Upside Down and Inside Out: Why Tax Expenditures Do Not Benefit Low-Income Families

Upside Down HouseThe number of people living in poverty in 2009 was the largest in the 51 years for which poverty estimates are available. There were 43.6 million people in poverty in 2009, up from 39.8 million in 2008, and the nation's official poverty rate in 2009 was 14.3 percent, up from 13.2 percent in 2008. And the number of people experiencing asset poverty is likely much higher.

The federal government uses tax policy as one tool to encourage American families to build assets, such as savings and business ownership, that help families survive financial crises and strengthen the national economy. The U.S.’s current asset-building strategy focuses heavily on tax incentives. In 2009, close to $400 billion were spent on promoting asset growth, with the vast majority being through tax expenditures. Only $37 billion were spent on direct budget outlays, meaning that less than one percent of overall federal expenditures went to directly subsidize asset-building activities. Unfortunately, this tax-based approach to asset building disproportionately benefits individuals who already own significant assets.

A recent study of asset-building expenditures for 2009, Upside Down by the Corporation for Enterprise Development (CFED), reveals that America’s current asset-building strategy does little to help low-income families build assets. According to the CFED study, families that make less than $19,000 a year received only 0.04 percent of the benefits from asset-building tax expenditures in 2009, averaging out to about $5 per taxpayer. In contrast, those with incomes higher than $160,000 received an average of $5,109 per taxpayer. In order to reduce the number of Americans in poverty, federal and state asset-building tax policies need to target those most in need, not those who already have.

Take for example policies aimed at promoting homeownership. The federal government directly spends less than 1percent of the money used to encourage homeownership on financial support for housing subsidies and assistance, but spends 99 percent on tax expenditures that overwhelmingly benefit individuals with higher incomes. In 2009, 80 percent of the value of mortgage and property tax deductions went to individuals earning more than $80,000 a year. In fact, the government actually ends up discouraging low-income families from owning homes by making rental assistance more available than mortgage assistance.

The current debate over tax cuts for the wealthiest taxpayers is another reflection of tax expenditures that are upside down. As Congress seeks to reach compromise over these tax policies, we as Americans need to call attention to the fact that a continuation of current policies will further increase the ever-widening wealth gap in the United States. At some point a more equitable distribution of tax expenditures is needed to ensure that low- and middle-income families are not left in poverty while the more affluent continue to accumulate more and more benefits. 

This article was coauthored by Kelly Ward.




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