The highest-income and lowest-income households receive the most benefit from 10 of the largest U.S. tax breaks, according to a Congressional Budget Office report released today.
Households in the bottom 20 percent of U.S. income distribution receive 11.7 percent of their after-tax income from the breaks, relying on benefits such as the earned income tax credit.
On the income scale’s other end, those in the top 20 percent receive 9.4 percent of after-tax income from breaks, with those in the top 1 percent getting 13.1 percent of their income from such breaks. The highest-income taxpayers rely on different provisions; 68 percent of the tax benefit from lower rates on investment income goes to the top 1 percent.
The report was released amid a partisan dispute over how to revise the U.S. tax code. Democrats want to curb tax breaks for high-income taxpayers to rein in the federal budget deficit. Republicans, meanwhile, want to use all the revenue that would be generated by broadening the tax base to cover the rate cuts.
“The feasibility of tax reform comes into focus when you see these numbers,” Douglas Holtz-Eakin, a former CBO director and president of the American Action Forum, said in a phone interview today. The group favors free-market approaches to policy. “It does lead you to the temptation to say we should just go get this money, and that’s dangerous because that’s different from reform.”
Democrats note that, in dollar terms, more than half of the breaks studied go to the top 20 percent of households while 8 percent go to the bottom 20 percent.
Representative Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee, said the report bolsters Democrats’ approach of combining spending cuts with tax increases for top earners.
“We could achieve a significant amount of deficit reduction, long-term deficit reduction, by limiting these tax preferences to the highest-income earners,” Van Hollen, who requested the study, told reporters on a conference call.
President Barack Obama’s budget calls for raising $529 billion over the next decade by limiting the value of tax breaks for top earners.
The study examined tax breaks including the exclusion of employer-provided health insurance, deductions for mortgage interest and charitable contributions and the child tax credit. In all, they cost the government $900 billion this year in forgone revenue and would cost the Treasury $12 trillion over the next decade.
“If you didn’t know anything about the U.S. individual income tax, you might be surprised at the magnitudes involved,” Holtz-Eakin said.
The health insurance tax preference is the largest at $248 billion this year, or 1.5 percent of the gross domestic product.
Because the benefits of the tax breaks are spread unevenly across income groups, changing the rules could alter the distribution of the nation’s tax burden.