$400 billion in tax breaks seen favoring wealthy

NEW YORK (CNNMoney.com) -- The United States spent nearly $400 billion last fiscal year to fund tax breaks and programs aimed at helping Americans build wealth, but the majority of that money went to the highest earning taxpayers, according to a report released Wednesday.

The report, from the Corporation for Enterprise Development and The Annie E. Casey Foundation, said low-income families benefit the least from federal policies aimed at helping Americans buy homes, save money, start businesses, pay for college and retire comfortably.

In fiscal 2009, the government spent a total of $384 billion on these "wealth-building" strategies, the report said. The policies included some direct spending, but were mainly comprised of tax breaks, tax credits and preferential tax rates.

While the goal is to help families climb the economic ladder by acquiring assets, the report said these policies are skewed towards high-income taxpayers because they are based on things such as the size of a home or an investment portfolio.

Middle class and low-income families, the report said, receive none of the benefits because they often don't make enough money to itemize deductions or even to accrue much tax liability.

"At a time when the economic downturn has left so many low- and middle-income families struggling to get by, we simply can't afford a wealth-building strategy that primarily helps those who are already wealthy," said Robert Giloth, a vice president at the Casey Foundation.

Other experts disagree. Roberton Williams, a senior fellow at the Tax Policy Center, said that although the rich do receive benefits from government policy, many programs are also aimed at the poor.

"The rich have a lot of money, but it's not a bottomless pit," Williams said. "You can't focus on getting money only from the wealthy."

Many tax credits, including those for dependent children, phase out at high income levels, Williams noted.

"Tax breaks are available throughout the income distributions," Williams said.

According to the study, more than half the benefits in question went to the wealthiest 5% of taxpayers, individuals and households making more than $167,000, in fiscal 2009. The top 1% of taxpayers, those making more than $1 million, received an average $95,000 in assistance, mostly through mortgage and property tax deductions and investment tax breaks.

By contrast, the poorest taxpayers, including families making $50,000, received less than $500 in benefits from the most expansive of these policies. Upper middle-income families making $100,000 annually received $1,600 in benefits.

The report came as Congress wrestles with expiring tax cuts and growing budget deficits. The nation's fiscal policy has emerged as a major issue in the upcoming mid-term elections that will decide control of Congress in November.

Andrea Levere, president of the Corporation for Economic Development, said changing some of the policies in question could shave $1 trillion off the nation's deficit over the next decade.

"If we are serious about cutting the deficit, Congress could start by trimming these upside-down subsidies and creating a more equitable approach," she said.

The federal government allocated $137.6 billion last fiscal year to policies aimed at encouraging homeownership, according to the report. The vast majority of that money was administered through tax breaks, which enabled higher-income households to deduct mortgage interest and property tax payments and avoid more capital gains when they sold the home.

Homeowners with lower incomes don't benefit from these tax breaks because the amount they could claim in their deduction is often not large enough to make a difference in their tax liability, the report said.

The report also took issue with favorable tax rates on long-term capital gains and dividend payments, as well as tax breaks on capital gains at death and investment income on life insurance and annuity contracts. These policies, the report said, accounted for 99.9% of what the government spent to encourage Americans to save and invest.

Instead of making it easier for wealthy taxpayers to save, the report argued that policymakers should aid less affluent Americans get out of debt by addressing income inequalities and predatory lending practices.

The report focused on policies designed to help Americans buy homes, save money and pay for college, as well as subsidies for small business owners. It excluded aid for corporations and certain subgroups, such as veterans, that have access to exclusive benefits.

Robert Friedman, chairman of the board at the corporation, said policies that help all Americans build wealth will support economic growth by lifting consumer spending, creating a more educated workforce as well as boosting savings and investment.

"If we are going to invest in unlocking the productive capacity of our people -- as we should do -- then we should open opportunity for everyone, including the broad middle class and low-income working families," he said.