What if the Outrage over Excessive Welfare Extended to the Tax Code?

By :: February 26th, 2013

Senator Jeff Sessions (R-AL) has created quite a stir with his estimates that every household below the poverty level receives an average of $168-a-day (or about $61,000-a-year) in government welfare.

Sessions' calculations are extremely controversial and overstate the amount of government assistance for those in poverty. But for the sake of argument, let’s assume he’s right. How would $61,000 in direct government spending and refundable tax credits for the poor stack up against tax subsidies for the rich?

It isn’t even close. Indeed, my colleagues at the Tax Policy Center figure that in 2011 households making $1 million and up got that much in average tax benefits from just two deductions--for charitable gifts and state and local taxes. Add a fistful of other preferences--such as deductions for mortgage interest and exclusions such as the one for employer-sponsored health insurance-- and top-bracket households got far more in tax benefits than the poor got in means-tested assistance.   

These estimates exclude low tax rates on capital gains and dividends which are, arguably, very different from, say, subsidies for mortgage interest or employer-sponsored health insurance. If you include preferential rates on investment income, households making $1 million or more got an additional $119,000 in tax benefits, on average, in 2011.

Keep in mind that tax rates on ordinary income were relatively low in 2011. Now that the rate for high-income households has gone up significantly, their tax subsidies will be even more generous.

I readily admit that on one level, this is a fairly silly exercise.  But there is an important point here: In much public discourse, direct government aid for the poor is easily dismissed by the pejorative “welfare.”  Yet, spending-like subsidies administered through the revenue code provoke far less outrage. This is true even though many of these tax preferences are economically indistinguishable from direct spending and often add far more to the deficit.

Take housing, for instance. CBO figures that the lowest-income 20 percent of households get an average of about $1,100-a-year in means-tested rental housing assistance. TPC estimates that the lowest-income households got no benefit from tax deductions for mortgage interest and real estate taxes in 2011. But those in the top 20 percent, who make more than $100,000, got an average tax benefit of $2,900. Those in the top 1 percent, who make an average of $1.5 million, did even better. They got an average tax break of $5,700, more than five times the benefit the government provided low-income renters.

As with so much of the tax code, these homeowner tax benefits are upside down. On average, the more you make, the more you get. This seems an odd design in an era when fiscal restraint is all the rage. Yet politicians still recoil when tax expenditures—the vast bulk of which go to middle-class and high-income households—are described as subsidies.

In recent years, both Democrats and Republicans (including their recent presidential candidates) did talk about capping or limiting tax preferences for the highest income households. But so far, at least, that talk has come to nothing. It would be helpful if Sen. Sessions directed some of his outrage to the more than $1 trillion in tax expenditures that litter the revenue code—much of which go to those who need help the least.

7Comments

  1. AMTbuff  ::  5:54 pm on February 26th, 2013:

    “Add a fistful of other preferences–such as deductions for mortgage interest and exclusions such as the one for employer-sponsored health insurance– and top-bracket households got far more in tax benefits than the poor got in means-tested assistance.”

    Except that tax rates are not exogenous. They were and are set based in part on the fact that certain items are excluded from taxable income. People with these exclusions benefit relative to people without these benefits, but it’s a relative scale, not an absolute one.

    If you need proof that tax rates depend on the aggregate amount of deductions and exclusions, I refer you to the 1986 Tax Reform Act which explicitly traded the latter for the former.

    Furthermore there are issues of horizontal equity. Is a handicapped person with $100,000 of income and $50,000 of medical expenses equally able to pay taxes as a healthy person with $100,000 of income? The current tax code has him paying more than a healthy person with $50,000 of income. Arguably even the current treatment is unfair to the handicapped person since there are non-medical expenses of all sorts which aren’t deductible. Yet Obamacare increased the floor on medical deductions and serious commentators propose further curtailment of this equity-promoting feature of the tax code. It’s all about money, and fairness be damned.

  2. Michael Bindner  ::  7:16 pm on February 26th, 2013:

    Let us start by disagreeing with Senator Sessions and say that much of what each family receives on a per diem basis goes directly to the medical industry. Would that they did get a decent amount of money – say $32 a day – they would not be so poor,.

    As for tax benefits for the wealthy and middle class, much of these also go to the medical sector.

    As to those that are related to capital gains, many would argue that they are earned by making the initial investment (unless inherited). Those who work for these companies and pay taxes on their labor might argue as to how fair the tax benefits are distributed, but the poor on assistance are not in the argument.

    Mortgage interest is a scam tax benefit. In order to get it you have to give banks at least 6 dollars for every 4 dollars in tax benefit. The really rich are much better off paying cash for houses.

  3. SteveinCH  ::  9:14 am on February 27th, 2013:

    A little history would be nice here on two dimensions.

    1. To the point that AMT buff just made, the exclusions were built into the tax code at it’s foundation and have been declining over time (at least for the rich). Income averaging, broader interest deduction and lack of phaseouts and a whole host of other things have been eliminated from this category.

    2. More fundamentally, the TPC’s published tables of tax distribution based on the ATRA show the top 1% paying a higher effective federal tax rate than in 2000 and nearly as high as in 1979. This while all other groups show lower, and at the low end of the income distribution, much lower rates. So the comparison done by Mr Gleckman is completely devoid of context. The tax deductions are already included in a baseline tax distribution table that is more progressive than any measured by the CBO back to 1979 (as far back as it goes). The spending described is outside of that distribution.

    More broadly however, we should discuss how many people there are making over $1 million versus HHs in poverty. I believe the ratio is 30:1 more or less.

  4. ben claassen  ::  7:07 pm on February 27th, 2013:

    see keeping track of entitlement dollars at benclaassenspeaks

    Conclusion, if Any
    The maze of government spending, constant printing of checks and funding of vouchers and EBT cards is the common view of “entitlements”. The story told herein sees a broader picture of entitlements to include all of the second tier recipients of the government cash flow. These folks cheer for debt reduction while not seeing themselves as getting hand outs.
    1. Reform of spending with the goal of improved economic growth needs to take on a larger program of change and overcome significant resistance from the lobbies and beneficiaries who do very well on their cut of government spending.
    2. The idea of defensive spending needs better ties to the real risk that is avoided so spending decisions reach a value balance with the goal of economic growth from infrastructure and productivity gains.

  5. kevin  ::  3:49 pm on February 28th, 2013:

    Many Republicans have long sought to drug test Welfare recipients. I wonder if they would support requiring taxpayers to submit a negative drug test to the IRS along with their Schedule A if they choose to itemize deductions?

  6. Fred  ::  1:50 pm on March 3rd, 2013:

    You lose all credibility when you equate “keeping more of your own money” with “getting a handout from the government.”

  7. Gerda van Erkel  ::  4:26 pm on May 9th, 2013:

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