Progressive Tax Code Not Visible in Tax Expenditures

NCPA January 20, 2014

The distribution of tax expenditures does not reflect the progressivity of the income tax code, says Michael Schuyler, a fellow at the Tax Foundation.

Tax expenditures are parts of the tax code that reduce the taxes of an individual or activity. Some of the major tax expenditures are the mortgage interest deduction, the property tax deduction, the earned income tax credit, the child credit and the charitable deduction.

Schuyler looks at two Congressional Budget Office (CBO) studies to highlight the role of tax expenditures.

• One study examined the distribution of taxes and found that the federal income tax was very progressive -- tax burdens rise as income rises.
• A second study looked at tax expenditures and found that high-income and low-income filers had large tax expenditures, while middle-income taxpayers had smaller expenditures.

Many people consider tax expenditures to be loopholes. But if that is the case, Schuyler posits, shouldn't tax expenditures mean that the tax code gives high-income earners favorable treatment? Instead, our tax code is extremely progressive, as the first CBO study demonstrates.

The two studies are not actually contradictory.

• High income earners do, in fact, receive more tax expenditures, but they also pay a much larger amount of the federal income tax: the top quintile receives 50.6 percent of expenditures but pays 94.1 percent of individual income taxes.
• On the other hand, the lowest quintile receives only 7.7 percent of expenditures while paying a -6.6 percent of the income tax (as a function of refundable tax credits).

Looking solely at tax expenditures, therefore, does not paint an accurate picture of who actually is paying taxes. While the federal income tax code is very progressive, someone looking at the distribution of tax expenditures would not see that progressivity.

Source: Michael Schuyler, "Baked In the Cake: Why the Progressivity of the Income Tax Isn't Visible in the Distribution of Tax Expenditures," Tax Foundation, January 13, 2014.