Do Seniors Deserve More Tax Cuts?

By :: November 6th, 2007

An awful lot of Democrats suddenly seem to think that senior citizens are overtaxed.

Presidential hopeful Barack Obama wants to exempt seniors making less than $50,000 from paying any federal income tax. House Ways & Means Committee Chairman Charlie Rangel (D-N.Y.) has tucked a new $700 above-the-line deduction for real estate taxes into his proposal to extend Alternative Minimum Tax relief for another year. While Rangel doesn’t say so, seniors who have paid off their mortgages and no longer itemize would be big beneficiaries of the new tax break.

This trend isn't just playing out in Washington. In Maryland, Governor Martin O'Malley has proposed doubling the state's $1000 income tax exemption for taxpayers 65 and older. O'Malley has included the idea in a bill that is otherwise filled with major tax increases, and he's done it at a time when the state faces a $1.7 billion shortfall.

This trend is troubling on many levels. Why are seniors more deserving of these tax benefits than, say, struggling young families? Why does Rangel want to provide yet another break to homeowners, who already enjoy not only $170 billion in tax benefits but also the equity in their homes. And, yes, despite recent mortgage market tremors, most long-time homeowners still have loads of equity.

Seniors already get an extra standard deduction on their federal returns and a tax break on their Social Security benefits. Most owe no income taxes at all. About half the states with an income tax also grant seniors a higher personal exemption and many also exempt at least some retirement income and even investment income. Many even grant those breaks to their highest bracket taxpayers, as long as they are over 65. The Institute for Taxation and Economic Policy estimates that Maryland seniors who earn below  $20,000 would get less than 1% of the benefit of the higher exemption.

Within two decades, 20% of the U.S. population will be over 65. Do we really want to exempt them from more and more taxes, especially when so much government spending, through Medicare, Medicaid, and Social Security, will be for their benefit? Transferring even more resources from the young to the old seems like a big step in the wrong direction.


  1. Anonymous  ::  6:38 pm on November 7th, 2007:

    The political pandering aside – this could also be a tacit attempt to keep many of the elderly in the work force and to delay their Social Security recipiency?
    It has been shown that the elderly respond to such incentives aimed at individual retirement and Social Security decisions (i.e. the “Delayed Retirement Credit” (Pingle 2006)).
    While I do not disagree with the authors opposition to tax credits to a constituency that already appears over served in the realm of government expenditures but I would be interested to see what the effects on the labor might be if it were to be implemented.

  2. Anonymous  ::  10:47 pm on November 9th, 2007:

    It is not clear how providing a tax deduction for property taxes would encourage people to stay in the work force. It is basically a windfall (not directly related to earnings). Economic theory would suggest that this would, if anything, encourage seniors to work less. (That is, leisure is a normal good. You consume more of it when your income rises.)
    End of economics lesson.
    If policymakers wanted to encourage older people to work, a better option would be to eliminate the Social Security earnings test, which discourages work for people who opt to collect Social Security benefits before the normal retirement age. They could also change pension rules to make it possible to collect retirement benefits without leaving one's career job.
    There are many other good suggestions for policy changes to encourage work at older ages here. (See page 23.)

  3. Anonymous  ::  9:18 am on March 21st, 2009:

    Thanks for opening this topic. I think the elderly must really receive a cut off in their taxes. Delaying this retirement plans will just lead their lives into financial troubles in the future. The state must offer these series of periodic money payments to the person who retires from employment because of age, disability, or the completion of an agreed span of service, and should generally continue for the rest of the recipient's natural life. This will encourage them to work better before they retire, benefiting not only them but also their families. In this times of economic meltdown people must know how to make sound financial planning. Planning for a retirement benefit for example is a great way of investment. But being wise enough in choosing the right bank to support this plan is crucial. A pension plan, for example, is a great source of social security. Pension payments in the UK, for example, have lately been disrupted by British citizens living abroad. The exchange organization Moneycorp has found out that British banks have been charging some pretty steep rates for international transfers to expatriates in other countries. No doubt that a lot of people are not happy with their banks’ treatment of the pension money that they worked so hard for, only to have it penalized so a bank executive can buy another ivory plated back scratcher.

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