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How Tax Expenditures Hurt the Economy - and What to Do About It

issue brief

How Tax Expenditures Hurt the Economy - and What to Do About It

By Diana Furchtgott-Roth April 6, 2012

As we approach the deadline for filing income-tax returns, a renewed focus has emerged on “tax expenditures.” These are reductions in taxes owed, which occur when taxpayers avail themselves of provisions in the tax code such as the deductions for mortgage interest, state and local income and property taxes, and charitable contributions. Such aspects of the tax code have come under attack for disproportionately benefiting upper-income earners. Indeed, in a March 13 New York Times article, Eduardo Porter writes that “the $1 trillion in tax breaks mostly benefits those higher up the income ladder.”[1]

There is much to question about the assumptions underlying this perspective. It is crucial to keep in mind that, in fiscal year 2009, the top half of earners paid 97.8 percent of federal income taxes, the top 10 percent paid 70.5 percent, and the top 1 percent paid 36.7 percent.[2] That is why upper-income earners get more benefits from tax expenditures. If the tax system were not as progressive as it is, upper-income taxpayers would not benefit from tax expenditures.

The wealthy are not the only beneficiaries of tax expenditures, however. Lower-income taxpayers benefit disproportionately from refundable tax benefits such as the Earned Income Tax Credit, the Refundable Child Credit, and the Making Work Pay credit. The federal government spent over $100 billion in 2011 on these refundable tax credits. In general, a family of four making $50,000 will pay no income taxes.[3]

More broadly, it is important to keep in mind that the major problem with tax expenditures is not the benefits that they provide for the wealthy, who already pay the largest share of taxes, but the ways in which they distort behavior, leading to inefficiencies in the economy.

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