There are six magic words that get attached to nearly every economic pitch. They're the gold seal for any tax plan or spending program, and a must-have for a legislator hoping to win over colleagues: "It will help the middle class."
Whether it's a Democratic proposal targeting the lower end of the income spectrum, or a Republican proposal for an across-the-board tax cut, nearly any attempt to redirect the nation's fiscal policy comes with that promise attached: more money in the pockets of hardworking, middle-class citizens to help them achieve the American Dream. (Also frequently filled into the Mad Libs session that is the typical congressional floor speech: help hardworking families, protect economic freedom, put more money in workers' pockets...)
But tax policy is a story of unintended consequences, and sometimes, tax policies billed as a blessing to the middle class (or even the rarely-mentioned but long-suffering lower class) end up, unintentionally or otherwise, actually providing the biggest benefits to those higher on the economic ladder.
The Home Mortgage Interest Deduction
The home-mortgage interest deduction is one of the most politically popular tax deductions. The initial tax code allowed individuals to deduct all personal interest. This was a time when home ownership was less than 50 percent, but ownership increased after World War II. The Tax Reform Act passed in 1986 eliminated the deductibility of consumer interest, including credit-card debt and car loans, leaving the Home Mortgage Interest Deduction intact.
Democrats and Republicans have touted the tax break, and billed any moves to eliminate it as an attack on the middle class. Ronald Reagan promised to protect the deduction on mortgage interest as his Treasury Department began proposals for what would become the Tax Reform Act. In 2012, Vice President Joe Biden accused Republicans Mitt Romney and Paul Ryan of plotting to eliminate the mortgage-deduction break. "The only way you can find $5 trillion in loopholes is cut the mortgage deduction for middle-class people," Biden said during the vice presidential debate.
One of the top priorities of the National Association of Home Builders, as stated on the group's website, is to protect the deduction, on the rationale that repealing it would raise taxes on homeowners and leave them with mortgages worth more than their property.
But in practice, the home-mortgage deduction tends to benefit the wealthy instead of the middle class, according to the conservative R Street Institute. In a 2014 study, the group found that it largely benefits suburban-area families in metropolitan areas, and families making at least $100,000 in all metro areas surveyed, and leads to the creation of McMansion-style homes.
"Generally what goes on is because we have a progressive tax system, the deduction is worth more to a high-income than a low-income person," said William Gale, codirector of the Tax Policy Center and former senior economic adviser to President George H.W. Bush.
It's not just conservatives who are critical of the deduction. A 2011 study from the left-leaning Center for American Progress found that families with incomes between $40,000 and $75,000 received an average of $523 from the deduction for a year, while families making more than $250,000 received $5,459 from the deduction on average.
Currently, the limit to the amount that can be deducted is $1 million. As part of their deficit-reduction plan, former Sen. Alan Simpson and former Clinton White House Chief of Staff Erskine Bowles capped the deduction at $500,000, instead giving a 12 percent nonrefundable tax credit to all taxpayers, which Simpson said would benefit "the little guy."
Tax credits for low-income housing
The Low-Income Housing Tax Credit is among the federal government's main tools for pushing private investors to put money into developing housing that people with little income can afford. The credit uses an indirect subsidy to finance housing and encourages allowing investors to claim credit on income-tax returns. The equity raised by the credits can be used for the construction or rehabilitation of housing. A study from the Office of the Comptroller Currency noted that it had helped create 2.4 million units for affordable rental housing.
In practice, however, there are indications that the tax break is more effective at rewarding developers than promoting low-income housing development. Elaine Maag, a senior research associate at the Tax Policy Center, said that every $1,000 spent on the low-income housing tax credit generates only around $600 worth of low-income housing. This is in line with a study from the Center placing that number around $590 for every $1,000 spent, but Maag says there is some evidence it is improving.
"When we give people a tax credit, we shift the type of house being built, but not necessarily building low-income," Maag told National Journal, adding that it might be better to give people housing vouchers to go into existing housing stock.
A study by a professor at Xavier University also found that developers respond to subsidies from the credit by building bigger housing units than they would if they were not subsidized, and also receive a bulk of the subsidies as a profit.
New Markets Tax Credit going to investors
Like the Low-Income Housing Tax Credit, the New Markets Tax Credit, created in 2000, was designed to encourage investment in businesses in low-income communities. Individual and corporate investors receive a tax credit in exchange for making equity investments in what are called Community Development Entities. It's an effort to break a difficult spiral: Investors hesitate to invest in low-wealth, high-crime areas, which in turns means fewer businesses, fewer jobs, and more of the poverty and crime that made investors hesitant to begin with. By offering a credit to invest in such areas, the federal government aims at starting the opposite cycle, with the subsidized businesses contributing to a local economy that draws independent investment.
But according to a report by the Government Accountability Office released last year, 62 percent of all projects that use the credit also received other public money from either federal, state, or local governments.
"While combining public financing from multiple sources can fund projects that otherwise would not be viable, it also raises questions about whether the subsidies are unnecessarily duplicative because they are receiving funds from multiple federal sources," according to the highlights page of the GAO study.
The study cited one example in which an investor put in $500,000 of New Markets Tax Credit equity and was able to claim $1.2 million of credits leveraged entirely with $2.5 million worth of state and federal historic tax credits—meaning that 83 percent of the equity the investor claimed was provided by other state and federal programs.
And, at least among direct beneficiaries, the credit's recipients may skew toward the upper end of the socioeconomic spectrum. Last year, then-Sen. Tom Coburn released a report noting that banks like Goldman Sachs used the tax credit to finance projects that were not even in low-income areas, according to The Fiscal Times.
The New Markets Tax Credit Coalition responded to Coburn's and the GAO's criticisms of the program, saying that, among other things, the credit had created 744,000 jobs in poor and rural areas in America and that federal subsidies accounted for only 17 percent of total projects financed by the New Markets Tax Credit in 2011 and 2012.
So are attempts to use the tax code to benefit the middle class always doomed?
Hardly. These are only three examples, and none of this is to say that these tax credits don't benefit middle- or low-income individuals. Instead, it demonstrates the difficulty of wielding the tax code to achieve specific economic outcomes. Congress can set up a credit, but who ends up claiming it—and how much they claim—is often outside of lawmakers' control.
It becomes particularly complicated when you consider that, in absolute terms, wealthy people tend to pay the highest dollar amounts in federal taxes. And so when it comes time to claim breaks, they have higher ceilings (again, in absolute terms) than taxpayers further down the ladder.
"In some ways, the tax code is always going to be a blunt instrument," Maag said. "It strengthens and touches a lot of people."