April 6, 2016

The biggest U.S. tax breaks

FT_16.04.05_taxExpendituresWith just two weeks till this year’s April 18 tax filing deadline, many Americans are still sweating over their 1040s, Schedule A’s and self-employment tax worksheets. One reason they might put in a little extra time: the more than $1.3 trillion worth of tax breaks that are allowed under the Internal Revenue Code.

That’s the total estimated impact for fiscal year 2016 of the nearly 200 major “tax expenditures” – government lingo for tax breaks – that come in the form of exemptions, deductions, credits and other special provisions, according to an annual staff report from Congress’ Joint Committee on Taxation. Even that $1.3 trillion figure is an understatement, as the report only gives specifics for a tax expenditure if it’s estimated to cost the government $50 million or more per year; dozens of breaks fall below that threshold.

Tax expenditures are defined as departures from “normal” income-tax law that benefit particular individuals and businesses. They include everything from the favorable tax treatment of employer-paid health insurance (estimated to cost the government a total of $769.8 billion over five years) to a tax credit for economic development in American Samoa (estimated five-year cost: less than $50 million).

Most tax breaks specified in the report benefit individuals rather than corporations. We counted 118 individual breaks with a net total estimated cost in fiscal 2016 of nearly $1.15 trillion, compared with 80 corporate breaks totaling $185.2 billion. More than half of that corporate total comes from one break, the deferral of taxes on income earned overseas through foreign subsidiaries and affiliates. (Bear in mind that, as we’ve noted before, the corporate income tax brings in far less revenue than the individual income tax does.)

The biggest individual tax break was for employer-paid health care, health insurance and long-term care insurance, none of which is counted as taxable income. That provision cost the government an estimated $145.5 billion last fiscal year, and is estimated to cost $143.8 billion this year. Taxing dividends and capital gains at lower rates than ordinary income will keep an estimated $134.6 billion out of the Treasury in the current fiscal year. The controversial mortgage-interest deduction will cost $77 billion this fiscal year, while the accompanying deduction for local property tax payments will cost another $34.7 billion.

Economists and tax analysts tend to use the term “tax expenditures” because such special-purpose breaks are effectively the same as direct spending – Congress can appropriate $150 billion for health care or provide an indirect subsidy worth $150 billion through the tax code. While it’s often politically easier to enact a tax break than a new appropriation, financing social programs through tax policy affects both how those programs function and who benefits from them. For example, a recent study of federal tax credits for higher education (which will cost an estimated $21 billion this fiscal year) concluded that most of the benefits go to middle- and upper-income households, and appear to have little impact on whether students go to college at all or what kind of schools they attend.

But simply repealing, say, the exclusion for employer-paid health benefits wouldn’t necessarily automatically add $143.8 billion to federal revenues, since taxpayers might be able to take advantage of other breaks hidden in the tax code. (In valuing each specific tax break, the Joint Committee staff assumed that if it were repealed affected taxpayers could and would claim the next-best tax treatment, but they did not try to incorporate any other behavioral changes that might result from the repeal.)

While not all tax breaks mainly benefit the well-off, many do. For instance, taxpayers with incomes of $100,000 or above receive more than 80% of the value of the mortgage-interest and property-tax deductions, according to Joint Committee estimates; more than two-thirds of the value of the deduction for charitable contributions goes to taxpayers with incomes of $200,000 or more.

Low-income people, who pay relatively little income tax, can’t take full advantage of many breaks. One exception is the earned-income tax credit, or EITC, which is aimed at assisting low- to moderate-income workers and their families. Unlike most tax credits, the EITC is refundable, meaning that if a taxpayer owes less tax than the credit is worth, he or she receives the excess amount as a refund. The report estimates that more than 80 percent of the value of the EITC goes to taxpayers with $40,000 or less in income.

Although all the remaining 2016 presidential candidates have released tax-reform plans, tax policy hasn’t generally been front and center during the campaign – perhaps because it’s not an especially high priority for the public. In a Pew Research Center survey earlier this year, Americans ranked tax reform far behind strengthening the economy, defending against terrorism and improving the educational system as top priorities for the federal government this year.

Still, Americans are hardly fans of the existing system. In a survey we did last year, 59% said there’s so much wrong with the tax system that Congress should completely change it (versus 38% who said only minor changes are needed). While that sentiment was more partisan than the last time we asked the question, in 2011, even half of self-identified liberal Democrats favored completely changing the system.

Note: This is an update of a post that was originally published in April 2015.

Topics: Economic Policy, Taxes

  1. Photo of Drew DeSilver

    is a senior writer at Pew Research Center.

