fact?

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