The Congressional Budget Office (CBO), which is tasked with analyzing the economic and budgetary effects of government policy, just issued a new report on the various tax expenditures in the United States’s tax code. These are provisions that allow taxpayers to shield some income from taxation or pay lower rates, and they come in various flavors: exclusions, deductions, credits, and other policies. What the CBO found is that their combined effect goes overwhelmingly to the benefit of the richest Americans.
CBO looked at the ten biggest expenditures — which encompass about two-thirds of the budgetary effect from all expenditures — and found they’ll total over $900 billion for 2013, or 5.7 percent of the economy. For the 2014 to 2023 period, they’ll amount to $12 trillion, or 5.4 percent of the economy.
Most dramatically, the CBO found that over half of that will go to the top fifth of income earners. For a family of four, that means those making $162,800 a year or more. Seventeen percent of expenditures will go to just the top one percent of earners — those families making over $654,000. Meanwhile, a mere 8 percent of the money from expenditures will accrue to the bottom fifth of American families.
Yet even though the poorest earners receive a pittance from expenditures in terms of dollars, those benefits are still a remarkably large portion of their overall income. In fact, when it looked at the distribution of expenditures as a share of income rather than as raw dollars, the CBO found a U-shape: expenditures were almost 12 percent of income for the poorest families, then dropped for higher quintiles, then rose again for the richest, and topped 12 percent for the richest one percent.
There’s a history here. At the start of the 2000s, the Bush tax cuts drove down the income tax rate for high earners and lowered the taxes paid on capital gains and dividends. According to various studies, those changes exacerbated income inequality while delivering no measurable benefit to economic growth.
But as the top graph shows, all tax expenditures are not created equal. Unlike tax exclusions, deductions, or preferential rates, tax credits are structured to concentrate their benefits on the poorest and most vulnerable Americans. And when CBO broke down these expenditures by benefit as a share of income, it found exclusions benefit all quintiles about equally, deductions and preferential rates overwhelmingly benefit the rich, and credits overwhelmingly benefit the poor. For example, the Earned Income Tax Credit and the Child Tax Credit kept millions out of poverty over the last few years, despite repeated attempts by Republicans to roll them back. And a recent tax reform proposal by the Center for American Progress actually recommended expanding those tax credits, changing many deductions into credits, and hiking the capital gains tax rate.