16 Comments

  1. Anonymous8 months ago

    Let’s tax individuals not couples/families…
    Otherwise, those of us in two-earner families are subsidizing those in one-earner families.
    Why should we???

    1. Anonymous8 months ago

      Check the facts. My taxes went up after divorce.

  2. Anonymous8 months ago

    Isn’t it important to know how many individuals, with what average incomes, are benefited by particular tax break.
    For example….employer paid health care…
    Vs. lower tax on capital gains [vs. wages]….!!

    But very interesting…
    Including how much we are subsidizing what some what call over-population! [at least over 2 kids]

  3. Mike Hihn8 months ago

    Or check the biggest misinformation of all.

    The President says a $50,000 school teacher should not pay a higher income tax rate than millionaires and billionaires. Most Americans agree with that, and also believe in general that the rich do not pay their fair share. But actual IRS data show (right hand column)
    $50,000 averages 8%
    million + averages 27%

    Proof: irs.gov/pub/irs-soi/13in11si.xls

    When Americans are so TOTALLY ignorant, might that explain why they want changes in the tax code … especially self-identified liberal Democrats, the biggest suckers of all?

  4. Bob2 years ago

    For personal income tax, go to a flat tax & eliminate all tax credits. The flat tax can be graduated like 1, 5, 10, 15 & 20% depending on taxable income, but everyone should pay some income tax. They have to have some skin in the game. All income should be taxed at the same rate.

  5. PAXPORT2 years ago

    Drew, your article appears to come from government perspective. It speaks of dollars collected as though they belong to the government. I view them as belonging to me & taxes I pay as spend on my part.

  6. RL Willie2 years ago

    It appears that listing contributions and earnings of defined pension benefit plans is not a tax “loophole”. Instead, the taxes are deferred until that defined-benefit is distributed whereupon it is subject to ordinary taxes (i.e., it contributes to AGI for the taxpayer).

  7. Michael Kelly2 years ago

    Fascinating. Since the earnings used to calculate Social Security is already taxed, the fact that all of the Social Security is not taxed twice is considered a “tax break”. What twisted logic.

    1. Mike Hihn8 months ago

      Umm, the wages are subject to two different taxes, but Social Security is taxed only once.

  8. Scoot2 years ago

    Tax “breaks” as written here is consistent with the left wing view that money earned does not belong to those who earned it, it belongs to the Government. Money that is saved in defined contribution plans is taxed when withdrawn, for example. This is a stupid and misleading analysis.

  9. Leesburg Guy2 years ago

    Some of the Tax Expenditures are basically unfair such as treating employer-paid insurance as a tax free exchange but not allowing an individual to deduct medical insurance premiums. Others such as having a lower rate on capital tax gains is really just a means of accounting for inflationary gains on invested capital. If capital gains were 1) indexed for inflation and 2) if capital losses could be deducted from ordinary income (other the the tiny $3k per year allowed today and not changed for decades) then the Tax Expenditure of that item would be much less than as currently calculated.

    1. Christopher Tebo8 months ago

      Incorrect, your health insurance premiums come out BEFORE you pay taxes on your incime. Look at uour paystub again.

  10. Buzz Mills2 years ago

    GOP: no taxes on dividends and capital gains bit.ly/1MCUY3O
    CBO: GOP estate tax repeal adds $269B to deficits bit.ly/1yiZ0eS
    applies to assets over $5.43 million; married $10.86 million

    1. Mike Hihn2 years ago

      Dividends are of course paid from after-tax profits. Even IRS call that double-taxation when describing the 100% tax exempt S corporations.

      So we essentially double-tax large corporations, who provide the best wages and benefits, to subsidize small-medium corporations who provide lower wages and benefits. Then we act surprised as all our best-paid union jobs disappear, middle-class wages decline (the average, not individual jobs) … and it’s somehow the fault of the rich who pay that double taxation (pension funds are exempt) … the same rich who subsidize 35% of the entire tax burden for the core middle class ($40-100K)

      1. Stephen1 year ago

        So two of the best paying (biggest, by your terms) corporations are Wal-mart and McDonald’s?
        And how about the 100 or so multi billion dollar (profit, not income!) corporations that not only pay NO taxes, but actually RECEIVE million dollar refunds? How about we just fix THOSE and quit trying to pay out Halliburton bills from the wallets of the working poor?
        How about we just go back to the top tax rate of that commie Eisenhower of 91%?

        1. myownviewpoint1 year ago

          “How about we just go back to the Eisenhower rates of 91%.”

          How about because we are 1) not insane and 2) not that immoral. 91% rates and we wouldn’t make anything anymore in this country. France tried to go up to 75% and their economy almost collapsed.