Who pays no income tax? It is the wrong question.

The real question is: Who benefits most from more than $1 trillion in tax preferences?

Would you rather get a tax cut of $1,000 or $1.4 million? I thought so.

Would you change your answer if taking the smaller tax cut allowed you to avoid paying income tax entirely?

That is exactly the focus of the endless squabble over the half of American households who pay no federal income tax. This factoid has become a source of outrage for anti-taxers ever since they got wind of some estimates by my Tax Policy Center colleagues.

But framing the debate as being about who pays tax and who doesn’t misses the point. The question we should be asking is who benefits most from more than $1 trillion in tax preferences that litter the tax code. And the answer is clear: While nearly everyone takes advantage of these breaks, the highest income households do best—by far—even though they are still likely paying some tax after taking those deductions and exclusions.

Thanks to low rates and a pile of tax preferences, it is true that people who earn relatively little are more likely to pay zero federal income tax or even receive net cash benefits through the tax system than those in the top brackets. More than two-thirds of those making less than $50,000 pay no federal income tax (many do pay payroll and other taxes), compared to less than 4 percent of those making $100,000 or more.

But by most other measures, high-income households benefit far more from tax expenditures than those at the bottom. On average, the lowest earners save enough in taxes to buy gas for three months. The highest? They save almost enough to buy three $500,000 Mercedes Benz SLR McLaren Roadsters (one for workdays, one for weekends, and one for truly special occasions such as tax day).

My TPC colleagues worked up some numbers to show how these tax breaks are distributed. They did it by looking at what would happen if Congress repealed all tax expenditures in 2015 (something like one of the plans proposed by the chairs of President Obama’s fiscal commission, Erskine Bowles and Alan Simpson). These tax breaks include everything from earned income and child credits to deductions for mortgage interest and charitable gifts to exclusions for employer-sponsored health insurance and retirement savings. They also include preferential rates for capital gains and dividends.

TPC figures these tax breaks are worth about $1,000 to a typical household earning about $21,000 or less (the bottom 20 percent), boosting their after-tax income by 9 percent. Middle income households earning between $40,000 and $70,000 get an average of about $4,000, increasing their after-tax incomes by about 8 percent.

The story is very different at the top of the economic food chain. Those tax breaks are worth an average of $275,000 to those in the top 1 percent (who make at least $668,000) and $1.5 million to those in the top 0.1 percent (who make more than $3 million). These preferences allow those folks at the very top to boost their after-tax incomes by more than 20 percent—more than twice the benefit of those at the bottom.

To put it another way, the highest-income 20 percent enjoy almost two-thirds of the benefits of tax expenditures. More than one-quarter goes to the top 1 percent alone. The bottom 40 percent? They get about 10 percent (chart). For some, it may be enough to zero out their tax bill, but compared to those at the top, it isn’t much of an increase in income.

Keep in mind that as President Obama and Congress scrub the federal budget, the debate over who benefits from tax expenditures is just one piece of the puzzle. It is, for instance, also worth figuring out who benefits from direct government spending.

But if you are arguing about who cashes in on those tax breaks in the federal income tax code, don’t just look at who pays tax and who doesn’t. The better question is whether you are better off with three months of fill-ups or three top-end Benz’s.

Add/view comments on this post.

--------------------------

The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. To add or view a comment on a guest blog, please go to the blogger's own site by clicking on the link above.