Counterparties: Broken tax breaks

May 30, 2013

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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 aren’t distributed equally. In fact, more than half of the total dollar value of America’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: “Surprise: The Tax Code Mostly Benefits the Rich”. Derek Thompson has a headline tweak: “Right headline might be: Here’s What Happens When You Have a Progressive Tax System With Lots of Breaks in a Top-Heavy Economy”. 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 CBO’s calculations distort the picture a bit. Lower tax rates for capital gains and dividends aren’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. That’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 America’s top tax rate has fallen, income inequality has soared, they find. — Ryan McCarthy

On today’s links:

America’s paper of record considering a pivot to America’s sponsored content provider of record – Edmund Lee

Second Acts
David Petraeus joins KKR for some reason – Jonathan Chait

Fannie Mae’s former CEO sleeps just fine, thank you very much – Max Abelson

Crisis Retro
The only group that’s skirted criticism over the financial crisis? Shareholders – Jesse Eisinger
Shareholders are selfish jerks – Matt Levine

Tax Arcana
How one Irish accountant helps Apple save tens of billions – Guardian

Bold idea: Give the poor money – Matt Yglesias

Wait, the “start-up nation” trend-mongering may have been just a trend? – WSJ

“Morgan Stanley Lowers Ambitions” – WSJ

Consumers’ attitudes toward the stock market have done a 180 in the last year – WSJ

Enough with the anecdotes, there isn’t another housing bubble – Ryan Chittum

How Goldman sailed around maritime law – WSJ

The nation’s largest oil store almost got hit by the Moore, Oklahoma tornado – Climate Wire

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