Wealthy win lion's share of major tax breaks

By ANDREW TAYLOR
Associated Press

WASHINGTON (AP) -- Wealthier households benefit significantly more than lower earners from big tax breaks such as deductions for mortgage interest and charitable giving, the government said in a study Wednesday.

More than half the benefits of 10 major tax breaks go to the one-fifth of U.S. households at the top of the income scale, according to the Congressional Budget Office.

• Interactive: Biggest federal tax breaks

The top 1 percent of earners reaps 17 percent of these tax breaks, which also include preferential treatment of investment income and the deduction for sales and income taxes paid to state and local governments.

Other breaks, such as the per-child tax credit of up to $1,000 and the earned income tax credit claimed by low-income households, generally benefit those in lower income ranges.

The report shows how lower and middle-income groups benefits from tax breaks. But once income is taken into account, the benefits are felt more equitably.

For example, tax breaks contribute almost 8 percent of after-tax income for couples making between $54,000 and $78,000. Such breaks represent 9.4 percent of income for couples making over $115,000 a year. Households in the bottom fifth, meaning couples making up to $35,000, receive 11.7 percent of their after-tax income from the breaks, about half of which is due to the earned income tax credit.

The study illustrates the challenges and trade-offs facing lawmakers as they consider overhauling complex U.S. tax laws by limiting or eliminating tax breaks and deductions in order to lower income tax rates for everybody.

The report was ordered up by Rep. Chris Van Hollen of Maryland, the top Democrat on the House Budget Committee.

The report "shows that tax breaks are skewed in favor of the top 1 percent of Americans at the expense of other priorities," Van Hollen said in a statement. "It's clear that we can limit unproductive and excessive tax preferences for the very wealthy as part of a plan to reduce the long-term deficit and promote long-term economic growth."

For instance, the top fifth of all households reap four-fifths of the benefits of deducting state and local taxes and 84 percent of the tax savings from deducting charitable contributions.

But the single biggest tax break, the tax-free treatment of employer-sponsored health care, is spread relatively evenly across income ranges, with 66 percent of the benefits going to the bottom 80 percent of households by income.

Democrats have proposed closing some tax breaks and devoting some of the money to reversing across-the-board spending cuts known as sequestration. The cuts began taking effect in March after Washington failed to reach agreement on tax increases and alternate spending cuts to replace them.

"Some tax preferences decisively benefit only the very wealthy while others are significant for middle-income taxpayers," said Rep. Sander Levin, of Michigan, the top Democrat on the tax-writing Ways and Means Committee. "The preferences that benefit the very wealthy highlight the ability to obtain the needed revenues to address the sequester and achieve a balanced approach to tax reform."

President Barack Obama has proposed to cap the rate at which wealthier households can reap savings from itemized deductions at 28 percent instead of 39.6 percent, the new top tax bracket imposed in a January tax deal.

The study said that the top one-fifth of households claim 81 percent of the benefits of itemized deductions.