Middle Income Earners Is Where Much Of Tax Break Action Is

As President Obama prepares to go after Republicans for resisting raising taxes on the wealthy and big companies to reduce deficits, here's something to keep in mind: federal revenues are dampened significantly by the tax benefits tens of millions of lower and middle income Americans receive, not just tax breaks to the rich or big companies.

As Lori Montgomery wrote in the Washington Post:

Broad tax breaks granted to millions of families at all income levels dwarf the corporate giveaways. Over the past two years, largely because of these popular benefits in the federal income tax code, the government has reached a rare milestone in tax collection — it has given away as much as it takes in.

The number of tax breaks has nearly doubled since the last major tax overhaul 25 years ago, with lawmakers adding new benefits for children, college tuition, retirement savings and investment. At the same time, some long-standing breaks have exploded in value, such as the deduction for mortgage interest and the tax-free treatment of health-insurance premiums paid by employers.

All told, federal taxpayers last year received $1.08 trillion in credits, deductions and other perks while paying $1.09 trillion in income taxes, according to government estimates.

This is really one of the most inconvenient truths of the debate increasing taxes. It's true some of the superwealthy have tax rates that are significantly lower than those of middle income taxpayers who make less in a year than some hedge-fund traders spend on a car.

But the significantly greater numbers of lower and and middle income tax payers means the revenue lost to the federal treasury through the mortgage-interest deduction or the earned-income tax credit is sizable.

Along these lines, a Republican congressional aide pointed out that if the president let's the Bush-era tax cuts for the wealthy lapse but maintains others that were part of the Bush cuts, it would defeat the president's stated purpose:

From the aide's email to reporters:

The Joint Tax committee estimated the President's budget proposal to make permanent all the current rates except the top rates would cost $2.3 trillion. Add 'patching' the AMT (at $683 billion) and you are at a cost of $3 trillion. So if the President wants to extend the other tax provisions- the ten percent tax rate, the child tax credit, protecting couples from the marriage penalty – it will 'cost' much more money than he will 'save' by raising the top income tax rate.

Get it? He can't have it both ways – if ending the 'tax cuts for the wealthy' saves money, then extending the other provisions costs money (and a lot more).

Democrats like Obama and even a few Republicans make the point that accelerating income inequality in recent decades means the very rich have an ever more disproportionate share of the nation's wealth. The very least that should be done is to make them pay taxes at the higher rates paid by many middle income earners. Obviously, any additional revenue from that could go to deficit reduction.

But the biggest bang for the buck, so to speak, in terms of deficit reduction would come from making less generous those tax benefits that are widely distributed to lower and middle income Americans.

Politicians don't want to talk about raising taxes on the middle income tax payers during good times, let alone when the economy so fragile and needs more money in consumer hands, not less.

The implication of all this, however, is that it would take ending a significant amount of the tax benefits middle income earners count on to bring deficits under control and significantly shrink the federal debt sooner rather than later. The Simpson-Bowles Commission, among others, have recommended as much.

Obviously, it would take an unusually courageous political leader to propose raising taxes on middle income voters. So don't hold your breath.

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