Tax season is upon us. And this year, change is coming to the U.S. tax code.
While President Obama's plans to remake our health, energy and education systems have received a great deal of attention, his key changes to the tax system have received much less attention, even though they are no less revolutionary. For so long, tax benefits have redistributed income upwards. Now, the administration is attempting to more equitably distribute the benefits of tax entitlements by ensuring those at the bottom get the benefits that higher income taxpayers already receive.
The U.S. tax code is becoming a more level playing field for low-wage workers and their families. For the first time, such earners are allowed greater access to tax entitlement programs like Child Tax Credit, First Time Homebuyers Tax Credit and the Making Work Pay Tax Credit.
Without these changes, we'd be left with the long-time shamefully inequitable American tax code --a system rife with giveaways to the most wealthy at the expense of low-wage families.
The tax code entitlements that currently benefit the wealthiest (at the expense of those at or near the bottom of the income ladder):
Child care. Middle and higher income Americans receive over $2 billion in government subsidies for child care in the form of federal tax breaks under the Child and Dependent Care Credit. The credit provides up to $3000 per child to a family for reimbursement for child care expenses. In 2006, only 17% of the credit's tax benefits went to the 50% of tax filers with income of $30,000 or less, while around 25% of the tax benefits went to the 12% of tax filers with above $100,000. Because the credit is not refundable, it provides no benefit to those who earn too little to qualify for income tax payments(although of course they pay FICA taxes).
Retirement. Americans who participate in pension and savings programs, defined benefit and 401(k) or Keoghs, receive $106.4 billion through exclusion in the tax code. Most of these go to families earning $100,000 a year or more because the well-to-do are more likely to get pension plans from their employers (low-wage workers are half as likely to be offered a pension plan by their employers and far fewer participate) and have money to put away for retirement. Billions are going to those who are most able to afford to save and don't need an incentive to do so.
Health care. Middle and upper income Americans are most likely to get coverage through their employers. (the higher the income you are the more likely you are to receive employer-provided coverage). They receive health subsidies by the exclusion of their employer's health insurance contributions from their taxes, by allowing individual tax deductions and by allowing flexible spending and personal medical funds to reduce taxable income. In fact two-thirds of the current $200 billion in annual health-care tax subsidies go to middle and upper income Americans.
Housing. The tax code gives huge housing subsidies to America's wealthiest. According to a report by the Congressional Joint Committee on Taxation, the U.S. currently provides $90 billion in housing subsidies to middle and higher income families, in the form of mortgage deductions. There is no cap on how much those deductions can be. Those with the highest incomes and the most expensive homes (including second homes) get the largest subsidies. Wealthy households are most likely to own homes and itemize deductions.
Half of all homeowners who make too little to itemize do not claim any deductions at all. More than half of last year's $90 billion homeowner subsidies went to the 11.8 percent of taxpayers with incomes over $100,000. Renters, of course, don't even qualify. The yearly total of mortgage deductions is more than four times the Section 8 rental assistance budget, twice that of HUD spending programs and 19 times as much as the low-income housing tax credits provided to developers of affordable housing. Households that either owe no tax or are not covered by such plans or do not own a home receive no benefits.
The American Recovery and Reinvestment Act provisions which give working families refundable tax credits are important steps in addressing the rampant discrimination in our tax code that redistributes income to the wealthy and works against families headed by low-wage workers. They begin to address this nation's vast economic inequality. These tax credits are also a good economic stimulus, because it targets the funds to families who are most likely to spend the money.
Those who claim that aiming recovery dollars at those who earn the least is simply a redistribution of wealth ignore the appalling ways in which our tax code has been taking money from the public coffers and distributing it to the wealthiest in our society for decades.
Isn't it time we start being honest about how America's tax code really redistributes wealth? The American Recovery and Reinvestment Act's provisions to giverefundable tax credits to low-wage families makes a lot of sense - for working families, for a stronger economy and for greater equity in the tax code. But let's hope this is just a beginning to ensure tax entitlements go to all working Americans.