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U.S. Tax Breaks: Top 20% Get More than Half the Benefit

One of the biggest debates about taxes is what is “fair” in terms of who should be paying how much of their income, and what how tax breaks are distributed.

Where you stand in the debate over who pays “more” in taxes — the rich, the middle class, or the poor — largely depends on what you define as “more.” Is it sheer numbers? Is it effective tax tax rate [3]?

Whether or not you think that more needs to be done to ensure that the tax code is more progressive (or whether you think it’s “unfairly” progressive by over-taxing the rich) is an interesting debate. And the recent report from Congressional Budget Office [4] about the distribution of tax breaks is only likely to add more fuel to the fire.

The Wealthy Benefit More for Tax Breaks

According to the CBO report, more than half of the $900 billion in tax breaks that are given out this year will go to the top 20% of households. The largest chunk of those savings go to the top 1% (or households with at least $327,000 in annual income), with those households receiving 17% of the total savings.

So, where do those tax breaks come from? And why do the richest households get access to them? A look at the breakdown offers some insight into the way that wealthy Americans handle their money [5].

First of all, the biggest tax benefit ($260 billion total) comes from the fact that employer-provided health insurance offers a tax deduction. This is something that many middle-class Americans [6] have access to as well. Where the wealthy start to pull way is when it comes to preferential treatment for dividends and capital gains ($160 billion) and contributions to retirement accounts ($140 billion). Also, the deductions for state and local taxes ($80 billion) and mortgage interest ($70 billion) are considered deductions that primarily benefit the top 20%. This is because many of those outside the top 20% don’t itemize their deductions, and therefore don’t get the benefit of these extra tax breaks.

Other tax breaks include contributions to charity ($40 billion), tax-free treatment of capital gains on assets transferred at death ($50 billion), tax-free Social Security benefits ($35 billion), earned-income credit ($60 billion), and child tax credit ($60 billion). Even though some of these tax breaks benefit middle-class and lower-income families, their relatively smaller amounts mean that the wealthy get the lion’s share of tax benefits.

Do the Wealthy Deserve the Tax Breaks?

Some argue that the wealth deserve these tax breaks. After all, the Tax Policy Center says that, in sheer numbers, the top 20% are responsible for 70% of federal tax revenue.

However, others point out that, even though some Americans might not pay federal income tax, they pay plenty of other taxes [7] (payroll taxes, which aren’t collected on income above $113,700 in 2013, are considered especially regressive by some) add up to mean that lower-income folks pay more of their income in total taxes than the wealthy. According to the Institute on Taxation and Economic Policy, the botton 20% of taxpayers end up paying 12.3% of their incomes in state and local taxes — even though they may not pay federal income tax. The top 20% pay 7.9% of their incomes in state and local taxes by contrast.

By the time payroll taxes, and state and local taxes are added in, some believe that it basically evens out in terms of what the wealthy end up paying vs. what the rest of Americans end up paying when it comes down to it.

All of these calculations include assumptions and averages, though, and there are always questions about who’s doing the math, and how the math is adjusted.

What do you think? Do the 20% deserve these tax breaks? Or should some of these tax breaks be eliminated at a certain income threshold?

(Photo: Tax Credits [8])