Earlier today I pointed out that revenue in the budget deal is not inconsistent with recent Republican talking points if the revenues come from cuts to tax expenditures. A question was raised: wouldn’t it be more regressive—meaning hit middle and lower income people harder—to raise revenues through cutting tax expenditures than through higher marginal rates?
Probably, but it depends on whose rates you raise versus which expenditures you cut.
The Tax Policy Center runs scads of useful tables on this sort of thing and below is a figure on the incidence of home mortgage interest deduction, which clocks in around a cool $90 billion (that’s an annual cost, btw).
Source: Tax Policy Center, Table T11-0009
About 9% of the benefits go to middle-income homeowners, but 67% goes to the top fifth and (not shown) 43% to the top 10%. So, cuts here would be pretty progressive (they’d also be ill-advised given the current housing market, but in normal times this expenditure is a target of most economists).
Of course, if you just let the high end Bush tax cuts sunset, by definition, 100% of the incidence falls on the top few percent. Conversely, if you went after a tax expenditure like the Earned Income Tax Credit, a wage subsidy for low-income workers, you’d be both deeply regressive and kinda cruel.
If grownups break through the barricades and the budget talks yield any revenues, they’ll come through cuts in tax expenditures, and this type of incidence analysis will be important. Stay tuned.