Wealthy benefit most from tax subsidies: study

WASHINGTON (Reuters) - Billions of dollars in U.S. tax breaks to encourage home ownership, retirement savings, business start-ups and education mostly benefit top income earners and do little to help low- and middle-income people build wealth, a report released on Wednesday said.

A 1040A Individual Income Tax form in a file photo. REUTERS/Mike Segar

The U.S. government spent nearly $400 billion, mostly through tax breaks, in 2009 to promote home ownership and other wealth-building strategies, and more than half of that benefited the wealthiest 5 percent of taxpayers, said the study sponsored by the nonprofit Annie E. Casey Foundation and the Corporation for Enterprise Development (CFED).

The Annie E. Casey Foundation and the CFED advocate for greater economic opportunities for the poor.

The groups will submit the report to President Barack Obama’s fiscal commission, which is due to recommend ways to reduce deficits approaching 10 percent of GDP and slow the growth of the country’s $13 trillion debt.

The tax code is under scrutiny as lawmakers debate whether to renew soon-to-expire income tax breaks during a fierce congressional election season focused on the sluggish economy and massive deficit.

Democrats want to renew only the income tax breaks in place for families making less than $250,000, saying the country cannot afford to continue low rates for wealthier Americans. But Republicans say spending, not tax revenue, is at the heart of the deficit challenge, and any tax increase would hurt small business and job creation when the economy needs it most.

The new report looks at numerous breaks embedded in the U.S. tax code.

It called those policies “upside down” and recommends redirecting wealth-building incentives to help more middle- and lower-income people save and build assets. With record deficits and tight budgets dominating the political landscape, CFED President Andrea Levere said the report was intended to help policymakers fine-tune some of these tax breaks to get the biggest benefit for the economy.

“We’re trying to be fiscally responsible, the deficit is going to frame our politics for many years to come, but at the same time if you don’t invest in the future, you don’t have one,” she said in an interview.

The commission, which is looking at these and other so-called tax expenditures as well as direct spending, is to report its recommendations in December.

“We can ill afford a federal wealth-building strategy that primarily helps those who are already wealthy,” the report concludes. “Redirecting the federal dollars spent on building assets more equitably would not only help poor families gain a foothold in the economy, it would fortify middle-class households,” the report added.

Levere said one way to encourage more people to save would be to expand a tax credit aimed at encouraging retirement savings for middle- and low-income people.

As it stands the amount of the credit depends on taxable income, she said. Making it refundable for those who do not earn enough to pay income taxes would encourage more people to open accounts.

“By making it refundable, you go from helping six million families to helping 50 million families,” she said.

The report looks at the mortgage interest tax deduction and other home ownership incentives which it said mostly benefit the wealthy with more expensive homes who can deduct more mortgage interest and property tax payments.

Doing away with the popular home mortgage interest deduction would be politically unpopular, but Levere said it could be limited to benefit mostly middle- and low-income people.

“It’s not as if all of the mortgage tax deduction is bad, it’s that there is no upper limit to it,” she said.

Editing by James Dalgleish and Andrew Hay