A new report from the Congressional Budget Office found that the top 10 tax expenditures are distributed unevenly across the income scale, with much of the benefit going to the top-earning 1 percent of the population.
The report, which was released Wednesday, examined exclusions from taxable income, such as tax breaks for employer-sponsored health insurance, net pension contributions and earnings, capital gains on assets transferred at death, and a portion of Social Security and Railroad Retirement benefits. Other top tax expenditures included itemized deductions such as certain taxes paid to state and local governments, mortgage interest payments, and charitable contributions. The other three tax expenditures were preferential tax rates on capital gains and dividends; as well as two refundable tax credits: the Earned Income Tax Credit and the Child Tax Credit.
The report found that in calendar year 2013, more than half of the combined benefits of those tax expenditures will accrue to households with income in the highest quintile (or one-fifth) of the population, with an estimated 17 percent going to households in the top 1 percent of the population. In contrast, 13 percent of those tax expenditures will accrue to households in the middle quintile, and only 8 percent will accrue to households in the lowest quintile.
“If you look at these tax benefits, the majority of them benefit families with incomes under $250,000 in aggregate,” said Rep. Chris Van Hollen, D-Md., ranking member of the House Budget Committee, in a conference call with reporters. “But it also shows very clearly that the tax expenditures are skewed disproportionately to the highest 1 percent of income earners. The bottom line on this point is that the top 1 percent of income earners get 17 percent of the tax preferences. Just as a point of comparison, that means the top 1 percent of income earners get essentially the same amount of tax preference as the bottom two quintiles, as the bottom 40 percent of income earners. If you look at this in terms of the budget, in 2013 the tax preferences to the top 1 percent amount to $157 billion. And if you add up the tax preferences to the top 1 percent over the 10-year budget window measured in terms of the static tax preference benefit, you’re talking about roughly $1.9 trillion in tax expenditure value to the top 1 percent.”
Van Hollen, who had requested the report from the CBO, argued that it buttresses the case made in the budget proposals from congressional Democrats and the Obama administration for taking a balanced approach to tax reform through a combination of tax cuts and limiting the tax preferences for the top income earners. He argued that the sequester was harming ordinary citizens such as the children of military families in his district, who are missing five days of school because of furloughs imposed by the automatic spending cuts.
Rep. Sander Levin, D-Mich., ranking member of the House Ways and Means Committee, told reporters that, being a modern-day lawmaker, he had read much of the CBO report on his iPad. “It shows very clearly the need for everybody to go beyond the rhetoric of lowering tax rates without people indicating how that would be achieved and the implications for tax equity and economic growth,” he said. “I feel that very deeply.” He pointed out that the results of the report confirmed a report issued two years ago by Congress’s Joint Committee on Taxation indicating that some tax preferences mainly benefit the wealthy, while there are others that are significant for middle-income taxpayers. “Therefore, you need to look at each of them actively, vigorously and carefully,” he added.
In response to a question from Accounting Today about which tax preferences might be targeted for elimination as a result of the report, Van Hollen replied, “What this report shows is over 50 percent of the tax benefits go to families with over $250,000, but it also shows that 1 percent of the income earners, 1 percent of families, receive about 17 percent of the tax preferences, so what this argues for in my mind is the kind of approach that the President has laid out, and the kind of approach that Democrats in Congress have laid out, which is to limit the value of tax preferences for the highest-income individuals. We don’t have to target any particular tax preference to do that. What you do is you essentially place a limit on the overall value of these tax preferences for the highest income earners. By way of example, the President has said we should limit the value of tax preferences for higher-income individuals to 28 percent. What this report underscores, given the magnitude of the numbers, is that you can accomplish the kind of balanced approach to deficit reduction that the President and the congressional Democrats have been talking about by limiting the value of these tax expenditures for very high-income individuals, and you don’t have to hit middle-income families, as the Republican proposals would do.”
Levin said that Congress would need to be careful with some of the top 10 tax expenditures addressed in the CBO report, such as employer-sponsored health care and net pension contributions. “The President’s approach might touch the health care only in terms of the high end of them and not touch pensions or the Social Security exclusion at all. Three of them—the mortgage interest deduction, the state and local tax deduction and the charitable [deduction]—would be affected by the President’s 28 percent proposal, that cap. We’ve said all along we need to look at them, but we need to look at them carefully. The President’s 28 percent doesn’t touch two of them that are addressed in the CBO report, the EITC and the Child Tax Credit, which mainly benefit the two lower quintiles. In terms of capital gains and dividend income, that is the third largest of all these preferences after pensions and health care, which I think need to remain basically intact. That needs to be discussed. The Republicans have usually drawn a very hard line at even looking at them. I think we need to look at them, but carefully in terms of overall tax reform.”
The lawmakers were also asked by Accounting Today about concerns from charities that contributions would decrease if there were a cap placed on the charitable deduction taken by high-income taxpayers (see Congress Considers Cap on Charitable Deductions and Charities Concerned about Congress's Tax Reform Proposals).
“By talking with them, as we’re doing, by going beyond rhetoric and really looking at the charitable deduction and really looking at what the impact would be of a cap,” Levin responded. “In the tax bill that we passed with Pease and PEP, there is some impact already on the charitable deduction and thus far I don’t think the evidence is that it would very much harm, if at all, the charitable contributions. We need to look at it, but carefully. That’s what we’re doing, at least among Democrats, on the Ways and Means Committee.”