Counterparties: Broken tax breaks
Welcome to the Counterparties email. The sign-up page is here, itâs just a matter of checking a box if youâre already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
The Congressional Budget Office is out with a report that boils down the byzantine US tax code into something relatively simple: the benefits of taxes arenât distributed equally. In fact, more than half of the total dollar value of Americaâs 10 largest tax breaks, deductions and exclusions go to the top 20% of American earners. 17% of these tax expenditures — including the mortgage interest deduction and preferential tax rates for capital gains — go to the top 1%.
Meanwhile, the middle class and poor get relatively few such benefits from the tax code: 8% of the value of these tax expenditures goes to the middle quintile and 13% go to the lowest-earning quintile.
Gawker takes the populist angle on this: âSurprise: The Tax Code Mostly Benefits the Richâ. Derek Thompson has a headline tweak: âRight headline might be: Here’s What Happens When You Have a Progressive Tax System With Lots of Breaks in a Top-Heavy Economyâ. And the CBO itself points out the poorest Americans get benefits equal to 12% of their after-tax income, while the top 20% of earners get benefits equal to roughly 9% of their income. (Regardless of which metric you use, the middle class gets screwed by the tax code.)
Kevin Drum thinks the CBOâs calculations distort the picture a bit. Lower tax rates for capital gains and dividends arenât really tax expenditures, Drum writes. And the CBO ignores the value of the standard deduction to the lower and middle classes. As a result, Drum argues, the CBO makes the tax code seem more tilted toward the wealthy than it really is.
Whatever method you use, the tax code matters — which is one reason why reforming it has been so politically fraught. The 10 largest expenditures total $900 billion, or 5.7% of GDP, the CBO says. As Dylan Matthews notes, over a decade these expenditures cost nearly $12 trillion. Thatâs more than Medicare, defense, or Social Security.
The tax code has also had an unusually dramatic impact on the structure of American society. A new Piketty-Saez paper looks at why income inequality has grown in America at a far faster rate than most other rich nations. The answer: the 1% have more than doubled their share of American income in the past 30 years in large part because of tax policy. As Americaâs top tax rate has fallen, income inequality has soared, they find. – Ryan McCarthy
On todayâs links: