• Thu
  • Jul 31, 2014
  • Updated: 2:29am
BusinessEconomy

Wealthy win lion’s share of major tax breaks

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

PUBLISHED : Thursday, 30 May, 2013, 11:06am
UPDATED : Thursday, 30 May, 2013, 11:06am

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 new study.

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

The top 1 per cent of earners reaps 17 per cent 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 US$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 per cent of after-tax income for couples making between US$54,000 (HK$419,240) and US$78,000 (HK$605,567). Such breaks represent 9.4 per cent of income for couples making over US$115,000 (HK$892,823) a year. Households in the bottom fifth, meaning couples making up to US$35,000 (HK$271,730), receive 11.7 per cent 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 US 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 favour of the top 1 per cent 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 per cent 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 per cent of the benefits going to the bottom 80 per cent 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 per cent instead of 39.6 per cent, the new top tax bracket imposed in a January tax deal.

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

Share

Related topics

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

 
 
 
 
 

Login

SCMP.com Account

or