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Those are the breaks

With another filing deadline behind us, the last thing most Americans want to do is think about taxes. But what better time to ask what it would take to achieve true reform of the tax system?

The answer is, an awful lot. To understand why, consider two numbers: 45.3 and 1.3 trillion.

The first number is a percentage—the portion of U.S. “tax units” (roughly similar to households) with zero or negative federal income tax for 2015. In other words, they owed nothing and in some cases received money from the government.

The second number is the amount, in dollars, of tax breaks that the Internal Revenue Code contains. It comes from the congressional Joint Committee on Taxation and is on the low side; those of less than $50 million a year are not counted.

The two numbers are related because some people who pay no income tax have one or many breaks to thank. Not all, of course; some people fall below the income threshold. But Tax Policy Center research suggests roughly half of non-payers are beneficiaries of the code’s special provisions.

Thus, it’s no surprise that many believe a system with broader-based rates and without a multitude of breaks would be more equitable.

There’s just one problem: Most Americans who pay federal income taxes receive some of these breaks—and they are loath to give them up.

The biggest federal tax expenditure, as they are called, is the exclusion of employer-paid health care; in fiscal 2016, it will total an estimated $143.8 billion. Next largest is the lower rates for dividends and long-term capital gains, at $134.6 billion. The mortgage interest deduction for owner-occupied residences keeps $77 billion from federal coffers. The deductibility of state and local taxes accounts for another $65.1 billion. And the list goes on.

A Pew Research Center poll conducted in January found that tax reform ranks fairly low on the list of Americans’ policy priorities, far behind a stronger national defense, a more robust economy and higher-quality education. Maybe they are satisfied with the current tax code. Or maybe they’re just realistic about what change would require.

4/22/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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