Princeton sociologist Matthew Desmond was recently on the NPR interview program Fresh Air speaking with guest host Dave Davies, who is also a senior reporter for WHYY in Philadelphia.
Desmond’s 2017 book Evicted received a Pulitzer Prize. His new book is Poverty, by America, in which he looks at factors that create and sustain financial inequality. And, for anyone who has a knee-jerk reaction of assuming that means everyone should be exactly the same, no, of course not, as that is never possible. However, what could occur is a reduction in the number of ways in which many millions are kept down so that a smaller contingent can benefit.
“Most government aid goes to families that need it the least,” Desmond said on the show. He pointed to tax breaks as a government mechanism that largely benefits the wealthy. And he’s right.
Start with one point he brings up: the mortgage interest deduction. Many people will argue that it isn’t a government benefit like “a housing subsidy or food stamps.” But of course it is. If you get to deduct interest payments, especially early on in ownership when they form the large bulk of mortgage payments, you don’t pay taxes on that amount. The more expensive the home and higher the mortgage, the greater the subsidy effectively is.
Home ownership comes with many benefits. It can help improve financial standing, allows you to build wealth for yourself in property rather than doing so for a landlord. For the vast majority of mortgages, you’re talking about a fixed rate over 15 or 30 years. Over that time, the cost doesn’t increase, although rents will, so you’ve capped an important personal expense. Ownership looks better when companies determine credit ratings.
You could argue that at the moment, with a home ownership rate of 65.9%, the majority of people receive this benefit. Except, that isn’t so. The majority never did and that dropped significantly after the Tax Cuts and Jobs Act of 2017, when the GOP and Trump added more benefits to the wealthy.
The reason most people don’t get the mortgage interest benefit is because claiming it requires itemizing tax deductions rather than using the standard deduction. But to itemize, you need enough deductions. In 2019, the Tax Foundation estimated how many people itemized after those big tax changes in 2017 that made it harder for most taxpayers to do so. It was 13.7%, or more than 17 percentage points lower than before the 2017 law.
Desmond pointed to a National Bureau of Economic Research study from 2015. Even at that point, about $195 billion of the $270 billion the federal government spent on housing was in the form of these tax code-based deductions. The remaining $75 billion is spent on the poor, or less than a third as much.
That $195 billion now is for the people who can claim it on their taxes, or less than 14% of the tax paying population.
Compare that to the child tax credit under the pandemic aid, a move that cut childhood poverty by about half, which Politifact verified. But that ended quickly, as it cost $125.5 billion a year, according to the Tax Policy Center. Which is significantly less than the price tag for subsidizing housing for a small percentage of relatively well-off taxpayers.
Or talk about workarounds that avoid the estate tax. There are tactics wealthy people can employ (because if you’re not wealthy, you’re not going to qualify for the estate tax). One is called step-up basis. Say you have some assets. You bought them decades ago and they’ve appreciated significantly. You are ultimately taxes on the increase in their value for capital gains, and it takes a sale of the assets to trigger the tax. Instead, you hold the assets until your death, when they pass onto your heirs. But with a basis step-up, the value is reset to its current level and the heirs don’t suddenly have a big tax bill to meet. All that increased value is now invisible to the tax authorities.
Another National Bureau of Economic Research study, this one from 2021, pointed to a massive amount of tax dodging by the wealthiest in the country. “We estimate that 36% of federal income taxes unpaid are owed by the top 1% and that collecting all unpaid federal income tax from this group would increase federal revenues by about $175 billion annually,” the researchers wrote. That would pay for the child tax credit and still leave $50 billion additional to put toward the national debt. But who’s taxes get the most scrutiny? People who earn very little.
It’s time for the wealthy to take some of their own advice and pay their own way.