Who Benefits Most from Tax Breaks? The Wealthy Says the CBO

June 26, 2013 | By: TaxCure Staff

cbo tax reportAny discussion about how to improve the government’s budget situation has to include taxes. These tax discussions also have to encompass various tax breaks — and who should have them.
A recent report from the Congressional Budget Office (CBO) indicates that perhaps calls for an end to some of the tax breaks enjoyed by the wealthy might increase in the near future. The report, titled The Distribution of Major Tax Expenditures in the Individual Income Tax Situation, breaks down the number of tax benefits/breaks in the system and concludes that slightly more than half of the tax breaks go to the wealthy.

Who is Considered Wealthy?

Of course, what constitutes “being rich” is something that is up for debate. However, the CBO report did break up the results into percentiles. The report found that the U.S. tax code is likely to provide benefits of a little more than $900 billion this year, and the households who are in the top 20% when it comes to income will see more than half the benefits.

The CBO also found that households in the top 1% of income earners (those making at least $327,000 a year) snag about 17% of the total tax break savings.

Why are the Wealthy Favored?

One of the reasons that those with higher incomes are favored in this manner is due to the nature of the tax benefits they receive. Some of the tax breaks that are more likely to benefit the wealth are among the biggest:
Preferential rates for dividends and capital gains ($160 billion)
Tax-free contributions to retirement accounts ($140 billion)
State and local taxes deduction ($80 billion)
Mortgage interest deduction ($70 billion)
Tax-free treatment of capital gains on assets transferred at death ($50 billion)

The biggest tax break, though, is the treatment of employer-provided health insurance ($260 billion) — and the middle class does get some access to those plans. However, the wealthy, with their “Cadillac” plans often see a bigger benefit since they have higher premiums.

And, of course, some of the benefits that the wealthy see (like mortgage interest deductions) come as a result of itemization. Many middle class and lower-income families don’t itemize. The breaks that normally help lower-income households are smaller than those that go to the wealthy and include such items as the treatment of Social Security benefits ($35 billion), EIC ($60 billion), and child tax credit ($60 billion).

Do the Wealthy Deserve Their Tax Breaks?

There is the argument that the wealthy deserve their tax breaks. Since many of them pay federal income taxes while some lower-income households don’t end up paying federal income tax, there are arguments that it makes sense for the wealthy to have bigger tax breaks. Others, though, argue that other taxes, such as FICA, sales taxes, and state income taxes, disproportionately impact those with lower incomes, so in the end, it tends to even out a bit, and the extra tax breaks for the wealthy aren’t really necessary.

Another observation is that some of these deductions could be phased out, at least, for those in the top 10% of income earners, and provide some help for the budget situation. However, the reality is that even if the entire $900 billion were got rid of, there would still be plenty of other budget issues to tackle.