Of the $900 billion that taxpayers can expect to save in 2013 through the ten largest tax credits and deductions, more than half will go to the richest 20 percent, according to a new report from the Congressional Budget Office. Nearly one fifth of the $900 billion will go to the richest 1 percent, who benefit disproportionately from the deduction for charitable giving and the preferential tax treatment for capital gains and dividends.

According to the CBO, tax expenditures—a catchall term for the over 200 loopholes, credits, exclusions, deductions, and preferential rates that riddle the individual and corporate tax code—will add nearly $12 trillion to the budget deficit over the 2014–2023 period. But most of the expense can be attributed to just a handful of programs. This year alone, the U.S. Treasury can expect to lose $248 billion on the tax-free treatment of employer-sponsored health insurance, $161 billion on the preferential tax rate for capital gains and dividends, and $137 billion on tax-advantaged retirement accounts—all tax savings that accumulate overwhelmingly to the upper middle class. 

Only two of the top ten tax breaks explicitly favor working class Americans: the earned-income tax credit ($61 billion) and the child tax credit ($57 billion). Together, these boost the after-tax income of households in the poorest quintile by nearly 10 percent; an amount comparable in percentage terms to what the richest quintile receives. But in dollar terms, the savings are worlds apart. The tax breaks received by the poorest fifth amount to about $2,000 as a percentage of after-tax income, while those received by the richest fifth are approximately ten times higher.

So far, policymakers have been hesitant to call for the elimination of many of these tax breaks. Some, like the home mortgage interest deduction and the tax exemption for employer-sponsored health insurance, are extremely popular with the middle class and enjoy broad bipartisan support. Others, like the preferential tax rate for investment income, are protected by politicians' symbiotic relationship with the so-called “donor class”—the same 1 percent who will receive 68 percent ($110 billion) of the capital gains tax benefit in 2013. (Only 7 percent will go to the bottom 80 percent.)

A more realistic scenario would be for Washington to cap deductions at a certain level. That was the idea favored by Mitt Romney, in one of his more thoughtful etch-a-sketch moments, and later supported by the Obama administration. But most proposals along those lines, including the provision for a 28 percent cap requested in the president's 2014 budget, are either too narrow or too timid to address the massive inequalities perpetuated by the current tax code.

To do that, we'll need something bolder. A good example is the Congressional Progressive Caucus's “Back to Work” budget, which would combine a cap on deductions with a slew of other reforms, including new income tax brackets, a higher estate tax, a financial transactions tax, the elimination of the mortgage-interest deduction for second homes, and taxing capital gains and dividends as ordinary income. That proposal received little press coverage at the time—unsurprising given the media's demonstrated center-right myopia. But polls suggest the majority of Americans would support the CPC's reforms. According to a survey conducted by Business Insider in February, a plurality of respondents favored the progressive budget to the Democratic or Republican budget proposal when asked to select among the three. (The plans were labeled “A,” “B,” and “C” to avoid bias.) Nearly 50 percent of Republicans supported the CPC plan over the sequester.

Keep that in mind this summer, as Washington turns its attention to comprehensive tax reform. The American people want a fairer tax system and a less unequal society. If Congress decides once again to preserve those inequalities perpetuated by the system, it will be out of deference to the political donor class, not the interests of their constituents.  

 

(For more on how tax expenditures work, check out Century Foundation Fellow Ed Kleinbard's post from last April, “Yes, Hard-Working Red-Stater, the Government Is Subsidizing Your Health Insurance.”)