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Posted at 4:38 PM ET, 01/ 5/2011

The welfare state for the middle class

By Ezra Klein

I can't wholeheartedly recommend Pew's tax expenditure database as, at this point, it's missing such tax expenditures as the exclusion for employer-sponsored health-care insurance, and that's a bit like having the World Cup without inviting Brazil. They say that'll be added at some future date. But I also can't let something called the "tax expenditure database" pass without some sort of mention.

What's interesting about tax expenditures, I think, is that they're basically the welfare state for the middle class, cleverly arranged such that they don't look like the welfare state for the middle class. If every year, the government sent every American -- from the richest CEO to the greenest public-school teacher -- a check covering 30 percent of their health-care costs, we'd think that a bit weird. We'd think it much weirder if we only sent the checks to the workers who happened to be at firms that offered benefits. It would certainly make it very difficult to argue that we shouldn't be subsidizing health-care insurance for the poor and the jobless.

Yet that's pretty much exactly what we do. We just hide it in the tax code rather than write it on a check. And because we hide it in the tax code, the people who're benefiting don't really know they're benefiting. They think the poor are getting all this help and they're paying for it. In reality, the lost revenue from the tax exclusion for employer-based health care is significantly larger than the entire cost of the health-care reform bill. And it messes up the system in countless other ways.

And don't even get me started on the mortgage-interest deduction. We've basically made it national policy in this country to get people to spend more money on health-care insurance and housing than they otherwise would, and we've done it at great expense to taxpayers. Harrumph.

By Ezra Klein  | January 5, 2011; 4:38 PM ET
Categories:  Taxes  
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Comments

Brazil (and the employer tax exclusion) are BOTH over-rated. I can't tell you how many employers (especially small ones) don't take the exclusion. I'd love to see some stats on that.

Posted by: visionbrkr | January 5, 2011 4:59 PM | Report abuse

I've been paying taxes on my benefits for years as an owner of an s-corp. Our employees on the other hand have been getting 100% of premiums covered, which means they haven't seen how much of a tax free raise they are getting each year in terms of increased health premium coverage. Our rates haven't gone up that fast, but there is still a gap there.

The thing I wonder about the mortgage interest deduction (although I am opposed to it) is what it would do to home ownership. If rent/buy ratios are maintained post the elimination of the deduction, there is then a large advantage to a corporation owning a home (where interest expenses are normal costs of doing business). It would just move the advantage to people willing to go that extra step on their tax return and create a sole proprietorship that owned the home- and rented it to the individual at cost. Maybe the right deduction to attack is the capital gains exclusion for home sales that Clinton passed at the tail end of the last slump. Of course, a lot of people didn't pay that either as they just rolled the gains into more expensive homes, so it only punished people trading down.

Posted by: staticvars | January 5, 2011 5:42 PM | Report abuse

Which Presidential candidate made eliminating the health care deduction part of his platform and which candidate demagogued that change as raising taxes on the middle class? I'll take Politicians in the Back Pocket of Labor Unions for $500 Alex.

Posted by: cdosquared5 | January 5, 2011 5:46 PM | Report abuse

I've got a suggestion: forgo these tax benefits for yourself.

Ask the WaPo HR how much your subsidized health care is worth and send a check for 30% of that to the Treasury. If you own a house, don't deduct it.

If you honestly think these things are wrong, then how is it not wrong for you to participate in them? Do they become right because everybody else is doing it?

Posted by: pj_camp | January 5, 2011 6:03 PM | Report abuse

Ezra, spoken like a true renter on the mortgage interest deduction. I assume you live in the city, so even with the mortgage interest deduction you probably still have a pretty vibrant rental market. Having just moved to the suburbs in a more spread-out Western city, the rental market is even worse due to that stupid deduction. Everybody owns, even when, based on their overall wealth and income and job mobility needs, they really should be renting. But, there's nothing for rent.

