A new report by the Congressional Budget Office finds that just ten popular tax breaks eat up more of the federal budget than Medicare, Social Security, or defense spending. And — prepare to be shocked — the benefits skew overwhelmingly to the rich.
The report studies "tax expenditures," which aren't exactly spending and aren't exactly taxes, but have the same effect on the federal budget and the deficit. For example, when the IRS allows people to deduct interest on home mortgage payments from their taxes, the government isn't giving out any actual money. But it does reduce the amount of tax money that comes in and prevents that from being spent elsewhere. That "lost" revenue accounts for more than five percent of our GDP.
According to the CBO, there are more than 200 such expenditures in the federal tax code, but just ten of them account for two-thirds of all the money that is "lost" to expenditures — more than $900 billion this year. And that's before the insurance credits related to Obamacare kick in next year, which could turn out to someday be the biggest expenditure of them all.
The major credits that we're talking about are not necessarily bad or wasteful by most taxpayers' standards. (Deductions for charitable contributions and mortgage interest; the Earned Income Tax Credit; pension contributions; etc.) However, they rarely get discussed in the context of budget fights, because they don't fall under the traditional debate points of "taxes" or "spending." Most of them were created to influence behavior or appeal to a certain interest group, but their value has been generally hard to measure until now.
The other problem is that the benefits of these breaks are not spread evenly across the country. In terms of pure dollar value, 50 percent of those expenditures benefit just one-fifth of the population. (Guess which fifth?) A full 17 percent go just to households in the top 1 percent of income.
One of the few expenditures that has been altered in recent years is the tax rates on capital gains and dividends, which increased slightly in 2013. Even with the change, the CBO projects that 70 percent of the benefit from that rule accrues to the top one percent of incomes.
When broken down as percentage of after-tax income, it appears a little more fair, as people in the bottom 20 percent of households get the biggest impact. (When your income is a low, even a small tax break makes a big difference.) However, the middle class income groups get the short end of the stick in both scenarios. And either way you slice it, the more money you already have, the more you're likely to benefit from a friendly tax code.