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Tax Expenditures

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The Congressional Budget Office recently released a report on the cost of tax expenditures: The Distribution of Major Tax Expenditures in the Individual Income Tax System. Tax expenditures, like traditional forms of federal spending, contribute to the federal budget deficit; influence how people work, save, and invest; and affect the distribution of income. The report examined how 10 of the largest tax expenditures in the individual income tax system in 2013 are distributed among households with different amounts of income.

Together, the 10 tax expenditures are estimated to total more than $900 billion, or 5.7 percent of gross domestic product (GDP), in fiscal year 2013 and are projected to amount to nearly $12 trillion, or 5.4 percent of GDP, over the 2014–2023 period.

The overall distribution of tax expenditures masks significant variation in the distribution of various categories of those expenditures.

  • Exclusions. The benefits of exclusions from taxable income are roughly evenly distributed among quintiles, ranging from 4.2 percent to 5.2 percent of after-tax income in 2013, according to CBO’s estimates; the middle and fourth quintiles will receive slightly larger benefits than households at either end of the distribution.
  • Deductions. The benefits of itemized deductions rise sharply with income in 2013, ranging from less than 0.1 percent of after-tax income for households in the lowest quintile to 0.4 percent for households in the middle quintile to 2.5 percent for households in the highest income quintile, CBO estimates.
  • Preferential Tax Rates. The preferential tax rates on dividends and capital gains provide almost no benefits to households in the bottom four quintiles but provide notable benefits to households in the top quintile—amounting to 1.7 percent of after-tax income in 2013, according to CBO’s estimates.
  • Tax Credits. The largest tax credits are distributed very differently than the other categories of tax expenditures. The credits provide very large benefits to households in the lowest income quintile (8.1 percent of after-tax income in 2013, by CBO’s estimate) and decreasing benefits to households in higher quintiles (amounting to 1.5 percent of income in the middle quintile and just 0.1 percent in the highest quintile).

Relative to income, deductions and preferential rates generally provide larger benefits to higher-income taxpayers than to other taxpayers, whereas tax credits generally provide bigger benefits to lower-income households. Exclusions from taxable income tend to be distributed roughly evenly across most income groups.

Wonkblog reports itemized deductions for state and local taxes, charitable contributions, and mortgage interest primarily benefit the rich:

Tax Deductions

Same goes for the lower rates on capital gains and dividend income:

Capital Gains


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