* Top 20 pct of earners get half the benefit of top breaks
* Tax breaks on capital gains favor the wealthy
* Study favors Obama's approach to tax reform -Democrats
By David Lawder
WASHINGTON, May 29 (Reuters) - The top ten U.S. tax deductions, credits and exclusions will keep $12 trillion out of federal government coffers over the next decade, and several of them mainly benefit the wealthiest Americans, a new study from the Congressional Budget Office shows.
The top 20 percent of income earners will reap more than half of the $900 billion in benefits from these tax breaks that will accrue in 2013, the non-partisan CBO said on Wednesday.
Further, 17 percent of the total benefits would go to the top 1 percent of income earners -- families earning roughly $450,000 or more. The same group that was hit with a tax rate hike in January.
The benefits of preferential tax rates on capital gains and dividends, a break worth $161 billion this year, go almost entirely to the wealthy, including 68 percent to the top one percent of earners.
House Democrats, who requested that Congress' budget referee conduct the study, argued that it backs up President Barack Obama's proposed approach to tax reform and deficit reduction: raise revenues by limiting the amount tax preferences for the wealthy.
"This shows that we could achieve a significant amount of deficit reduction by limiting the preferences to the highest income earners," said Representative Chris Van Hollen, the top Democrat on the House Budget Committee.
Although the study did not provide income thresholds, U.S. Census Bureau data for 2011 shows the top 20 percent of household income extends to down to $101,582, a level that is considered middle-class in many parts of the United States. The lowest quintile topped out at $20,262 in the Census data.
But the study also showed that benefits for the largest of the tax preferences, the exclusion for employer-paid health benefits, worth $3.4 trillion over 10 years, are more evenly distributed, with well over half of the benefits going to the middle 60 percent of earners.
The middle 20 percent of earners also got the biggest benefit from excluding a portion of Social Security and Railroad Retirement benefits, a perk worth $414 billion over 10 years.
Three other big tax breaks, the $2 trillion exclusion of net pension contributions and earnings over 10 years, the $1 trillion deduction for mortgage interest and the $1.1 trillion deduction for state and local taxes, also benefited the top 20 percent disproportionately.
Representative Sander Levin, the highest ranking Democrat on the House Ways and Means Committee, the panel that is trying to advance tax reform this year, said the study shows that Republicans would have to greatly reduce tax breaks that benefit the middle class in order to achieve their goals of reducing tax rates and balancing the budget.
"The CBO report underscores the need to go beyond the rhetoric of lowering tax rates without indication of how that would be achieved or the implications for economic growth and tax equity," Levin said.
A spokesperson for Ways and Means Committee's Republican Chairman, Dave Camp, could not immediately be reached for comment on the study.
Republicans want to reform the tax code by eliminating certain deductions, credits and exclusions, but they do not want to divert any resulting revenues toward deficit reduction. Instead they want to use the savings to lower rates, which they say will accelerate economic growth and increase revenue collection.
Democrat Van Hollen said his favored approach would be to limit the total amount of deductions for the top 2 percent of income earners, or families earning $250,000 or more, while leaving intact much of the top 10 tax breaks, which also include deductions for charitable contributions and tax credits for earned income and children.
These latter two tax breaks, which are largely aimed at the working poor, provide two thirds of their $118 billion in 2013 benefits to the lowest 40 percent of wage earners, the CBO said in the study. Over 10 years, these two credits will cost $1.2 trillion.