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Monday, December 09, 2019 {{ new Date().getDay() }}

Half Of The $900 Billion In Tax Breaks Will Go To The Richest 20 Percent This Year

by Benjamin Landy, @Ben_Landy

Policy Associate, The Century Foundation, @tcfdotorg

Of the $900 billion that taxpayers can expect to save in 2013 through the 10 largest tax credits and deductions, more than half will go to the richest 20 percent, according to a new report from the Congressional Budget Office. Nearly one fifth of the $900 billion will go to the richest 1 percent, who benefit disproportionately from the deduction for charitable giving and the preferential tax treatment for capital gains and dividends.

tcf chart

According to the CBO, tax expenditures — a catchall term for the over 200 loopholes, credits, exclusions, deductions, and preferential rates that riddle the individual and corporate tax code — will add nearly $12 trillion to the budget deficit over the 2014–2023 period. But most of the expense can be attributed to just a handful of programs. This year alone, the U.S. Treasury can expect to lose $248 billion on the tax-free treatment of employer-sponsored health insurance, $161 billion on the preferential tax rate for capital gains and dividends, and $137 billion on tax-advantaged retirement accounts—all tax savings that accumulate overwhelmingly to the upper middle class.

Only 2 of the top 10 tax breaks explicitly favor working-class Americans: the earned-income tax credit ($61 billion) and the child tax credit ($57 billion). Together, these boost the after-tax income of households in the poorest quintile by nearly 10 percent; an amount comparable in percentage terms to what the richest quintile receives. But in dollar terms, the savings are worlds apart. The tax breaks received by the poorest fifth amount to about $2,000 as a percentage of after-tax income, while those received by the richest fifth are approximately 10 times higher.

So far, policymakers have been hesitant to call for the elimination of many of these tax breaks. Some, like the home mortgage interest deduction and the tax exemption for employer-provided health insurance, are extremely popular with the middle class and enjoy broad bipartisan support. Others, like the preferential tax rate for investment income, are protected by politicians’ symbiotic relationship with the so-called “donor class”—the same 1 percent who will receive 68 percent ($110 billion) of the capital gains tax benefit in 2013. (Only 7 percent will go to the bottom 80 percent.)

A more realistic scenario would be for Washington to cap deductions at a certain level. That was the idea favored by Mitt Romney, in one of his more thoughtful etch-a-sketch moments, and later supported by the Obama administration. But most proposals along those lines, including the provision for a 28 percent cap requested in the president’s 2014 budget, are either too narrow or too timid to address the massive inequalities perpetuated by the current tax code.

To do that, we’ll need something bolder. A good example is the Congressional Progressive Caucus’s “Back to Work” budget, which would combine a cap on deductions with a slew of other reforms, including new income tax brackets, a higher estate tax, a financial transactions tax, the elimination of the mortgage-interest deduction for second homes, and taxing capital gains and dividends as ordinary income. That proposal received little press coverage at the time—unsurprising given the media’s demonstrated center-right myopia. But polls suggest the majority of Americans would support the CPC’s reforms. According to a survey conducted by Business Insider in February, a plurality of respondents favored the progressive budget to the Democratic or Republican budget proposal when asked to select among the three. (The plans were labeled “A,” “B,” and “C” to avoid bias.) Nearly 50 percent of Republicans supported the CPC plan over the sequester.

Keep that in mind this summer, as Washington turns its attention to comprehensive tax reform. The American people want a fairer tax system and a less unequal society. If Congress decides once again to preserve those inequalities perpetuated by the system, it will be out of deference to the political donor class, not the interests of their constituents.

(For more on how tax expenditures work, check out Century Foundation Fellow Ed Kleinbard’s post from last April, “Yes, Hard-Working Red-Stater, the Government Is Subsidizing Your Health Insurance.”)

The Delinquent Generation: Why Students Aren’t Repaying Their Loans

By Benjamin Landy

Policy Associate, The Century Foundation

By nearly every measure, American households have made significant progress repairing their balance sheets in the four years since the Great Recession. Total credit card debt has fallen $187 billion, stabilizing at late-2006 levels, and mortgage debt is still dropping, down over $1.2 trillion since 2008. Consumers are getting better at paying their bills on time, too: the number of delinquent borrowers behind on their payments by 90 or more days has fallen substantially in almost every credit category.

