We are the tax loopholes

Those dang federal tax breaks! We just know that the super-rich are exploiting the tax code while we’re too dumb to take advantage. Right?

Well, no. Turns out some of the biggest tax breaks in the U.S. tax code are distinctly middle class.

The non-partisan Congressional Research Service recently put together a handy document that makes it relatively easy to understand non-corporate tax breaks (expenditures in budget-speak).

Researchers estimated that while there are more than 200 separate tax breaks in the code, 20 of those represent 90 percent of the revenue loss to the Treasury.

Here’s the CRS chart (click on it for a larger view):

taxes.jpg

The agency notes:

Is it possible to repeal or substantially trim most special tax deductions, credits, exclusions, and special rates, also known as tax expenditures? If so, the potential for lower rates or additional revenue would be significant.

For FY2014, the year used in analyzing these provisions, individual income tax expenditures, which account for most of the potential base broadening provisions, are projected to total over $1.1 trillion. This amount is equivalent to 74% of the total FY2014 revenue from individual income taxes, and about 7% of GDP.

In other words, eliminating all those tax breaks would put us well on the way to closing the huge annual U.S. budget deficit and set us on path to actually pay down all our outstanding national debt, now up above $15.5 trillion.

Or you could use the cash to slash personal income tax breaks.

You see where this is headed?

Who’s willing to give up tax breaks for employer health insurance, pensions and (gasp) mortgage interest — stuff that is largely tied to middle income America?

When the president’s own commission proposed a dramatic federal financial reform plan that included slashing tax breaks, it was beaten down in the U.S. House of Representatives.

It’s a debate that can’t be won. However, there may be an end run. Bruce Barlett, a policy official who served in the Reagan and George H.W. Bush administrations, supports a plan that would “simply give every family a tax exemption of $100,000, which would eliminate the income tax for 90 percent of those now filing returns…abolish the income tax for the vast bulk of Americans and replace the revenue with a 12.5 percent value-added tax.”

That won’t happen any time soon. But, as I contemplate next week’s tax filing deadline, I’m at least happy for the idea.

— Paul Tosto

  • jon

    number 5 on the list is capital gains rates… which is the loop hole that keeps the super rich (where all of their money is capital gains) paying a lower tax rate.

    Does this also take into account tax breaks for corporations? Because the “Job Creators” that own privately held large corporations have the potential to pull from a completely separate pool of tax breaks.

    Also, I think perhaps a redefinition of middle class needs to be hashed out… because reading the deduction list sounds like middle class is defined as having a house, children, medical problems, and/or being a senior with a pension/social security/medicare.

  • TomK

    Why are pensions tax-free when withdrawals from retirement savings (401K) are not?

    What % of current pension receivers were government employees? Convenient.

  • Ed

    I believe that #2 is not a tax loophole, but actually taxes that are deferred. If there is a way to get a tax free pension, I would like to know about that.

    Crazy that the mortgage interest deduction is number #3.

  • bsimon

    The top 2 refer to benefits received by us that are not taxed as income (but who gets a pension anymore?). While everyone with a mortgage is eligible for the deduction, its limited to those who itemize & those who borrow more benefit more. I.e. the tax benefit to me for interest charges on my $150k mortgage are dwarfed by tax benefits for interest charges on a million dollar mortgage.