WASHINGTON (MarketWatch) — Everybody is talking about balancing the federal budget, but many of the loudest voices are unwilling to talk about one of Washington’s dirty secrets: The budget hides $1 trillion in spending that primarily benefits wealthy and upper middle-class Americans and corporations.

If we reined in this hidden spending, it’d be a lot easier to balance the budget. But we can’t eliminate it — or even slow its growth — unless we’re willing to look at it squarely and call it what it is: welfare for the wealthy and for the middle class.

The urgency of the national debt

Even if we did acknowledge that the government subsidizes much of what we in the private sector spend on housing, health care, education and retirement, it’s nearly impossible to believe that Washington will ever touch these programs. They are just too popular.

We may hate big government in the abstract, but we sure do love the goodies it provides us.

I’m talking about private spending that the government subsidizes through loopholes, deductions and credits in the tax code. These tax breaks — known as tax expenditures — subsidize some of the most expensive items in the family budget: buying a home, buying health care, saving for retirement and paying for college and child care.

Rich get the benefits

Because the government provides these subsidies through the tax code instead of through direct spending, the benefits go largely to those who make the most money. A $1,000 deduction provides $350 in benefits to a taxpayer in the top 35% tax bracket, but just $100 to one in the bottom bracket of 10%. The 65% of taxpayers who don’t itemize deductions but take the standard deduction instead get nothing at all.

The richest 20% of families — those who make more than $115,000 a year — capture 71% of the benefits from the housing subsidies, as well as 80% of the benefits of retirement-savings deductions, according to the Tax Policy Center. Much of benefit accrues to the top 1% or top 0.1%. Read the Tax Policy Center’s report.

Meanwhile, the 20% at the bottom, who make less than $27,000 a year, get just 0.1% of the benefits of the housing subsidies and none of the benefits from the tax breaks for saving. Those in the exact middle 20% — families that make between $50,000 and $75,000 a year — get 8% of the benefits from the housing subsidy and 6% of the retirement subsidies.

The middle class doesn’t get much … just enough to ensure that Congress wouldn’t dare touch these giveaways.

It’s hard to believe that the richest among us need Uncle Sam’s help to buy a house or save more wealth, but they get it anyway.

By the way, lest you think I’m just jealous, I saved a considerable amount on my 2010 taxes from these sorts of tax breaks, including deductions for mortgage interest, health-insurance premiums, saving for retirement and college, state and local taxes paid, charitable giving and the exclusion of interest from tax-exempt municipal bonds.

These tax expenditures get in the way of balancing the budget, because the spending is largely hidden from view during the budget process. Congress doesn’t vote on these provisions each year, as it does for discretionary-spending programs, so they don’t get any scrutiny at all. In many cases, a direct subsidy would be a more efficient way of promoting a public good than a tax break.

Perverse incentives

As bad as they are for honest budgeting, the real damage to the economy comes from the perverse incentives that misallocate capital and drive up costs.

Most of these incentives don’t actually do what they are intended to do. The deduction for mortgage interest just drives up the cost of housing, rather than making housing more affordable. Subsidies for saving mostly go to those who would save anyway. Also, one of the biggest reasons we can’t control health-care costs is that the tax code encourages us to buy too much health care.

Tax Report: Tax deductions you may not know about

We are not talking chicken feed; it’s big money. In 2012, these so-called tax expenditures will amount to $1.1 trillion, more than twice as much as the $462 billion budgeted for nondefense discretionary spending. It’s a third of all federal spending, but you never hear about it.

As you know, the Republicans in Washington want to slash nondefense discretionary spending by $100 billion, starting right now. They want to roll back spending in another big part of the government: the entitlement spending for Social Security insurance, and for health insurance in the Medicare and Medicaid programs. At the state and local levels of government, Republicans are itching to eliminate pensions and health-care benefits for state and municipal workers and retirees.

$1 trillion elephant

But the Republicans aren’t talking about the $1 trillion elephant in the room. Fortunately, not everyone is ignoring it.

The bipartisan deficit-reduction commission headed by Erskine Bowles and Alan Simpson said this about these boneheaded subsidies: “Washington has riddled the system with countless tax expenditures, which are simply spending by another name. … Instead of promoting economic growth and competitiveness, our current code drives up health-care costs and provides special treatment to special interests. The code presents individuals and businesses with perverse economic incentives instead of a level playing field.” Read the commission’s report.

The president’s proposed budget also takes a big whack at tax expenditures, in part by limiting how much taxpayers in the top bracket can benefit from them and in part by eliminating some corporate-tax loopholes. Read more about Obama’s budget.

We should do more. We are told constantly that we all must do our part to bring our fiscal policy into balance. If teachers and cops are going to lose their pensions in the name of fiscal responsibility, it’d only be fair if these much-larger tax expenditures also were sharply reduced — especially the ones that don’t accomplish any public purpose.

Eliminating any of these big provisions immediately could be devastating to the economy, but we could phase in limitations over time (as Martin Feldstein as proposed), or slowly eliminate them entirely. With the savings, we could reduce the deficit, or cut everyone’s tax rate or spend the money directly on the things we’ve been trying to encourage through tax breaks.

Should we really be subsidizing mansions? Or cottages by the lake? Or “Cadillac” health-insurance plans? Or millionaires’ 401(k) plans? I don’t think so, and I bet you don’t either.