Student loans remain the glaring exception, soaring to $966 billion last quarter as college costs—and applications—continued to rise unabated. That’s nearly triple the debt that students held in 2004, thanks to a 70 percent increase in the number of borrowers and an average loan balance among indebted graduates that passed $26,600 in 2011.

Student debt would not be such a problem if borrowers were finding jobs and paying their bills. But the number of former students behind on their payments has increased substantially in the past year, even as other consumers have been finding their economic footing. According to the Federal Reserve Board of New York, the share of student loan balances 90 or more days delinquent surged to 11.7 percent in the last two quarters—three percentage points higher than the same time last year—elevating student loans, for the first time, to the ignominious distinction of having a worse repayment rate than credit cards.

Yet even that figure underestimates the severity of the delinquency crisis. Among borrowers who have already entered repayment—excluding those in their post-graduation grace period, or in deferral or forbearance for economic reasons—the delinquency rate is roughly twice as high.

It’s hard to know what to make of this unexpected downturn among college graduates.

The first impulse is to blame the economy—specifically high unemployment—for borrowers’ sudden inability to manage their debts. But the unemployment rate for people over age 25 with a bachelor’s degree or higher was just 4.2 percent last month, far below the 9.2 percent rate for those with only a high-school education. And while the numbers are less clear for recent graduates (one widely circulated story reported half are jobless or underemployed, but did not differentiate between the two), there is nothing to suggest that their job prospects worsened considerably in the last year as the broader economy recovered.

Mark Kantrowitz, publisher of FinAid.org and an expert on student loans, told me he thinks the beleaguered college graduate narrative is overplayed. “When you look at the data and you see unemployment rates for those with bachelor’s degrees or associate’s degrees, they’re much lower than the figures pushed by people who are trying to claim that there is a bubble,” Kantrowitz says. “A lot of people seem to have a vested interest in [that story], so they either misinterpret the data because they aren’t familiar with it or they deliberately mischaracterize the data to push their point.”

At the same time, he admits, default rates tend to be a lagging indicator of unemployment. The ability to apply for an economic hardship deferment or forbearance means an unexpected job loss may not turn up in the delinquency data for months or even years after the borrower begins to struggle.

As a result, the recent delinquency trend may be driven by borrowers who graduated or entered the job market at the height of the recession and have now reached the end of the maximum three-year deferral period allowed under the federal loan program. The large spike in delinquencies in the second half of 2012 appears to support this theory, as large numbers of students who left school in 2008 and 2009 would have had to enter repayment this year. If that were the case, we might expect delinquency rates to get worse before they get better.

student loan chart

Kantrowitz thinks there is more to it than that. He suggests that the delinquency data are distorted in part by an unintended loophole that allowed borrowers before 2006 to consolidate federal student loans while still in college, locking in lower in-school interest rates. The early repayment status loophole was closed by the Higher Education Reconciliation Act of 2005, but not before the savviest borrowers entered early repayment at the lower rate.

“Every 1 percent increase on the interest rate on a federal student loan is, on average, a 5 percent increase on the monthly payment of a 10-year term, and 9 percent on a 20-year term.” Fast-forward a few years, and the remaining borrowers from the 2005-2006 cohort who weren’t paying attention to the loophole opportunity are now the most likely to be in default.

Still, seven years have passed since the Department of Education closed the loophole, and unsubsidized federal interest rates have been locked at 6.8 percent since 2010. Even if the early repayment status loophole caused some of the increase in the delinquency rate, its effect should be largely dissipated at this point.

Perhaps indebted college students have simply reached a breaking point, as the combination of rising college tuition, growing loan burdens, underemployment and falling wages becomes unsustainable – call it student financial fatigue.

According to a recent TransUnion study, more than half of student loan accounts are in deferred status, as more borrowers attempt to avoid their loan balances until the economy improves or they are forced into repayment. Some return to school for a graduate degree, amassing more debt in exchange for a competitive advantage in the job market, while others manage their debts by retreating from the middle class consumer economy—delaying homeownership, marriage and children until their loans are paid.

But if the souring delinquency data are any indication, none of these strategies are working particularly well. Until policymakers find a way to address the underlying problem of soaring college costs, or design a better structure for the federal loan program, the bills will keep coming.