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Invisible spending

Andrew Biggs makes the important point that an enormous amount of government spending is driven by spending or benefits for middle and upper-class Americans. In particular, he fingers Social Security, Medicare, and, puzzlingly, Medicaid, which I wouldn't put in that group.

I would, however, add the tax exclusion for employer-provided health insurance and the mortgage interest deduction, both of which are incredibly expensive tax policies that concentrate their benefits among the middle and upper tiers of the income bracket. And all these policies get at another important driver of spending, though one that doesn't get enough attention: The distinction between "automatic" spending and controlled spending.

For the growth rate of military or education or child-care spending to increase, Congress needs to take a vote. The money needs to fit somewhere in the budget. Not so for tax deductions or entitlements. If more people buy more expensive houses this year, the cost of the mortgage interest deduction goes up. If seniors begin using much more expensive medical treatments, the cost of Medicare rises. In theory, Congress could cap the increases in these areas, but in practice, it doesn't. The spending is allowed to increase automatically.

Worse, that's not something people really understand. Medicare is visible, but the employer-tax exclusion -- which not only costs money directly, but also makes the whole health-care system more expensive -- is basically invisible. But it's a huge benefit. It costs, for instance, much, much more than the entire health-care reform bill. And yet lots of people who abhor the bill's spending on health-care subsidies happily collect this benefit every month, yet don't know it, or vaguely know about it but don't understand that it's a subsidy. Same goes for the mortgage-interest deduction. I'd also recommend Len Burman's op-ed on this from awhile back.

By Ezra Klein  | September 17, 2010; 5:43 PM ET
Categories:  Taxes  
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Comments

Sounds like Ezra wants a flat tax? But seriously, that's the problem with looking at everything belonging to the government - you start looking at not taking something away from someone as being the same thing as giving them something.

Posted by: MrDo64 | September 17, 2010 6:09 PM | Report abuse

It is not "invisible spending." Failing to tax is not an "expense".

It does make the health care system more expensive by artifically creating incentives to insurance. Why we are replicating this via subsidies to tens of millions with Obamacare is beyond me.

Posted by: justin84 | September 17, 2010 6:11 PM | Report abuse

"In theory, Congress could cap the increases in these areas, but in practice, it doesn't. The spending is allowed to increase automatically."

I believe that a key provision of Paul Ryan's Roadmap plan is to do exactly that. I also believe that the plan deals with the employer provided health insurance tax exclusion by converting it into a capped individual deduction.

Posted by: jnc4p | September 17, 2010 6:13 PM | Report abuse

Spending shouldn't be invisible. How can we best spend money to support the "base"? How can taxpayers be convinced to spend, spend, spend to support the "base" of Social-Democratic Party supporters? Is there something that the Obama/Pelosi Regime can do -- not a tax, but perhaps a regulation or executive order -- to support the "base" and to encourage the "base" to vote?

To hell with "lots of people who abhor the bill's spending on health-care subsidies" -- the Obama/Pelosi Regime needs the votes. The fact that the PPACA allocates the money paid by taxpayers to non-working, non-taxpaying, non-citizens shouldn't matter: the Obama/Pelosi Regine needs the votes and if such votes can be obtained, what difference does it make how they are obtained.

I, for one, encourage every American to ignore the facts and to support the Regime: logic and ethics are unimportant when votes are involved. Without the bribery, there are no votes: without the votes, there is no power!

Posted by: rmgregory | September 17, 2010 6:44 PM | Report abuse

Medicaid pays for nursing home care for most of our elderly. That's a big benefit for their middle-class children.

MrDo64: We effectively have a flat tax if you look at TOTAL federal taxes for people who earn between $20,000 and $500,000. People who earn either less or more than that pay a lower total federal tax.

Posted by: J_Bean | September 17, 2010 7:00 PM | Report abuse

". But it's a huge benefit. It costs, for instance, much, much more than the entire health-care reform bill. And yet lots of people who abhor the bill's spending on health-care subsidies happily collect this benefit every month, yet don't know it, or vaguely know about it but don't understand that it's a subsidy."

That would be why, of course, that President Bush proposed changes to the tax exclusion.

