Where the federal government is concerned, taxing the public is pretty much equivalent to federal spending. Don’t get lost in the legal language associated with taxing—tax credits, tax deductions, exemptions, and exclusions are colorful words that describe adding money to bank accounts, not subtracting money from them.
In 2013, the Corporation for Enterprise Development conducted an analysis of tax subsidies for education, housing, savings, and retirement. The organization discovered that of $340 billion in tax subsidies issued by the government, $95 billion wound up being distributed to the top 1 percent of income earners. By comparison, approximately $90 billion was divided among the bottom 80 percent.
On top of that, the Congressional Budget Office’s 2013 report analyzed the top 10 tax subsidies. These subsidies have a combined value of $900 billion. Congress found that more that 50 percent of these subsidies were issued to those in the top 20 percent of earners. Moreover, the extremely wealthy 1 percent of Americans, with a median income of $7.6 million annually, received an average tax return of $33,391. Meanwhile, those earning less than $65,000 per year make up 60 percent of the population and received an average income tax return of less than $1,000.
For example, in 2014, retirement tax spending in the United States totaled $146 billion. This was an increase from 2013’s spending budget of $128 billion. The Corporation for Enterprise Development found that these subsidies also unfairly favored high income earners. Of the total retirement tax spending, the top 1 percent received an average return of $13,088 while the lower 60 percent of income earners received an average of just $200.
In recent years, conservatives have been applying pressure to reduce government spending. Because of this pressure, the federal tax code has become the main source of influence over social policies relating to retirement, housing, and education. Consequently, the budget for federal spending through taxes in these areas has been increasing steadily. For instance, federal tax spending in these combined areas totaled $540 billion in 2013, then increased to $640 billion in 2014. Nevertheless, combined federal tax spending in 15 other areas, such as health and human services, transportation and labor, totaled $464 billion.
Several anti-tax advocates have argued against the federal government’s notion that reductions in taxes are equivalent to public assistance. In fact, the Tax Policy Director of Americans for Tax Reform spokesperson Ryan Ellis stated “That’s just stupid and dishonest. Letting people keep their own money does not increase the size of government in any way.”
Many advocates for tax reform would like to see more tax dollars spent in areas that help the 27 million low-wage workers in need of assistance just to make ends meet rather than lining the pockets of the nation’s wealthiest taxpayers. The Earned-Income Tax Credit and the Tax Saver’s Credit are good examples of programs being highlighted by such advocates. Some argue that subsidies such as those mentioned above are the most effective anti-poverty measures in place at the moment and represent the direction that tax code reform should take.
The Obama administration has responded to current tax spending concerns by adding a $500 tax credit for working parents with children into the budget for 2016. The White House approximates that the majority of this credit will benefit workers earning less than $120,000 per year, while some credit will benefit households that earn up to $210,000 annually.
According to some economists, tax code spending is fair, at least from an accountant’s perspective. These economists argue that low-wage workers who use vouchers to help make rent payments are benefitting from the same incentives as a high-income earner deducting mortgage interests so that they can take a vacation. In fact, each of these incentives is derived from the federal tax budget. But this ignores the much larger issue of income inequality in the United States, and the role that the current tax code plays in perpetuating that inequality.
Tax policies often lean in favor of the rich for a number of reasons. For instance, high-income earners are much more likely to receive passive income, which is taxed differently. High-income earners are also overwhelmingly more likely to be in a position to take advantage of corporate tax shelters and loopholes. Furthermore, wealthy households have more assets, such as houses and retirement accounts. As a result, wealthy households are able to capitalize on a greater amount of tax subsidies. The question isn’t whether the tax code favors the rich. In its current form, it does. The question is what we as a nation will do about it.