A Nation With Too Many Tax Breaks. deadline looming at the end of the year to cut trillions from the deficit, the partisan debate over the budget has become an existential battle over the purpose of government.
Obama’s insistence that the rich must pay more to preserve programs that help the poor and middle class has crashed against the Republican claim that the president’s Robin Hood policies amount to class warfare.
A Nation With Too Many Tax Breaks.
With the presidential election in sight and a deadline looming at the end of the year to cut trillions from the deficit, the partisan debate over the budget has become an existential battle over the purpose of government.
President Obama’s insistence that the rich must pay more to preserve programs that help the poor and middle class has crashed against the Republican claim that the president’s Robin Hood policies amount to class warfare.
Whatever their merits, both arguments rely on an assumption that is at best overstated: that the government uses resources from those who are richer to pay for programs that mostly benefit the less fortunate.
At first glance the budget does seem heavily tilted to take from the rich and redistribute to the rest. Taxpayers in the top fifth of the population shoulder three-quarters of the federal tax burden and receive only about 10 percent of entitlement spending, according to calculations by the Urban Institute and the Brookings Institution’s Tax Policy Center, and the Center on Budget and Policy Priorities.
Families in the bottom 40 percent of the income distribution pay less than 1 percent of taxes and receive about 60 percent of entitlements.
But this is too narrow a view of taxing and spending. There is an alternate, more comprehensive way to measure how the government moves resources across the economy. It includes amounts that are not reported either as revenue or spending in the budget, but recorded as tax expenditures; that is, money that the government does not collect because of tax breaks.
These breaks may be labeled differently, but they serve the same function as government spending. They pay for services, like making homes more energy efficient, provide incentives for things like saving and investment, or simply raise the income of selected groups. For instance, encouraging businesses to offer health benefits to their workers by exempting the cost from taxes deprives the budget of $109 billion, according to Congress’s Joint Committee on Taxation. Tax breaks to encourage charity cost $39 billion.
If we eliminated them all and replaced them with regular spending on the same set of objectives, the budget would look very different. It would become apparent that initiatives are much more costly than we think — about $1.1 trillion more costly , according to the Tax Policy Center.
Moreover, including this money creates an entirely different landscape of winners and losers of the government’s largess: of the extra $1 trillion, almost $7 to the top fifth of taxpayers. Only $1 out of $10 goes to the bottom 40 percent.
Taxpayers of all incomes would pay higher taxes. The Tax Policy Center says those in the bottom 20 percent, making about $8,500 a year on average, would pay 9.4 percent of their income in all federal taxes. This amounts to about 13 percentage points more than they do today (now they get a net credit). The average federal tax for those in the top 20 percent — families making $214,000 a year — would rise to 34.5 percent from 22.9 percent.
In some respects, this might make us look like the big government social democracies of Europe, where taxes and government benefits are a much larger share of the economy. Unlike Europe and other industrial countries, however, the United States government uses only a fairly small part of the resources it has to benefit the have-nots.
The accompanying chart shows how the federal government spreads benefits. This includes direct spending on mandatory entitlements and core discretionary benefits, like housing and energy assistance. It also includes deductions, exclusions and other tax expenditures.
One feature stands out: The roughly $2 trillion pot of federal entitlements mostly benefits lower-income families. But the $1 trillion in tax breaks mostly benefits those higher up the income ladder. Taxpayers in the top fifth of the income distribution get almost $25,000 each, on average. Families earning more than $1 million before taxes receive $447,259 from tax breaks. By contrast, for taxpayers earning $10,000 or less, the average break amounts to $427.
Consider housing. The federal government spent about $55 billion in housing assistance last year, most of it to cover some rental costs for low-income Americans. It gave a further $5.4 billion in tax credits to subsidize low-income housing. But this is just a small share of what the government spends on housing.
To increase homeownership, borrowers can subtract the interest paid on their mortgages from income on their tax returns. This cost the government almost $78 billion last year, more than the entire budget of the Department of Housing and Urban Development. And it is not the only goody. Homeowners can also deduct state and local property taxes from their income tax, at a cost of about $24 billion last year. Allowing homeowners to pocket tax-free much of the profit from selling their homes cost $18 billion more.
Even if one agrees government should spend all this money to get Americans into a home, the deduction for mortgage interest is a lopsided way to allocate it: 76 percent of the total benefit goes to the richest fifth of the population — they have bigger houses and pay higher tax rates — at an average of about $1,952 per taxpayer, according to the Tax Policy Center.
By contrast, the average family in the bottom 40 percent of the income distribution got $14. Rather than improving home ownership rates, the billions forsaken by government enabled more affluent buyers to buy bigger homes and more sellers to get more money for their real estate. If voters could see how the benefits flowed, they might not be so enamored of the policy.
They might see better uses for this money. Spending cuts of $1.2 trillion are supposed to kick in automatically in 2013 if Congress fails to pass a plan to reduce the long-term deficit. Tax experts hope the sense of urgency might create the political will to strip away many of the deductions and exclusions that pockmark the tax code. The result would be more money on the revenue side of the ledger to cut the deficit without threatening necessary social programs.
Tax expenditures die hard, however. Each is backed by its own set of lobbyists pressing its merits upon Congress. Some, like the mortgage interest deduction, are wildly popular.
A quarter century ago, Ronald Reagan and a Democratic Congress managed to pare back tax expenditures as part of the budget reform of 1986, overcoming powerful opposition. Those in the trenches at the time remember it as an epic struggle. But for all the heroics, tax expenditures were pared only to 6 percent of gross domestic product in 1988, from 8.7 percent in 1985. By 2003 they had crept back up to 7.8 percent of the nation’s output.
Perhaps the depth of the fiscal chasm we face will impel us to do better. The commission on fiscal reform created by President Obama in 2010 recommended axing many tax expenditures. So did a report by Alice M. Rivlin, a former vice chairwoman of the Federal Reserve, and former Republican Senator Pete V. Domenici of New Mexico. Tax expenditures have been featured regularly on the campaign trail, with both Mr. Obama and Republican frontrunner Mitt Romney promising to slash loopholes to broaden the tax base.
But even if those efforts fail, the debate may just temper the belief that current government policies are mostly about helping the poor.
E-mail: eporter@nytimes.com. Twitter: @portereduardo. |