Posted by: krazen1211 | September 17, 2010 7:35 PM | Report abuse

I agree that the tax exclusion on health care is inefficient and should be eliminated. It is not, however, a subsidy nor is it a government expense. For either of those to be true, the government would have to actually spend money. So there you have it, the reason citizens don't see this "expense" is because it's not one.

Posted by: FatTriplet3 | September 17, 2010 8:02 PM | Report abuse

"I would, however, add the tax exclusion for employer-provided health insurance and the mortgage interest deduction, both of which are incredibly expensive tax policies that concentrate their benefits among the middle and upper tiers of the income bracket."

Whaddya know! Ezra and I agree on 2 things.

Not only are the exclusion and the deduction incredibly expensive, they both also distort the health care and housing markets and drive up costs.

Obama could totally rehabilitate himself for his failures to date if he'd devote his energies to flattening the tax rate by eliminating these boondoggles.

Posted by: bgmma50 | September 17, 2010 9:01 PM | Report abuse

Biggs makes some excellent points regarding the benefits paid out through Social Security and Medicare outweighing the amounts contributed...which is why liberal's who call those taxes regressive are studiously avoiding the benefit side of the equation.

However, at least most Medicare and Social Security recipients paid into the system for like, 40 plus years. What about Obamacare, which creates instant entitlement beneficiaries, who have never contributed and will never be required to contribute to the program?

Posted by: bgmma50 | September 17, 2010 9:08 PM | Report abuse

"Medicaid pays for nursing home care for most of our elderly. That's a big benefit for their middle-class children."Posted by: J_Bean

When you think about it, the same can be said for Social Security and Medicare. I've often wondered how these programs have impacted our demographics (child bearing decisions) as well as our child rearing practices. Think about it. If the Boomers knew that their level of comfort in their golden years depended, at least in part, on bearing and raising productive and loving offspring, how differently they might have lived their lives.

Posted by: bgmma50 | September 17, 2010 9:17 PM | Report abuse

The reason he cites Medicaid as a program for middle income Americans is that the majority of Medicaid spending is for nursing home custodial care. In many instances, this allows middle class families to avoid financial ruin when their parents are placed in nursing homes. Those placed in nursing homes must "spend down" their assets first, so the Medicaid-covered nursing home residents are poor by definition. Their families would have otherwise paid for some of their care, though.

Posted by: JeffLevin-Scherz | September 17, 2010 10:30 PM | Report abuse

"I would, however, add the tax exclusion for employer-provided health insurance and the mortgage interest deduction"

I would definitely add in 401k deductions. Poor, working and middle class folks don't have retirement plans available in nearly the numbers that high-end workers have. And, when they do, they often don't (can't afford to) contribute. Plus, the deduction is worth more as you move up the income ladder. What's a guy making $20,000 paying on the next dollar, 10-15%? The gov is making 1/3 of the contribution for his boss.

Posted by: rat-raceparent | September 17, 2010 11:24 PM | Report abuse


I have posted this already here before You guys should stop complaining because, one the health care we have now isnt as good as it was supposed to be. also the law has just been signed so give it some time. so if u want to say u have the right to choose tell that to ur congress men or state official. If you do not have insurance and need one You can find full medical coverage at the lowest price by calling 877-882-4740 or check http://bit.ly/9fDY7U If you have health insurance and do not care about cost just be happy about it and believe me you are not going to loose anything!

Posted by: quincyhow18 | September 18, 2010 5:56 AM | Report abuse

"In particular, he fingers Social Security, Medicare, and, puzzlingly, Medicaid, which I wouldn't put in that group."

Agreeing with the above posters who point out that in many states Medicaid's spend down provisions plus smart lawyers can make nursing home care a middle class entitlement.

