As the U.S. tax code draws increased attention during the debate over avoiding the fiscal cliff, a Washington and Lee University senior brings a new perspective with his comprehensive study of whether or not tax expenditures that reduce revenues for social and economic purposes are helping those citizens who live in poverty.
Joe Landry, of New Ipswich, N.H., conducted his study with Harlan Beckley, director of W&L’s Shepherd Program on Poverty and Human Capability, over the summer under an E.A. Morris Research Grant. He is an American history major with a minor in poverty studies.
"Joe's research gives us a clear picture of how tax expenditures impact low-income people," said Beckley, the Fletcher Otey Thomas Professor of Religion. "It's important to see that the benefits are going mostly to the upper middle class and the upper class, reducing the progressive nature of the income tax code. The tax system is still slightly progressive, but over the past 30 years it has become less and less so. A 2011 report by the Congressional Budget Office is important support for the comprehensive work that Joe has done on social spending and tax expenditures."
Political leaders from both sides of the aisle are giving more attention to the role of tax expenditures. They are a form of government spending because the tax code allows exemptions, deductions or credits to select groups for specific activities. These expenditures often advance goals that are in themselves laudable. For example, provisions in the tax code allow people to deduct their mortgage interest, charitable contributions and health-care premiums, or to receive a tax credit for children.
Tax expenditures mean revenue losses at the federal level and currently run around $1.04 trillion annually, excluding reduced rates for capital gains and dividends. If included as part of federal spending, they would equal about one quarter of total spending.
According to Landry's study, the latest data show that, on average, households in the top 1 percent of income received $101,089 from these tax expenditures in 2007. Special tax rates on capital gains and dividends reduce tax revenues even further and benefit high-income taxpayers almost exclusively. Including these latter data would show that the benefits of tax breaks are even more skewed in favor of upper-income households. In 2007, households in the bottom 10 percent of income received on average only $1,154. In addition to material from the Congressional Budget Office, Landry used data from the Organization for Economic Cooperation and Development (OECD) and the Office Management and Budget (OMB).
One reason for this difference is that the mortgage tax deduction does not benefit renters or homeowners who do not have a positive annual tax obligation. As Landry explained, the deduction also disproportionately subsidizes home ownership for people whose higher-income bracket makes their deductions more valuable, and who qualify for larger mortgages, sometimes on two homes, that lead to higher interest deductions.
Other examples of tax expenditures are exemptions for employer contributions for medical insurance and retirement plans, life insurance savings and health-care flexible spending accounts. "If you don’t have health insurance, then you don't get any benefit," said Beckley, "and 50 million Americans don't have health insurance. That's one sixth of the population."
Landry’s study is controversial but not politically partisan. During the recent presidential campaign, both President Barack Obama and Gov. Mitt Romney proposed ways to increase revenues by reducing deductions, and House Speaker John Boehner has called for increasing revenues from the well-off by this kind of tax reform.
"I don't think my research comes across as partisan, because both liberals and conservatives indicate that they want a simpler tax system," said Landry. “Nevertheless, these political leaders resist eliminating specific deductions that benefit their constituents. Political discourse requires understandable information on the distribution of benefits from these tax benefits.”
Landry also examined social spending on programs such as Social Security, Medicare and Medicaid. He showed that while spending on those programs has increased, overall benefits for those with lower incomes have decreased. The CBO data show that low-income households now receive a smaller percentage of social spending than they did in 1979.
"Over the years, more and more of the benefits of social spending have been given largely to people who have high incomes as well as people who have been middle class for most of the their lives," said Beckley. "Exceptions to this are Food Stamps and the Earned Income Tax Credit (EITC), both of which increased during the period of the recession."
Landry also examined historical trends and international comparisons, showing that the United States ranks significantly below average among OECD nations in social spending as well as in revenues collected through taxes and other means. "We can know what social spending is in the United States now, at a certain point in time, but it's important to be able to place this in historical and comparative context," he said.
Landry continues his research, which will soon be posted on the Roosevelt Institute’s “Next New Deal” blog. Contributors to that blog include such well-known authors as Joseph Stiglitz, the institute’s senior fellow and chief economist; Elizabeth Warren, the Harvard Law School professor and U.S. senator-elect from Massachusetts; and Jonathan Alter, journalist and former editor of Newsweek. Beckley is using the research in the classroom and in talks to groups interested in poverty, both locally and on other campuses.