Tax Expenditures

June 3, 2013
Posted by Jay Livingston
   
We got another reminder last week that despite complaints about federal government programs that give money to the poor, when it comes to taxes, the government is much more generous to the wealthy.

The news came in a report  from the Congressional Budget Office:

The Distribution of Major Tax Expenditures

in the Individual Income Tax System

Tax expenditures are ways that the government uses the tax system to give money to people. Some expenditures are tax credits, which can take the form of cash payments.  Others are tax breaks – giving people a discount on their income tax.  For example, if I am in the 35% tax bracket, but the government charges me only 15% on the $100,000 I made playing the stock market, the government is giving me $20,000 it could otherwise have had me pay in taxes. That’s an expense. The special rate I get on the money I made in the market costs the government $20,000.

This government largesse benefits some people more than others. 

(Click on a chart for a larger view.)

About half of all tax expenditures go to the top quintile.  The bottom 80% of earners divide the other half.  And within that richest quintile, the top 1% receive 15% of all tax expenditures (this distribution of tax breaks roughly parallels the distribution of income). Were you really expecting Sherwood Forest? 

Here is a breakdown of the costs of these different tax expenditures.

The Earned Income Tax Credit, which benefits mostly the poor, costs less than $40B.  The tab for the low tax on investment income (capital gains and dividends) is more than twice that, and nearly all of that goes to the top quintile.  More than two-thirds goes to the richest 1%.

Dylan Matthews at the WaPo WonkBlog (here) regraphed these numbers to show the total amounts overall plus the amounts in each category for each income group.

The justification for these expenditures is that they are a way the government can encourage people to do something that it wants them to do.  With tax breaks, the government is basically paying people by not charging them full tax fare – encouraging them to buy a house or give to charity or  get health insurance at their work.  Similarly with the tax credits that go mostly to the poor. We want people to hold a job and to care for their kids.  The child tax credit gives people more money to care for their children.  The Earned Income Tax Credit pays them for working, even at jobs that pay very little.  By the same logic, the government is paying me to invest my money in companies – or put another way, to play the stock market.