When you look at the distribution of Medicaid spending in certain states, you see that although most of the _people_ on the program are poor moms and kids, the actual majority of the spending goes to the elderly and disabled (who are also disproportionately elderly). Check out Kaiser's breakdown by in spending by enrollment group here:
http://www.statehealthfacts.org/profileind.jsp?ind=858&cat=4&rgn=34

I think this varies immensely from state to state, though. In New York State, there is a right of spousal refusal, so basically a middle to even upper middle class couple can have one spouse take all the assets, legally refuse to support the care of the other, and then put them on Medicaid once the other partner becomes legally indigent. There's an entire cottage industry of lawyers who facilitate this asset transfer and spend down (and a really funny story of how then-Governor Hugh Carey's personal compassion for an elderly friend with a sleazy rich husband caused this to become law, with massive unintended consequences).

Ironically, it can be easier for an individual who is middle class elderly or disabled to get on Medicaid than an individual poor person (young or old) because they can afford the lawyers who will make sure their paperwork is right. And once they are in the system, a lot of institutions like hospitals and nursing homes have a huge economic interest in making sure they maintain their coverage. Not so the poor mom in decent health with 2 mostly healthy kids--nobody's bottom line is really impacted when she stops bringing them in for their $50 annual checkup and their $20 vaccinations.

To reinforce this point, look at how odd the distribution of elderly to adults is for Medicaid in New York State, and take into account the fact that NYS has some of the broadest eligilibity for adults in the nation: http://www.statehealthfacts.org/profileind.jsp?ind=210&cat=4&rgn=34

Still, the problem is that there are poor elderly who need Medicaid. How do we see who's "truly" poor and who is gaming the system? Because, of course, the gaming of spend-down to qualify for Medicaid is reflected in the income stats as well! Very tricky to disentangle, and there's almost zero political will to do it because middle class people are also able to organize politically to protect their sick mother's nursing home benefits.

But you're right, we should not forget the insurance subsidy and the mortgage deduction, which are absolutely huge and where it's much easier to disentangle how they help the middle class and especially the wealthy.

Posted by: theorajones1 | September 18, 2010 9:15 AM | Report abuse

rat-raceparent,

"I would definitely add in 401k deductions. Poor, working and middle class folks don't have retirement plans available in nearly the numbers that high-end workers have. And, when they do, they often don't (can't afford to) contribute. Plus, the deduction is worth more as you move up the income ladder. What's a guy making $20,000 paying on the next dollar, 10-15%? The gov is making 1/3 of the contribution for his boss."

Um, the poor and working classes by and large aren't paying income taxes. In 2007, the bottom 50% of the population paid a whopping $32 billion of the income tax bill. I'd say good for them, though the low tax bill probably encourages them to vote in politicians who promise them to take money from the rich and shower it on them.

Unfortunately, a single gal who is making $20,000 probably does have to cough up some of her hard earned cash to the government. Depressing, isn't it? The government can't even keep its hands off of the tiny wad of cash someone making $10/hr at a full time job would accumulate.

The middle class does pay taxes (I'd imagine most of that $32 billion is played by those between the bottom 40% and bottom 50%), but if they don't have a 401(k), they can put up to $5,000 in a IRA, and more into a HSA which they can decide not to use until retirement.

By the way, the government is NOT making 1/3 of the contribution for the wealthy. The wealthy are jumping through hoops in order to keep what is theirs, and yet the presumption somehow is that this is the government's money?

Posted by: justin84 | September 18, 2010 10:16 AM | Report abuse

So what. Government programs can and should benefit the middle class.

Posted by: Hopeful9 | September 18, 2010 11:42 AM | Report abuse

Your headline about invisible spending I thought would be about, oh, corporate welfare that ends up in the hands of those who don't need help, or big agra, or on the personal side, the mortgage deduction even if you own $1mil home. Now there's some worthless invisble spending.

Posted by: TomCantlon | September 18, 2010 3:08 PM | Report abuse

Even if you kept the mortgage and charity deductions, if you scrapped the $1 trillion in other tax expenditures, there's more than enough money saved to eliminate all FICA taxes and just pay for Social Security and Medicare out of general revenue.

Posted by: beowulf_ | September 18, 2010 6:08 PM | Report abuse

The costs of health care soar when prices and information aren't transparent. Check out the explanations at http://www.whatstherealcost.org/info-desk.php?category=o.ut-of-control-costs

Posted by: ChristineaWithRegence | September 20, 2010 10:42 AM | Report abuse

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