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Who Benefits from Tax Expenditures?

Roberton Williams

Published: May 04, 2011
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Abstract

The federal income tax is replete with tax expenditures, provisions that grant special benefits to selected taxpayers or for selected activities. Exclusions and deductions reduce taxable income, preferential rates cut the tax on specific types of income, and tax credits are subtracted directly from tax liability.

Reprinted with permission of Tax Analysts and written with support from the John D. and Catherine T. MacArthur Foundation. The text below is an excerpt from the complete document. Read the entire report in PDF format.


The federal income tax is replete with tax expenditures, provisions that grant special benefits to selected taxpayers or for selected activities. Exclusions and deductions reduce taxable income, preferential rates cut the tax on specific types of income, and tax credits are subtracted directly from tax liability.

The various kinds of tax expenditures reduce taxpayers' individual income tax liability differently throughout the income distribution (see graph). More than 90 percent of the tax savings from preferential tax rates on long-term capital gains and qualified dividends go to taxpayers in the top quintile (or fifth) of the income distribution, and nearly half the benefits go to people in the top one-tenth of 1 percent. The top quintile gets about three-fourths of the savings from itemized deductions and more than 60 percent of the benefits of exclusions of selected sources of income such as employer health insurance contributions. Highincome households receive relatively larger benefits from special rates, deductions, and exclusions, because they have relatively more income from certain tax-favored sources (capital gains, dividends, tax-exempt interest) and because under our graduated income tax, exclusions and deductions are worth more to taxpayers in higher rate brackets.

End of excerpt. The entire report with graphs and footnotes is available in PDF format.