Inequality’s big enabler? The tax code.

how large is the tax code

(Justin Lane/EPA)

By Editorial Board April 22

“EVERYDAY AMERICANS need a champion, and I want to be that champion.” So said Hillary Rodham Clinton in announcing her 2016 presidential campaign. The former first lady, senator and secretary of state is preparing to run under the banner of progressive populism, not the more moderate “third way” politics for which both she and her husband, the former president, have been generally known. It’s a message more in tune with both the leftward movement of the Democratic Party since Bill Clinton won the presidency in 1992 and, according to Ms. Clinton, the reality that, in U.S. society, “the deck is still stacked in favor of those at the top.”

But how exactly is that deck stacked? And how would Ms. Clinton “reshuffle the cards,” in her phrase? On neither point has she been specific; her incipient candidacy so far consists of atmospherics, not proposals.

If Ms. Clinton wants to get substantive, all she needs to do is look at the income tax code. Of the 10 largest tax expenditures, only two — the $70 billion-per-year earned-income tax credit and the $57 billion child tax credit — favor the poor. The others disproportionately benefit the top 20 percent of earners, according to a Congressional Budget Office report. For example, the top quintile captures 73 percent of the mortgage interest deduction; 80 percent of the state and local taxes deduction; 84 percent of the charitable deduction; and 93 percent of the preferential rate on capital gains and dividends. This last one confers 68 percent of its benefits on the top 1 percent of taxpayers.

In short, the tax code redistributes a good deal of income upward, not so much because of overt “stacking” in favor of the rich but because Congress got sold on tax breaks as a means of achieving various socially desirable goals without directly spending on them. The mortgage interest deduction promotes homeownership, the charitable deduction promotes charity, and so on. The appropriate response for a would-be champion of everyday Americans, whether it’s Ms. Clinton or one of her rivals, would be to explain that these goals are being achieved at an unduly high cost in inequality, if at all, and that they need to be limited or abolished accordingly.

Alas for Ms. Clinton, that implies political challenges: Taking on the favorable treatment of investment income might put her at odds with her erstwhile Wall Street and Silicon Valley supporters. The state and local taxes deduction is a back-door subsidy to high-tax, high-service jurisdictions such as New York and San Francisco, where Democrats dominate. The mortgage interest deduction, defended by a legion of real estate agents and mortgage bankers, enables regular-voting upper-middle-income folks in red states and blue to afford more house than they could otherwise. And let’s not forget $23 billion in tuition breaks for higher education, which hardly benefit low-income households and hardly increase college attendance, according to a new National Bureau of Economic Research working paper .

Small wonder, then, that Ms. Clinton is not yet fleshing out her campaign theme, at least as it applies to taxes. Everywhere you look in the code, there’s an opportunity for egalitarianism — and an opportunity to make enemies.

Source: www.washingtonpost.com

Category: Taxes

Similar articles: