The Congressional Budget Office has published a report in which it examines ten major tax expenditures that benefit individual taxpayers and how these tax provisions are distributed among income groups.
One of the ten tax expenditures included is the mortgage interest deduction (MID).
The report concludes that more than half of the total benefit of the ten tax expenditures accrues to the top 20% of the population by income and 17% goes to the top 1%. This skewing is particularly remarkable given that one of the ten expenditures, the Earned Income Tax Credit, primarily benefits people in the bottom income quintile.
Almost three-quarters (73%) of the benefit of the MID goes to the top income quintile, with 38% going to the top 5% and 15% to the top 1%.
The minimum income in the top quintile is $81,400 for a one-person household, $115,100 for a two-person household, and $162,800 for a four-person household. Minimum incomes for the top 5% are $148,200, $209,500, and $296,300 for one, two, and four-person households respectively.
The report also clearly states that tax expenditures are simply spending through the tax code, intended to achieve some societal goal. The report cites five effects of subsidizing the specific activities at which tax expenditures are aimed that may reduce the desired effects.
The first is that they can be inefficient by subsidizing activities in which people would engage without tax breaks, such as buying homes. The MID is specifically cited as an example. Moreover, the MID incentivizes people to “purchase more expensive homes, investing too much in housing and too little elsewhere relative to what they would do if all investments were treated equally.”
Second, tax expenditures greatly increase the federal role in the economy relative to GDP and mask the true size of the federal government. Third, they reduce federal revenue and thus require higher tax rates to achieve needed revenue. Fourth, they add to the complexity of the tax code, although some tax exclusions reduce individual record keeping requirements. Finally, they alter the distribution of taxes owned in ways that are not intended or even acknowledged.
Tax expenditures operate more like mandatory spending than discretionary spending and not governed by the annual appropriations process. And unlike other spending that is administered by agencies with expertise in specific societal goals, tax expenditures are administered by the IRS, which has no particular expertise in any of the substantive areas that are subsidized by tax expenditures.
Click here to read the CBO report entitled The Distribution of Major Tax Expenditures in the Individual Income Tax System.