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Why Do Liberals Like the Tax Code?

January 6, 2011

From Baseline Scenario it seems the Tax Code is best for Rich People, why do the liberals like it so  much?

Tax expenditures primarily benefit the rich, for a few reasons.

 

  • First, most of them are deductions from taxable income, which means their value to you is proportional to your marginal tax rate. Not only do rich people have higher marginal rates than middle-class people, but remember that many middle-class people pay exactly zero in income taxes. (The average tax rate for people in the middle income quintile is 2.3 percent.) This is true, for example, of the deduction for employer-provided health insurance.
  • Second, because most of them are itemized deductions, you only get them if you itemize your deductions–which usually means either that you have a big enough house to have a big mortgage or you have enough income to pay a lot of state and local taxes.
  • Third, the size of the deduction is highly correlated with income. To take the most obvious example, rich people have bigger houses, and so they have bigger mortgages. (In another universe, they might buy the same size houses and pay for them with cash — but that’s not our universe.)
  • Fourth, there are the tax expenditures that you get on investments, which are disproportionately held by the rich. There’s the tax exemption for life insurance investments. There’s the big one: tax-advantaged investment accounts, including 401(k)s, IRAs, Roth IRAs, 529s, etc.  This is even leaving aside the question of whether lower tax rates for capital gains and dividends count as tax expenditures.
  • Fifth, there are the tax expenditures for businesses, since in theory those flow to their shareholders, who are disproportionately the rich. (I say “disproportionately” because someone with a net worth of $1 million has much more than ten times the capital market investments of someone with a net worth of $100,000.)
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