@pj_camp: It is possible to disagree with a policy yet still take advantage of it for your own benefit while it exists. This is politics and economics, not religion. He's not professing to be on higher moral ground for his beliefs yet still taking the benefit; he's simply disagreeing with the policy that unfairly benefits him and others in his situation. Spare us the purity test.

Posted by: scotbrad | January 5, 2011 6:25 PM | Report abuse

pj:

Why must we reduce every question of public policy to a debate between right and wrong? Holding human beings in bondage is wrong. Barring people from voting because of the color of their skin is wrong. Homicide is wrong. An invisible 30% percent subsidy for health care to people who may not need the financial assistance is (possibly) bad policy in the sense that it may be an unnecessary or ineffective market distortion that achieves little social benefit. I would not say it is "wrong." Perhaps if it were wrong it would merit personal financial sacrifice. But maybe its just bad policy that should be changed. Is it possible to examine the benefits and shortcomings of federal policies -- and possible changes to those laws -- without turning the discussion into a crusade?

Posted by: dollarwatcher | January 5, 2011 6:53 PM | Report abuse

I personally hate these posts about pie in the sky ideas that have absolutely no hope of becoming law. Please, stick to reality. Thanks.

Posted by: AuthorEditor | January 5, 2011 7:14 PM | Report abuse

The make work pay "tax credit" was given even to people with no income tax liability, and it was phased out for people who earned a lot of money and presumably had a large tax liability.

Now, we find that the government letting middle class people keep their own money is actually just welfare.

I guess I have to make some updates to my newspeak dictionary!

Posted by: justin84 | January 5, 2011 7:32 PM | Report abuse

If you broaden your perspective properly, most tax expenditures benefit the wealthy, although these aren't often captured in the data. Nor are they necessarily wrong or evil. The middle class knows that it's only getting some bones tossed its way. Most individual and corporate income is not subject to income tax after deductions, or is subject to lower (i.e., subsidized) rates. Qualified dividends and capital gains are examples of lower rates; capital gains income also is reduced by deducting any losses. Income can be deducted for many things, including rental property expenses, office expenses, product input expenses, equipment expenses, wage/salary/bonus/benefits expenses, corporate officer travel by private jet expenses, . . . .

Posted by: pjro | January 5, 2011 8:56 PM | Report abuse

Mr. Klein,
Getting rid of tax subsidies because it distorts the market is mainstream libertarianism. I have hope for you now.

Posted by: JPM16 | January 5, 2011 9:51 PM | Report abuse

prjo: "Qualified dividends and capital gains are examples of lower rates; "
That's because the that money is being taxed at twice, once at the corporate rate and again when it makes it to the owners of the corporation (shareholders).

prjo: "capital gains income also is reduced by deducting any losses."
The other way simply doesn't make sense.

Posted by: staticvars | January 5, 2011 10:45 PM | Report abuse

"And don't even get me started on the mortgage-interest deduction. We've basically made it national policy in this country to get people to spend more money on health-care insurance and housing than they otherwise would, and we've done it at great expense to taxpayers. Harrumph."

Completely agree.

Posted by: jnc4p | January 5, 2011 11:07 PM | Report abuse

Another insideous problem created by the health care exclusion: it makes your tax rate look higher.

A typical middle class family making, say, $80,000 in salary and wages is probably making north of $100,000 once you factor in their untaxed medical insurance, 401k matches, etc. If they are paying $10,000 in income taxes, they would often conclude they are paying a 12.5% net tax rate, rather than the 10% that they are really paying. This in turn causes them to be more susceptable to claims that they are "overtaxed".

PS:) My wife and I make right around $80k before benefits, and probably $105k if you include them. We pay just a bit over $7000 in federal taxes, with no gimmicks...just 401k, standard deduction, etc. That's a 7% federal income tax rate. "Overtaxed" my heiney.

