I recently cited this important new paper from the CRS on tax expenditures. In my earlier post, I emphasized the “reality-check” findings of the piece regarding how much you can realistically pay for lower tax rates by closing tax expenditures (answer: less than you think, and a ton less than Rep Ryan claims in the new House budget).
Here, I’d like to briefly highlight some nice analysis in the paper regarding the distributional effects of various tax expenditures, i.e., who benefits from different tax breaks?
In general, as shown in the figure here (see second figure), tax expenditures flow upstream; 66% of their benefits go the top 20%; 24% of their benefits accrue to just the top 1%.
But the picture below shows some very different outcomes within that aggregate result. The figure plots the share of tax benefits on the Y-axis and the share of incomes of the households who get them on the X-axis. If a particular tax expenditure were proportionally distributed such that the poorest 10% of households got 10% of the tax benefits, the bottom 50% got 50%, etc., the plot of that benefit would be coincident with the diagonal line.
Thus, measures above the line are progressive—more of their benefits go to lower income families—and vise-versa.
The EITC—a wage subsidy for low-income, working families—and the special break for realized capital gains provide good examples of the opposite ends of the distributional continuum. As the figure shows, the benefits of the EITC are exhausted before you hit the 20th percentile of the income scale (the sample here is all taxpayers). Conversely, the benefits of the lower rate on cap gains don’t start rising until you get above the 60th percentile of taxpayers, and about half of the benefits go to the top fifth.
Check out the doc (appendix B) for more of these types of graphs, but the table below provides a summary measure—the Suits index—of a bunch of tax expenditures. The numbers range from -1 to +1, with values close to 1 indicative of a highly progressive expenditure (the EITC scores 0.937) and those close to -1 concentrated at the top.