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Bald Eagle in Anchorage, Alaska

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Thursday, January 3, 2013

United States Federal Income Tax Breaks


In 2011, the United States received 47 percent of its Federal tax revenue through income taxes on individuals and 8 percent from corporate income tax.  (Payroll taxes, i.e. funds dedicated to Social Security and Medicare, provide 36 percent of Federal receipts.)    Individual income taxes provided 1,090 billion dollars, and corporate income tax provided 181 billion dollars. 

Through the years, the government has established many exclusions (termed "tax expenditures") which permit individuals and corporations to avoid taxes on part of their income.  Congress established these exclusions for reasons of fairness, or as incentives for certain economic or social goals.   The Washington Post reports that there are 172 tax breaks, primarily benefiting individuals, which deprive the treasury of over a trillion dollars of revenue each year.  The table below was created from the Washington Post interactive graphic, and show the top 73 tax breaks, using the threshold of one billion dollars.  The top 73 tax breaks amount to nearly 1.2 trillion dollars of lost annual tax revenue, an amount approximately equal to the 2012 Federal deficit.   Over 200 billion dollars of new tax breaks have been enacted since the year 2000.

Although each of the tax exclusions was designed to create specific benefits to society, the cumulative result is massive complexity in the tax code.  The GAO reported that economic distortions resulting from tax preferences cost the United States between 2% and 5% of GDP annually.

These tax breaks are deeply ingrained in American culture.  Individuals have been promised tax relief on their retirement savings and on their home mortgages.  These tax benefits are critical elements of life-long financial planning for many individuals.  Nevertheless, in the interest of simplicity, transparency, and economic efficiency, many of these tax exclusions should be gradually removed from the tax code.

Tax Break
Year
benefit
Billion $
Exclusion of Employer Contributions for Health Care
< 1975
Individuals
173.8
Mortgage interest deduction
< 1975
Individuals
88.7
401K Plans
2001
Individuals
62.9
Earned Income Tax Credit
1975
Individuals
62.5
Step-up of Capital Gains at Death
1977
Individuals
50.9
Exclusion of Net Imputed Rental Income
2004
Individuals
47.0
Making Work Pay Tax Credit
2009
Individuals
44.0
Child Credit
1997
Individuals
42.5
Employer plans for Income Security
< 1975
Individuals
42.2
Deferral of Income from Controlled Foreign Corporations
1977
Corporate
41.4
Deductibility of charitable contributions *
< 1975
Individuals
39.6
Deductibility of non-business state and local taxes **
< 1975
Individuals
37.7
Capital Gains (except Agriculture, Timber, Iron Ore & Coal)
< 1975
Individuals
37.6
Exclusion of Interest on Municipal Bonds
< 1975
Individuals
31.3
Capital Gains Exclusion on Home Sales
1997
Individuals
27.6
Treatment of qualified dividends
< 1975
Individuals
23.6
Exclusion of Interest on Life-Insurance Savings
< 1975
Individuals
21.2
Social security benefits for retirees
< 1975
Individuals
20.3
Property tax deduction
< 1975
Individuals
19.3
Accelerated Depreciation of machinery
1977
Individuals
17.5
Keogh Plans
1983
Individuals
15.0
American Opportunity Tax Credit
2009
Individuals
14.4
Individual Retirement Accounts
< 1975
Individuals
13.9
Deduction for US Production Activities
2004
Corporate
13.8
Exclusion of benefits and allowances to Armed Service Personnel
< 1975
Individuals
13.3
Exception from Passive Loss Rules for $25,000 of Rental Loss
1987
Individuals
10.9
Credit for Homebuyer
2008
Individuals
10.4
Deductibility of Medical Expenses
< 1975
Individuals
10.0
Social security benefits for disabled workers
< 1975
Individuals
7.2
Exclusion of workers'compensation benefits
< 1975
Individuals
7.0
Expensing of Certain Small Investments
1993
Individuals
6.7
Self-employed Medical Insurance Premiums
1998
Individuals
6.2
Credit for Low-Income Housing Investments
1986
Corporate
6.0
Credit for Energy Efficiency Improvements, existing homes
2005
Individuals
5.5
Exclusion of income earned abroad (citizens)
< 1975
Individuals
5.5
Carryover Basis of Capital Gains on Gifts
1988
Individuals
4.8
Expensing of Research and Experimentation
< 1975
Corporate
4.6
Deductibility of charitable contributions; Education
< 1975
Individuals
4.5
Deductibility of charitable contributions; Health
1977
Individuals
4.5
Exclusion of veteran's death and disability payments
< 1975
Individuals
4.5
Credit for Increasing Research Activities
1981
Corporate
3.9
Lifetime Learning Tax Credit
1997
Individuals
3.9
Exclusion of Interest on Hospital Construction Bonds
1980
Individuals
3.6
Graduated Corporate Income Tax Rates
1978
Corporate
3.3
Social security for spouses & dependents
< 1975
Individuals
3.2
Alcohol Fuel Credits
1980
Corporate
3.1
Exclusion of Employee Reimbursed Parking Expenses
1993
Individuals
3.0
Exclusion of scholarship and fellowship income
< 1975
Individuals
3.0
Parental exclusion for students 19 & older
< 1975
Individuals
3.0
Inventory Property Sales Source Rules Exception
1986
Corporate
2.9
Build America Bonds
2009
Corporate
2.6
Credit for Small Business Health Insurance
2010
Individuals
2.6
Additional Deduction for the Elderly
1986
Individuals
2.5
Exclusion of Interest on Bonds for Private Non-Profit Educational Facilities
1983
Individuals
2.4
Premiums on Group Term Life Insurance
< 1975
Individuals
2.0
Credit for Child and Dependent Care Expenses
< 1975
Individuals
1.9
Medical Savings Accounts/Health Savings Accounts
1996
Individuals
1.9
Energy Production Credit
1978
Corporate
1.6
State Pre-paid Tuition Plans
1997
Individuals
1.6
Special Rules for Employee Stock Ownership Plans
1988
Corporate
1.5
Deductibility of Student Loan Interest
1997
Individuals
1.4
Discharge of Mortgage Indebtedness
2007
Individuals
1.4
Employer Provided Child-Care Exclusion
1983
Individuals
1.4
Low and Moderate Income Savers Credit
2001
Individuals
1.4
Exclusion of Interest on Owner-Occupied Mortgage Subsidy Bonds
1978
Individuals
1.3
Deferral of interest on US Savings Bonds
1975
Individuals
1.2
Exemption of Credit Union Income
< 1975
Corporate
1.2
Excess of Percentage over Cost Depletion Fuels
< 1975
Corporate
1.1
Exclusion of employee meals and lodging
< 1975
Individuals
1.1
Exclusion of Interest on Rental Housing Bonds
1980
Individuals
1.1
Qualified School Construction Bonds
2009
Individuals
1.1
Exclusion of certain allowances for Federal Emp. Abroad
1999
Individuals
1.0
Work Opportunity Tax Credit
1978
Corporate
1.0
Total Tax Expenditures >  $1 billion
1169.5
* non-health or education
** other than owner-occupied homes


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