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Sunday, May 8, 2011

More on who benefits from tax expenditures

The talk about the $1.1 trillion of tax expenditures in the federal income tax system continues. An op ed blog in the Christian Science Monitor on May 7, 2011 by Howard Gleckman of the Tax Policy Center* contrasts the report that half of individuals pay no income tax to who benefits from the $1.1 trillion of tax expenditures. He notes that the tax expenditures - special deductions, credits and exclusions that are not crucial to defining the income tax base, provide a greater tax savings to higher income individuals.

He states, based on Tax Policy Center data, that the tax expenditures (including the lower capital gains rate) are ...

"worth about $1,000 to a typical household earning about $21,000 or less (the bottom 20 percent).... Middle income households earning between $40,000 and $70,000 get an average of about $4,000.... The story is very different at the top of the economic food chain. Those tax breaks are worth an average of $275,000 to those in the top 1 percent (who make at least $668,000) and $1.5 million to those in the top 0.1 percent (who make more than $3 million)."

So he suggests that we should not just look at the tax savings of the half that don't pay any federal income tax, but also the savings of those at the top of the income list.

A good reminder that there are many aspects to look at in tax reform. Additional ones that come to mind for me include:

  • The need to look at all federal taxes, not just income taxes.

  • The reality that a multitude of special rules reduces transparency making it difficult to know your actual tax rate. Such rules also increase complexity and economic inefficiencies.

  • Differences between deductions and exclusions (worth more to those in higher tax brackets) versus credits (worth same to everyone).

  • How progressive should the federal income tax be?
*See "Who pays no income tax? It is the wrong question" by Gleckman.

What do you think?

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