Counterparties: Broken tax breaks
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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 arenâ€™t distributed equally. In fact, more than half of the total dollar value of Americaâ€™s 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: â€śSurprise: The Tax Code Mostly Benefits the Richâ€ť. Derek Thompson has a headline tweak: â€śRight headline might be: Here’s What Happens When You Have a Progressive Tax System With Lots of Breaks in a Top-Heavy Economyâ€ť. 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 CBOâ€™s calculations distort the picture a bit. Lower tax rates for capital gains and dividends arenâ€™t 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. Thatâ€™s 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 Americaâ€™s top tax rate has fallen, income inequality has soared, they find. – Ryan McCarthy
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