It Makes Perfect Sense that the Rich Benefit More from Deductions!

The Los Angels Times recently reported that the richest households are getting the majority of “tax breaks” and deductions built into our tax code.  Their article is based on a CBO Report titled, The Distribution of Major Tax Expenditures in the Individual Income System.

First thing is first, I think it reprehensible that a non-partisan group (can’t really blame a newspaper) counts a lower tax bracket as a “tax expenditure.”  Taxing someone at a lower dividend or capital gains rate is not a tax expenditure.  I even have a problem with calling a tax deduction an expenditure because it isn’t! It is just uncollected revenues based on legal means of tax planning, and as we know one has no patriotic duty to over pay taxes,

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes and public duty to pay more than the law demands.

Judge Learned Hand 1934

Notwithstanding what one might consider semantics the LA Times provides a great graphic on what they consider the main part of the article:

la-na-tax-breaks
Source: http://graphics.latimes.com/towergraphic-la-na-tax-breaks-tower/

When I first read the headlines all I could think is…”So What?” – isn’t this the logical conclusion given how taxes are currently calculated in America.

A Deduction is as Valuable as Your Income Tax Rate…to a point

The headline was everywhere in 2011 when then Presidential Candidate Mitt Romney said that 46% of the population pays no income taxes.  He was referring to a study done by the Tax Policy Center on the topic.  So the first thing we have to do is remove all those people who don’t pay any income tax either because they either don’t earn enough or have ample deductions.  For example:

  • someone earning $24,000 per year with a few kids just doesn’t have the ability to deduct mortgage interest because they already have reduced their tax income to the point of not “needing” the deduction.
  • A taxpayer earning $100,000 through their pass through business (S-Corp, some LLCs, etc) may deduct enough legitimate business expenses that their charitable contribution to their church or synagogue just doesn’t matter

Moving beyond that concept we have the “value” of a deduction.  Many common deductions are based on the tax payer’s marginal tax rate.  Take this mortgage interest deduction example provided by Center for Budget and Policy Priorities,

An investment banker making $675,000 who has a $1 million mortgage and pays $40,000 in mortgage interest each year receives a housing subsidy of about $14,000 annually from the mortgage interest deduction.  The banker pays about 65 cents per dollar of mortgage interest, and the taxpayers pick up the remaining 35 cents.  By contrast, a schoolteacher making $45,000 and paying $10,000 a year in mortgage interest on a more modest home receives a housing subsidy worth $1,500 annually.  Here, the family pays 85 cents of every dollar of mortgage interest and taxpayers pick up 15 cents.  The banker’s subsidy is not only larger than the teacher’s in dollar terms, but also represents a greater share of the banker’s mortgage interest expenses.

To get an even better sense of the above contention, the LA Times article linked above mentions that the top 1% receives 17% of all tax “expenditures” (again, I hate the word expenditure in this conversation)  but according to Huffington Post that same top 1% will pay about 35.5% of all income taxes received by the Federal Government.

To recap where what we have:

  • We have 46% of Americans (in 2011) that paid no income tax either because they didn’t earn enough over the standard deduction or because they were able to reduce their tax income to the point that they couldn’t use all their deductions…then
  • We have a deduction worth more to those that are paying more taxes and the top 1% pay over a third of all income taxes collected by the Federal Government.

So again, to the left wing media outlets hyping this story, I say again…so what? 

 

5 Responses to It Makes Perfect Sense that the Rich Benefit More from Deductions!

  1. It must be a slow news day! This is not news, it is a fact that the more you earn the more choices you have. Higher income individuals also have access to experts to advise them. Who wouldn’t pay $500 to save tens of thousands of dollars.

  2. There’s a larger point here, which is that if we want a truly progressive tax system (i.e. as your income increases, the proportion of your income paid as taxes increases), we need to maximize taxing decisions in ways that put lower burdens on low-income individuals with those burdens increasing as income increases.

    Take, for instance, payroll taxes. After a few stimulus years where rates were 3% or so, they are now back up to 6% (or something like that…forgive me if the details aren’t exact). You pay payroll taxes ONLY on the first $115k of earned income, and after that, it is phased out. This is NOT progressive — if you make $50k a year, 6% is going to the government in payroll taxes, while someone making $200k pays 6% only on their first $115k in income, with the remaining $85k exempt from payroll taxes. We should be in favor of taxing decisions that would reverse that — say, lowering all payroll tax rates back down to 3%, but paying for it by eliminating the $115k cap on income subject to those taxes (no idea if the math works out, but you get the idea).

    Similarly, we should be in favor of progressive tax rates on capital gains income — if you made $1 million in capital gains last year, you should be (but are not currently) paying a higher tax rate on that $1 million than someone who made $1000 on capital gains. That way, we can balance our budget/reduce our deficit while providing a responsible social safety net/infrastructure for our economy in a manner that places more burdens on the people who can most afford it.

  3. I agree – the attempt to change the semantics is bald and ridiculous. The very point of some of these deductions was to encourage behavior – and now that the behavior is encouraged we complain?

    Take charity, for example. First off, it’s a deduction, not a credit. Second, with the money going to the Fisc PLUS the money to the charity, there are a greater number of dollars leaving a rich person’s pocket than would otherwise – and the charity likely spends more dollars on social benefit than the US.

    Again, silly – but hey… if it was politically possible to do a flat tax with a standard deduction, and (my wrinkle) a smart NIT, I’d be down.

  4. Since we have a progressive tax system where the more you make the more you are taxed, it would make sense that the more you make the more you can deduct. Only logical, and don’t really see the problem with it, even if I might not totally agree with our tax system as a whole.

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