"Upside Down" Report Calls for Equitable Tax Subsidies

Posted September 22, 2010, By the Annie E. Casey Foundation

Newsrelease upsidedownrelease 2010

The Unit­ed States spent near­ly $400 bil­lion in fis­cal year 2009 to help peo­ple save mon­ey and build wealth, but the vast major­i­ty of that mon­ey went to the nation’s rich­est tax­pay­ers, accord­ing to an analy­sis of tax and bud­get pro­grams released Wednesday.

This inequity is all but invis­i­ble because the wealth-build­ing strate­gies are most­ly tucked into the fed­er­al tax code — as deduc­tions, cred­its and pref­er­en­tial rates — rather than in the annu­al dis­cre­tionary bud­get where they would receive con­tin­ued scruti­ny, accord­ing to Upside Down: America’s $400 Bil­lion Fed­er­al Asset-Build­ing Bud­get, pro­duced by the Cor­po­ra­tion for Enter­prise Devel­op­ment (CFED) and the Annie E. Casey Foundation.

If we are seri­ous about cut­ting the deficit, Con­gress could start by trim­ming these upside-down sub­si­dies and cre­at­ing a more equi­table approach,” said Andrea Levere, pres­i­dent of CFED, a nation­al non­prof­it that advo­cates for expand­ing eco­nom­ic oppor­tu­ni­ty. As Con­gress debates whether to extend the Bush-era tax cuts for the wealthy and the president’s fis­cal com­mis­sion devel­ops rec­om­men­da­tions to bal­ance the fed­er­al bud­get, they should remem­ber that we could shave $1 tril­lion off the deficit in the next decade sim­ply by cap­ping some of these ben­e­fits,” said Levere, who released the report in a speech to CFED’s bien­ni­al con­fer­ence on asset-build­ing poli­cies that help low-income Americans.

The fed­er­al gov­ern­ment has sup­port­ed pro­grams that help fam­i­lies move up the eco­nom­ic lad­der as far back as the Home­stead Act in 1862 and con­tin­ues with today’s home mort­gage deduc­tion, tax-pre­ferred retire­ment accounts and Pell grants. In fis­cal 2009, the fed­er­al gov­ern­ment spent $384 bil­lion on poli­cies that help indi­vid­u­als buy homes, save mon­ey, start busi­ness­es, pay for col­lege and retire com­fort­ably. The costs large­ly reflect tax expen­di­tures but also include some direct bud­get outlays.

The study and oth­er research demon­strate that these asset-build­ing poli­cies are doing lit­tle to help work­ing fam­i­lies who most need the finan­cial cush­ion. They found: 

  • More than half the ben­e­fits went to the wealth­i­est 5% of tax­pay­ers in fis­cal year 2009. The top 1% received an aver­age $95,000 in assis­tance, while the poor­est received less than $5. Even upper mid­dle-income fam­i­lies mak­ing $100,000 annu­al­ly received only $1,600 in benefits.
     
  • Eight out of 10 of the wealth­i­est fam­i­lies saved approx­i­mate­ly one-third of their house­hold income in 2009, while a full one-third of low-income house­holds earned too lit­tle to make ends meet, much less save for the future.
     
  • About 80% of the val­ue for mort­gage and prop­er­ty tax deduc­tions accrued to the top 20% of tax­pay­ers. In fact, many home­own­ers don’t take the mort­gage deduc­tion because they do not earn enough income or incur enough of a tax lia­bil­i­ty to war­rant item­iz­ing their deductions. 
     
  • Employ­er-based plans make pre-tax sav­ing for retire­ment rel­a­tive­ly pain­less, but rough­ly 78 mil­lion work­ers have no access to a retire­ment plan at work, and these are work­ers con­cen­trat­ed in the low­er end of the income dis­tri­b­u­tion chain. 

At a time when the eco­nom­ic down­turn has left so many low- and mid­dle-income fam­i­lies strug­gling to get by, we sim­ply can’t afford a wealth-build­ing strat­e­gy that pri­mar­i­ly helps those who are already wealthy,” said Robert Giloth, a vice pres­i­dent at the Casey Foun­da­tion, which works to build a bet­ter future for the country’s dis­ad­van­taged children.

By embed­ding so much of the asset-build­ing pol­i­cy into the tax code as deduc­tions and exclu­sions, the fed­er­al gov­ern­ment nat­u­ral­ly favors those who pay the most tax­es – though it’s worth not­ing that the wealth­i­est 1% of tax­pay­ers received 45% of the fed­er­al asset bud­get while pay­ing in 27% of the tax rev­enue. Poli­cies that depend on direct out­lays in the annu­al bud­get, includ­ing the Assets for Inde­pen­dence pro­gram that pro­vides matched-sav­ings accounts for low-income fam­i­lies, have proven suc­cess­ful in encour­ag­ing sav­ings, home­own­er­ship and busi­ness starts. Yet, because they are so vis­i­ble, such pro­grams often become polit­i­cal fodder.

Cap­ping the biggest tax deduc­tions and invest­ing a small part of the cost sav­ings in direct out­lays could help poor fam­i­lies gain a foothold in the econ­o­my and for­ti­fy mid­dle-class house­holds, who are strug­gling in today’s tighter cred­it mar­kets, pay­ing high­er col­lege tuitions and hav­ing to tap into retire­ment nest eggs, said CFED Board Chair Robert Friedman.

If we are going to invest in unlock­ing the pro­duc­tive capac­i­ty of our peo­ple – as we should do – then we should open oppor­tu­ni­ty for every­one, includ­ing the broad mid­dle class and low-income work­ing fam­i­lies,” Fried­man said. After all – we will all ben­e­fit from the growth in the econ­o­my that results from mil­lions of added busi­ness­es, edu­cat­ed work­ers and home­own­ers, and bil­lions in sav­ings and investment.”

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