Few Tax Expenditures for Poor

Mike KonczalMike Konczal is a very good economics writer who I regularly read. This morning, he was at Wonk Blog talking about, The Tax Break State. In it, he went over the main tax breaks that the federal government gives to individuals. For example, people don’t think of it as a tax break, but when a business gives health insurance to an employee, he is getting a tax break. Under normal circumstances, the worker would just get extra pay with which he would buy health insurance. That extra payment would have then been taxed. Thus, the exemption of taxes on this benefit is a tax break. And it’s big too: about one-third larger than the mortgage interest deduction.

There is one really import aspect of these programs: they are a form of welfare. There is no ultimate difference between allowing people not to pay taxes on their mortgage interest and giving people a check for purchasing a house. And this isn’t some liberal theory. This is exactly the argument made by conservative economist Milton Friedman. I think we need to remember this. There is such a stigma to programs like SNAP (food stamps), but none whatsoever to programs like the mortgage interest deduction. But they are both government handouts and the “respectable” one costs a whole lot more.

And that brings me to the problem I have with Konczal’s article. In order to show how the different kinds of tax expenditures (generally speaking, deductions) benefit different groups, he provided the following graph:

Tax Expenditures

For clarity, he presents the three types of expenditures as percentages. I’m afraid that this gives the impression that we are devoting far more money on the poor than to other income brackets. Here’s a graph from the Congressional Budget Office that shows the relative size of these categories (click to expand):

CBO Tax Expenditures

So the exclusions (50%) and deductions (30%) are by far the biggest share: 80%. The preferred tax rates are around 11%. And the tax credits are just 9%. But this understates the preferred tax rates. Capital gains are not taxed at death, so really the categories would be more appropriately: 75-16-9.

The take away from this is something I’ve been ranting about for years: welfare for the poor is cheap. All it seems we get in the mainstream is discussion of all the poor spending their whole lives in Paul Ryan’s hammock. And when it comes to tax expenditures, all of the conservative media are now and forever in a tizzy over the fact that 47% of Americans pay not federal income taxes. But on the expenditure side of this, we are doing very little for the poor and it would hurt us very little to do quite a lot more.


Two quick things. First, Konczal’s overall point is the same as mine. Second, the reason that the poor get the expenditures they do is that there has been a trend away from direct payments like welfare checks to tax expenditures like the EITC and CTC.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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