New Report: Upside Down: America’s $400 Billion Federal Asset-Building Budget

Posted by on October 04, 2010

Casey Foundation says tax-based asset-building programs not working

The federal government spent nearly $400 billion in fiscal year 2009 to help people save money and build wealth, but the vast majority of that money went to the nation’s richest taxpayers, according to an analysis of tax and budget programs published by the Corporation for Enterprise Development and The Annie E. Casey Foundation.

The report, called Upside Down: America’s $400 Billion Federal Asset-Building Budget, said that the inequity is not obvious because most of the asset-building strategies are part of the federal tax code as deductions, credits and preferential rates, rather than in the annual discretionary federal budget.

http://cfed.org/knowledge_center/research/federal_asset_budget/

“If we are serious about cutting the deficit, Congress could start by trimming these upside-down subsidies and creating a more equitable approach,” said Andrea Levere, president of CFED, a national nonprofit that advocates for expanding economic opportunity.

The federal government has supported programs that help families move up the economic ladder as far back as the Homestead Act in 1862 and continues with today’s home mortgage deduction, tax-preferred retirement accounts and Pell grants. In fiscal 2009, the federal government spent $384 billion on policies that help individuals buy homes, save money, start businesses, pay for college and retire comfortably. The costs largely reflect tax expenditures but also include some direct budget outlays.

The study and other research demonstrate that these asset-building policies are doing little to help working families who most need the financial cushion. They found:

— More than half the benefits went to the wealthiest 5 percent of taxpayers in fiscal year 2009. The top 1 percent received an average $95,000 in assistance, while the poorest received less than $5. Even upper middle-income families making $100,000 annually received only $1,600 in benefits.
— Eight out of 10 of the wealthiest families saved approximately one-third of their household income in 2009, while a full one-third of low-income households earned too little to make ends meet, much less save for the future.
— About 80 percent of the value for mortgage and property tax deductions accrued to the top 20 percent of taxpayers. In fact, many homeowners don’t take the mortgage deduction because they do not earn enough income or incur enough of a tax liability to warrant itemizing their deductions.
— Employer-based plans make pre-tax saving for retirement relatively painless, but roughly 78 million workers have no access to a retirement plan at work, and these are workers concentrated in the lower end of the income distribution chain.

By embedding so much of the asset-building strategy into the tax code as deductions and exclusions, the federal government naturally favors those who pay the most taxes –though it’s worth noting that the wealthiest 1 percent of taxpayers received 45 percent of the federal asset budget while paying in 27 percent of the tax revenue.

Policies that depend on direct outlays in the annual budget rather than tax deductions, including the Assets for Independence program that provides matched-savings accounts for low-income families, have proven successful in encouraging savings, homeownership and business starts. Yet, because they are so visible, such programs are at more risk of funding cuts and regulatory restrictions.

Capping the biggest tax deductions and investing a small part of the cost savings in direct outlays could help poor families gain a foothold in the economy and fortify middle-class households, who are struggling in today’s tighter credit markets, paying higher college tuitions and having to tap into retirement nest eggs, said CFED Board Chair Robert Friedman.

“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,” Friedman said. “After all – we will all benefit from the growth in the economy that results from millions of added businesses, educated workers and homeowners, and billions in savings and investment.”