Taxes: Tax Expenditure of the Week: Tax Day Roundup

Some of our largest government programs are structured as tax exclusions or tax deductions. Because marginal tax rates are higher for people who make more money, exclusions or deductions are more valuable for taxpayers in higher tax brackets. Whether the purpose is to promote homeownership, retirement savings, or investment, these programs tend to provide the largest government subsidies to those who need them the least, while providing little or no benefit to those who could use them the most.

But provisions like the mortgage interest deduction, the retirement and education savings incentives, and the charitable deduction are essentially subsidies for the desired activities. And they are upside-down subsidies because they give the biggest rewards to the people who would most likely take the desired action—buy a house, save disposable income—even without the incentive.

In addition to fairness concerns, the upside-down nature of such deductions raises questions about these programs' efficacy. If policymakers were designing a new government program to encourage homeownership, they'd probably target incentives toward people who most need them or who are most likely to respond to them. Giving wealthy taxpayers with incomes of more than $250,000 a housing subsidy 10 times as large as families making $40,000 to $75,000 is clearly not the most cost-effective way of encouraging homeownership.

[Emphasis added].

For more, see Tax Expenditure of the Week: Tax Day Roundup by Seth Hanlon, April 15, 2011 at Center for American Progress.