Wealthiest Americans get most tax gravy

IRS sign with magnifying glass Internal revenue Service tax taxes CBS/iStockphoto

(MoneyWatch) Tax breaks will cost the American treasury nearly a trillion dollars this year. And most of that money goes to people at the top of the heap -- the very top.

That's the conclusion of a new study by the Congressional Budget Office, a non-partisan unit of the U.S. Congress. The CBO looked at 10 major tax breaks -- there are 200 overall -- including the earned income tax credit, itemized deductions, preferential tax rates for capital gains and dividends, and the child tax credit.

"More than half of the combined benefits of those tax expenditures will accrue to households with income in the highest quintile (or one-fifth) of the population -- with 17 percent going to households in the top 1 percent of the population," the CBO found.

Other tax breaks, such as the per-child tax credit of up to $1,000 and the earned income tax credit claimed by low-income households, generally benefit those in lower-income ranges.

The issue of tax breaks has long been a sore spot in Washington, looming large during the 2012 presidential election. For the U.S.economy, such expenditures affect how much the federal government collects in taxes and figure in the ongoing debate over the nation's deficit.

A tax break is supposed to encourage productive activities, like homeownership, that benefit the economy as a whole. So a disproportionate allocation of these preferences to the wealthy raises fundamental issue of economic equity.

The CBO also said that when it measured the tax breaks relative to after-tax income in 2013, the 10 major tax expenditures are largest for the bottom fifth and top fifth of income earners.

"The combined benefits will equal nearly 12 percent of after-tax income for households in the lowest income quintile, more than 9 percent for households in the highest quintile and less than 8 percent for households in the middle three quintiles," the CBO said.

Robert McIntyre, director of Citizens for Tax Justice, said many of the breaks, such as deductions for employer-paid health insurance and the child tax credit, are progressive, benefiting middle- and lower-income groups proportionally. But the huge breaks that help the wealthiest people in the country are wildly disproportionate.

"If you look at details, most of the distributions aren't that big of a problem," he said. "It's the capital gains -- that's the big one that's skewed to the top," he said. "Don't look at the top 20 percent -- look at the 1 percent. And within that it's capital gains, and capital gains at death that mainly go to the top 1 percent."

McIntye noted that lumping the top 20 percent of earners by income is misleading because it ranks billionaires alongside people making around $100,000 a year, an income typically considered middle class that doesn't collect huge amounts of investment income.

That distinction is particularly relevant to one of the tax expenditures the CBO looked at -- retirement contributions, a break that it noted benefits the top 20 percent. But it was primarily the least wealthy people in that group who reaped the biggest retirement tax rewards. 

  • Charles Wilbanks

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