Who Really Gets Those Tax Breaks?

Liberals claim the wealthy get all the tax breaks, but our Swiss cheese-like tax code dispenses goodies to all income groups, including lower-income taxpayers. First, who pays? Thanks to an already heavily progressive tax code, in FY2009:

• the top 1% of earners paid ONE-THIRD (36.7%) of all federal income taxes collected;
• the top 10% of earners paid over TWO-THIRDS (70.5%) taxes collected; and
• the top 50% of earners paid almost ALL (97.8%) taxes collected.

Who gets? In FY 2011, tax breaks "amounted to over $1 trillion," among them:*

• $100 billion to low-income taxpayers through three "refundable" tax breaks: the Earned Income Tax Credit, the Refundable Child Care Credit, and the Making Work Pay tax credit;
• $109.3 billion to earners with company benefits for tax-free employer-provided health insurance;
• $42 billion to taxpayers for deductions to offset state and local taxes paid; and
• $76 billion to homeowners for mortgage-interest deductions.

The $1 trillion figure "is why many deficit reduction plans want to shrink them," writes Diana Furchtgott-Roth, a former chief economist of the U.S. Labor Department.

Those on the left of the political spectrum seek to eliminate tax expenditures as a way of raising revenue. Those on the right want to lower tax rates, keeping revenue collected by the federal government at the same level as it stands now.

The soundest way to reduce our deficit is through fundamental tax reform, which generates the economic growth that powers our economy. This means a revenue-neutral plan to get rid of tax expenditures [i.e., breaks] and to lower tax rates, without raising overall levels of taxation. Raising taxes by eliminating tax expenditures, without a commensurate decline in tax rates, will only reduce economic growth.

*See Furchtgott-Roth's three page report and chart for a breakdown of these and other tax breaks.

Voigeli: The Case for Anti-Tax Absolutism

In "Not a Penny More," William Voigeli makes the case for why "anti-tax absolutism" is smart public policy. Anti-taxers, he asserts, are simply "confronting a governing failure—an abiding lack of candor about what our welfare state costs." Moreover, "by restricting the fiscal oxygen supply that sustains a fundamentally flawed system," anti-taxers are forcing welfare state proponents to face reality.

Federal spending occurs in three broad categories:

1. National defense;
2. Welfare state — Social Security, income support programs (disability, unemployment), health care (Medicare, Medicaid, Children's Health Insurance Programs), education, job training, and social services; and
3. "Housekeeping" — law enforcement (federal courts, prisons, prosecutors, FBI), Amtrak and air traffic control; national parks and EPA; embassies, veterans programs, NASA and so on.

How have each grown over the last few decades? From 1965 to 2008,

• National defense grew 42%
• Welfare state grew 583%
• "Housekeeping" grew 76%

By 2008, the welfare state consumed 61% of all federal government spending.

Welfare state expansion over the decades has been built on deception and dishonesty. Two examples:

• In 1965, proponents predicted the Medicare hospital insurance part would cost taxpayers $9 billion by 1990. Actual cost: $67 billion. 
• In 1987, proponents predicted Medicaid expansion would cost $1 billion by 1992. Actual cost: $17 billion.

Faced with unsustainable deficits and debt today along with Americans' strong desire to rein in government spending, liberals are now misleading Americans on the scope and scale of the tax increases necessary to sustain the current welfare state. They have vowed not to raise taxes on any individual earning under $200,000 or families earning under $250,000.

Do these vows hold water? A 2010 study by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, found that reducing federal deficits by the second half of this decade to a reasonable 2 percent of GDP, while keeping Obama’s promise, would require increasing the rate in the second-highest federal income-tax bracket from 33 percent to 85.7 percent, the rate in the highest bracket from 35 percent to 90.9 percent, and the capital-gains tax rate from 15 percent to 39 percent.

The study, Desperately Seeking Revenue, pointed out that such tax rates would give the prosperous a strong incentive to defer income, shift it to nontaxable forms, or spend it on deductible items, like charitable contributions. The resulting revenue shortfall would necessitate even higher tax rates or might simply make reducing deficits to 2 percent of GDP impossible.

Even Jonathan Chait, who has devoted hundreds of New Republic blog posts over the years to advocating higher taxes on the rich, conceded after the August 2011 debt-ceiling agreement, “It has become clear that Obama’s pledge not to raise taxes at all on anybody earning less than $250,000 a year is no longer compatible with even the minimal demands of government over the next decade.” [emphasis added]

Liberals argue that anti-tax absolutists are fanatics who want to rip "the social safety net to shreds."

To see why that argument is wrong, think all the way back to 1995, when America had social insurance for the elderly, health care and welfare for the poor, and various other appurtenances of a welfare state, to say nothing of public schools and colleges, mass transit, public parks, and lots more. Since then, the federal government’s total revenues, adjusted for changes in population and inflation, have grown, despite the recession. In other words, to duplicate now the revenue stream that paid for the 1995 menu of government services would mean cutting taxes, not increasing them.

Voigeli argues that "by restricting the fiscal oxygen supply that sustains a fundamentally flawed system," anti-tax absolutists are forcing welfare state liberals to come to grips with reality and to finally be truthful with the American people as to what sustaining the ever-expanding welfare state will truly cost all of them.

Read the whole article.