How the IRS Helps the Rich Get Richer

This U.S. presidential campaign, and particularly that of Democratic Senator Bernie Sanders of Vermont, moved the issue of income inequality front and center. Now there are some new numbers in that department, and they won’t make many people happy. At best, maybe just 1 out of 100.

The top 1 percent of Americans as measured by income rake in 17 percent of all U.S. income on an annual basis—before taxes, of course. And that caveat is important, according to a new analysis by the Tax Policy Center (TPC),1 because that select group of citizens gets 27 percent of the tax breaks doled out by the federal government.

The TPC’s calculations show an estimated $1.17 trillion in federal revenue last year going to individual tax expenditures (a fancy way of saying taxes we didn’t have to pay because of deductions, like for giving old clothes to the Salvation Army—or, in this case, collections to the Metropolitan Museum of Art). While the wealthy see an outsize benefit compared with their share, the lowest-income households get just about 4 percent of federal tax breaks, close to their portion of all pretax income. That same trend holds for taxpayers in middle- and upper-middle-income households.

Those 1.1 million folks in the 1 percent, as measured by the TPC, have annual income that averages a little less than $700,000. The top one-tenth of that group, some 110,000 households, average about $3.6 million, according to Howard Gleckman, a senior fellow at the TPC.2

The middle of the pack, some 33 million people, have pretax income ranging from $45,000 to $80,000. The lowest one-fifth of taxpayers, a universe of about 47 million Americans, have income up to about $24,000.

Among the biggest of these givebacks, courtesy of the Internal Revenue Service (well, really Congress), are capital gains and dividends—these are the biggest way the wealthiest benefit. Characterizing capital gains and dividends as government spending is somewhat controversial, noted Gleckman. “The IRS considers them a tax expenditure, but there is a question of whether they really are. There are tax-preferential rates, but are those preferential rates really a government spending program?” The terminology does sound like it’s already government money, and only if your accountant finds the appropriate deduction can you have some back.

Using the IRS nomenclature, the top 1 percent got more than 60 percent of the benefit from a basket of subsidies including the preferential tax rates on capital gains and dividends, the step-up basis for inherited assets, and the exemption of most gains from the sale of a primary residence. The top 1 percent also gets a big serving of benefits from itemized deductions, which include gifts to charitable organizations, gobbling up 32 percent of that category. That’s a lot of old Chanel suits.

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