How the U.S. Tax Code Benefits the Wealthy (and Screws Over Most Everyone Else)

One thing to remember on Tax Day 2013: It’s good to be a wealthy citizen in the United States. Thanks to tax breaks aimed specifically at those who make boatloads of money, the average rich person takes in an additional $250,000 in income each year.

The rest of us? Not so fortunate. Although the government spends more than $1.3 trillion a year on tax expenditures, most of them aren’t aimed at middle-class America.

Think Progress has a rundown of just five of the ways that wealthy people come out ahead in terms of the U.S. tax code. Here’s a sampling:

1. Deductions: The majority of tax breaks come through deductions, and while several deductions have substantial benefits for working class Americans, the advantages for the wealthy are much larger. Because of the way they are structured, popular deductions like those for mortgage interest, retirement savings, and charitable giving provide far bigger benefits for the wealthy than they do for average Americans, creating an “upside-down” effect that gives the biggest tax breaks to those who need them least and making the tax code look “more progressive than it actually is.”

…2. Capital gains: The capital gains preference taxes income from investments at a lower rate than ordinary wage income, providing a huge tax break to investors. Republicans argue that the low capital gains rate boosts the economy, but there is little evidence that higher capital gains rates hurt the economy. Instead, the preference increases income inequality, since capital gains income is earned almost solely by the wealthy. Cuts to the capital gains rate since Ronald Reagan equalized it with tax rates on normal income, in fact, are “by far the largest contributor” to increased income inequality over the last three decades, according to recent studies.

3. Carried interest: The carried interest loophole, which President Obama closes in his recent budget proposal, benefits wealthy hedge fund managers who take their pay from investors’ profits instead of through management fees, which makes the income subject to the lower capital gains rate than ordinary income rates. The loophole applies to virtually no one, but it allows those who use it — wealthy hedge fund managers and private equity executives like Mitt Romney — to substantially lower their tax rates. Eliminating it would both make the tax code more equitable and save as much as $21 billion over 10 years.

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The wealthy also benefit through the estate tax and by owning vacation homes. It’s clear based on this list that most of us are getting shafted. Now, if only we were all so rich that we could afford to own multiple homes like, for example, Romney.

— Posted by Tracy Bloom.