CBO report shows top 10 tax breaks disproportionately benefit the wealthy

A study by the non-partisan Congressional Budget Office found that most of the top 10 tax breaks disproportionately benefit high-income Americans.

The CBO’s report “The Distribution of Major Tax Expenditures in the Individual Income Tax System” debunked the widely-held perception that most tax credits and deductions – known as tax expenditures because the tax losses add to the federal deficit – help the middle-class and the poor.

The tax expenditures cited in the CBO’s report are: exclusions of (1)employer-sponsored health insurance, (2)pension contributions and earnings, (3)capital gains on inheritances, and a (4) portion of Social Security benefits from taxable incomes; itemized deductions of (5) certain taxes paid to state and local governments, (6) mortgage interests, and (7) charitable donations; (8) preferential tax rates on capital gains and dividends income, which are lower than the income tax rates on wages; (9) earned income credit; and (10) child tax credit.

In fact, the CBO’s examination of the10 most popular – and expensive – tax breaks revealed that households in the top income bracket have kept more money in both dollar terms and as a share of their after-tax income than middle-class or low-income households from those tax credits and deductions.

“Higher-income households benefit significantly more from tax expenditures in dollar terms than do lower-income households,” according to the CBO report. “When tax expenditures are measured as a share of after-tax…income, they benefit households in the lowest and highest income groups by more than households in the middle of the income distribution.”

More than half of the combined benefits of the top 10 tax breaks will increase the after-tax incomes of the top 20% households; 17% of those tax breaks benefit households in the top 1% of the population, according to the CBO. By contrast, only 8% of the top 10 tax breaks will benefit the bottom 20% households.

The tax breaks account for 13.1% of the after-tax incomes for the top 1% households compared to 11.7% of after-tax incomes for households in the bottom 20%. This means that the wealthiest 1% of Americans receives more benefits from the 10 most popular tax credits and deductions than some of the poorest Americans. On the other hand, middle-income Americans benefit the least from these tax cuts, which account for less than 8% of their post-tax incomes.

Not only does the CBO’s report clearly show that the tax breaks re-distribute more wealth to the richest Americans, those 10 popular tax expenditures are adding nearly $1 trillion to the federal deficit every year.

In 2013, the top 10 tax expenditures will cost the federal government about $900 billion, which is about 5.7% of the gross domestic product (GDP) or the size of the U.S. economy. To put that figure into perspective, $900 billion “will equal about one-third of total federal revenues and will exceed spending on Social Security, defense, or Medicare net of beneficiaries’ premiums and other offsetting receipts.”

Over the next decade, the U.S. government will lose about $12 trillion in revenue due to those 10 tax expenditures.

About 40% of the projected revenue loss – or $4.6 trillion – will result from preferential tax rates and deductions that disproportionately benefit the wealthiest 20% of Americans.

According to CBO, more than 90% of the capital gain and dividends preferred tax rate, which is taxed at a lower rate than work wages, will go towards households in the top 20% bracket, with “almost 70% going to households in the top percentile”, equalling 5% of the after-tax income for households in top 1%.

“The preferential tax rates on dividends and capital gains provide almost no benefits to households in the bottom four quintiles but provide notable benefits to households in the top quintile,” according to the report.

Itemized deductions and the exclusions of pension contributions and certain inheritances from taxes also skew in favor of the wealthy. In fact, 21% of the estate tax preferences are going to the top 1% of households.

“The benefits of itemized deductions rise sharply with income…The tax expenditure for the exclusion of net pension contributions and earnings tilts heavily toward the top of the income distribution,” the report stated. “The exclusion of capital gains at death largely benefits households with high net worth, and such households tend to be in the upper portion of the income distribution.”

Amount the U.S. government will lose if the top 10 tax expenditures are not eliminated: $11.6 trillion between 2014 and 2023

Exclusions from taxable incomes: Total $6.4 trillion or 55% of tax expenditures
* employer-sponsored health insurance: $3.36 trillions
* pension contributions and earnings $1.999 trillions
* capital gains on inheritances $644 billions
* a portion of Social Security benefits $414 billions

Itemized deductions: $2.677 trillions or 23% of tax expenditures
* certain taxes paid to state and local governments $1.098 trillions
* mortgage interest payments $1.011 trillions
* charitable donations $568 billions

Preferential tax rates on capital gains and dividends: $1.340 trillions or 11.5% of tax expenditures

Tax credits: $1.210 trillions or 10.5% of tax expenditures
* earned income tax credit
* child tax credit


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