It’s no secret that tax expenditures — that’s the legislative term for what you and I know as tax deductions, credits and income that’s exempt from taxation — keep a lot of money out of Uncle Sam’s hands.
The Joint Committee on Taxation regularly looks at what these uncollected tax amounts cost the U.S. Treasury. Now another report, this time from the Congressional Budget Office, or CBO, confirms the lost revenue.
For 2013, the cost of 10 of the largest tax expenditures comes to around $900 billion.
However, the difference in the new CBO analysis is that it puts the tax breaks and their dollar amounts in a taxpayer context.
The CBO says that more than half of that $900 billion in tax breaks benefits the wealthiest 20 percent of taxpayers.
The congressional number crunchers reached that result after examining how the 10 tax expenditures are distributed among households with different amounts of income. That explains the document’s somewhat ponderous name, “The Distribution of Major Tax Expenditures in the Individual Income Tax System.”
Categorizing tax breaks
The tax breaks in the CBO report fall into four categories.
There are exclusions from taxable income, which include employer-sponsored health insurance, net pension contributions and earnings, capital gains on assets transferred at death and untaxed portions of Social Security and Railroad Retirement benefits.
Three tax breaks fall in the itemized deductions area: certain taxes paid to state and local governments, mortgage interest payments and charitable contributions.
Preferential tax rates on capital gains and dividends got its own category in the CBO study. This still accounts for much lost revenue despite being increased in 2013 as part of the “fiscal cliff” tax bill, officially known as the American Taxpayer Relief Act, from 15 percent to 20 percent for higher income individuals.
Finally, two tax credits are among the costliest expenditures, the Earned Income Tax Credit, or EITC, and the child tax credit. The child tax credit also was part of the January tax bill, being permanently set at $1,000 per kid.
As expected, CBO estimates show that more than 90 percent of the benefits of lower tax rates on capital gains and dividends this year will go to households with the highest income.
At the other end of the earning spectrum, about half of the benefits of the EITC will go to households in the lowest income sector.
Again, the demographics of those and the other tax break benefits are not surprising. But the CBO’s data could add some oomph to what is likely to be a lively debate when Congress finally does get around to talking about tax reform.
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Veteran contributing editor Kay Bell is the author of the book “The Truth About Paying Fewer Taxes” and a co-author of the e-book “Future Millionaires’ Guidebook.”