FACT CHECK: Does America’s Complex Tax Code Benefit The Rich?
Chief White House Economic Advisor Gary Cohn claimed that simplifying the tax code would tax “the higher end [of the income spectrum] at a higher rate” during a Friday CNBC interview.
“Simplification does not mean tax cuts for the higher end of the bracket,” Cohn explained. “We can simplify and we can get rid of a lot of the deductions… affecting the high [income] taxpayers the most.”
Data from the Internal Revenue Service (IRS) confirms Cohn’s claim that upper income taxpayers benefit most from tax code complexity.
The ability of the wealthy to benefit from America’s tax code is in great part rooted in the tax system’s structure and complexities. The U.S. tax code encourages certain activities – homeownership, marriage, higher education, green energy home renovations, etc. – by allowing taxpayers to “deduct” associated spending from their tax bill. (The IRS may subsequently audit to ascertain if deduction claims are fair.)
When Americans file their tax return forms every April they can file for either a “standard deduction” or an “itemized deduction.” A standard deduction is an IRS-set lump sum – varying by categorical qualifications like marital status – that tax filers can deduct from the taxes they owe. An itemized deduction, conversely, is a more detailed filing that lists a taxpayer’s specific expenditures that qualify to be deducted from income taxes owed.
Only a third of taxpayers opt to itemize their deductions, and the likelihood of an individual opting to itemize goes hand-in-hand with income.
Adam Michel, a policy analyst at the conservative think-tank the Heritage Foundation, described the correlation between income level and the likelihood of itemizing as a “straight line” relationship. “The richer you are, the more likely you are to use those special deductions,” Michel explained.
An analysis of IRS data by Scott Greenberg of the Tax Foundation, a tax policy-related nonprofit, revealed that over 93 percent of 2013 taxpayers earning over $200,000, the IRS’ highest tax bracket, opted to itemize. This figure falls to just under 80 percent for taxpayers earning between $100,000 and $200,000. The percentage of taxpayers who itemize thereafter drops roughly 20 percentage points for each subsequent tax bracket; only 6 percent of 2013 taxpayers who made under $25,000 – the lowest tax bracket – itemized.
This discrepancy in tax filings between income groups is significantly rooted in costs associated with the tax code’s complexity. According to the Tax Policy Center, taxpayers spent 1.8 billion hours and almost $30 billion preparing and filing their individual income taxes in 2010 alone, with upper income taxpayers spending considerably more time and money – employing specialized lawyers and accountants to minimize taxes – than low income taxpayers can.
These deductions in large part facilitate taxpayers paying less tax. One Pew Research Center analysis counted 118 deductions and tax breaks for individuals in the income tax code, amounting to an estimated $1.15 trillion of lost revenue for the Treasury in 2016 alone.
“It’s not so much that people are getting to deduct their yachts or whatever,” Greenberg explained to TheDCNF. “It’s just that when we look at the biggest [deductions], they’re overwhelmingly helping higher income Americans.”
Greenberg pointed towards deductions for charitable donations, which are “extremely skewed” to benefit the upper income Americans who naturally donate most in dollar terms; according to the Pew Research Center, over two-thirds of the dollar value of deductions for charitable donations benefits taxpayers with annual incomes of $200,000 or more.
Other deductions that primarily benefit upper income Americans include the mortgage interest and property tax deductions, both meant to encourage homeownership. According to Pew, over 80 percent of the dollar value of annual mortgage interest and property tax deductions goes to taxpayers with incomes of $100,000 or more.
Deductions like the mortgage interest may also have a positive feedback effect. Such deductions, Michel explained, don’t “incentivize home ownership but incentivize larger homes with larger mortgages.” Larger homes with larger mortgages often mean larger property and local tax bills, which in turn could result in larger property and local tax deductions on federal income taxes owed.
The highest income taxpayers are not necessarily the biggest beneficiaries of tax deductions in proportional terms. An analysis of 2014 IRS tax data provided to TheDCNF by Greenberg shows that total itemized deductions as a percentage of total gross income for each tax bracket increases from 7 percent for the lowest tax bracket to 14.6 percent for the $100,000 to $200,000 tax bracket. This would indicate that deductions benefit higher income people more. After the $100,000 to $200,000 income tax bracket, however, the itemized deductions-to-income ratio declines to 14.1 and 11.6 percent, respectively, for the top two income tax brackets.
“It’s a number of factors,” Greenberg explained to TheDCNF. “Part of it is that house value doesn’t grow as fast as income does. My guess is that, proportionally, folks in the upper middle class spend a greater proportion of their income on mortgage interest, state and local taxes, and charity [the three largest income tax deductions].”
Higher income Americans, in short, are more likely to be able to afford deductible expenditures and more likely to be able to afford the resources to identify what deductions they qualify for; the better off thus benefit more from the tax code’s complexity. Cohn’s claims are true.
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