Posted by: brickcha | January 5, 2011 11:09 PM | Report abuse

From the book “AN AUTISTIC WORLD (1)”

As long as there are people willing to take advantage of situations by exploiting the limitations of other individuals, there will be all sorts of mercantilist theories that will excuse their actions. The common reference is the ability to profit from manipulating the loopholes in the law, or the modification of such, to accommodate the complete absence of justice, which enables certain governments or individuals to act in a selfish and amoral manner. The superfluous vision of a theoretical present based on those simplistic but effective actions, includes the creation of dream societies founded on the rotten supports of misleading imaginations, that happily pass the baton of inflation, corruption, stagnation, etc. to future generations.

Societies often want to be mesmerized more than enlightened by finding the truth. That predisposition is what misdirects them from their paths into hazardous conditions, because while they are watching the environment and wondering in awe “how” it is possible; someone else is benefiting with their denial by knowing “why” it is possible.

Posted by: kanino | January 5, 2011 11:38 PM | Report abuse

From the book “AN AUTISTIC WORLD (1)”

As long as there are people willing to take advantage of situations by exploiting the limitations of other individuals, there will be all sorts of mercantilist theories that will excuse their actions. The common reference is the ability to profit from manipulating the loopholes in the law, or the modification of such, to accommodate the complete absence of justice, which enables certain governments or individuals to act in a selfish and amoral manner. The superfluous vision of a theoretical present based on those simplistic but effective actions, includes the creation of dream societies founded on the rotten supports of misleading imaginations, that happily pass the baton of inflation, corruption, stagnation, etc. to future generations.

Societies often want to be mesmerized more than enlightened by finding the truth. That predisposition is what misdirects them from their paths into hazardous conditions, because while they are watching the environment and wondering in awe “how” it is possible; someone else is benefiting with their denial by knowing “why” it is possible.

Posted by: kanino | January 5, 2011 11:40 PM | Report abuse

Over the life of a 30 year loan, a $300 per month decrease would equal over $100K in savings. Search the web for "123 Mortgage Refinance" website they helped me find 3.118% rate easily. Strongly recommend them for anyone.

Posted by: katehall123 | January 6, 2011 12:49 AM | Report abuse

The tax code is social engineering by whomever is in power. It's the font of political power and will never really change, because to change it enough is to lose it entirely.

Details may vary, but the results are the same: rewards to some, punishment to others. The real winners are the politicians, or Realpolitik without the German accent.

The rest is farce, played out on Fox and MSNBC.

Posted by: tomcammarata | January 6, 2011 3:42 AM | Report abuse

Encouraging home ownership through the tax code isn't inherently a bad idea. What doesn't make sense is subsidizing luxury homes. Why not limit the subsidy to interest on a median-priced home, and if somebody wants to buy a 4000 sq. ft. McMansion in a bubble inflated Sunbelt suburb they can pay for it themselves.

Posted by: tl_houston | January 6, 2011 9:21 AM | Report abuse

Here's what you're missing, Ezra: The middle class actually pay income taxes. So if they get "tax expenditures," they basically get a rebate of money they earned through work and paid over to the government. Don't think it's weird at all to rebate some of that money back, but it would be simpler to just adjust rates and let people choose what to do with their own money. Re: healthcare, there was a very easy way to provide affordable, universal access. Congress has the power to regulate interstate commerce. A LEGITIMATE exercise of that power would be to declare that no state could prohibit a citizen from purchasing health insurance from companies outside of their state and to either provide everyone an equal refundable tax credit based on the number of covered family members (more welfare- horrors!) or to take the health insurance coverage issue out of the equation and reduce tax rates at the low end of the income scale (maybe the lowest two quintiles). Congress could then mandate that no insurance carrier could drop or decline coverage based on pre-existing conditions and provide added protections for people who bought health insurance in advance of getting sick, as an incentive to healthy people to participate and broaden the risk pool. I could write this bill in about 40-50 pages or less. But no. We needed umpty-dumpty government panels, requirements, micromanagement and penalties, the IRS in everybody's shorts and 2200 pages of bullcrap, thrown at the feet of a clueless Congress, who passed it in a faith-based spasm of extra-Constitutional flimflammery and parliamentary bamboozlement. And they wonder why we hate them.

Posted by: mgyoung | January 6, 2011 9:51 AM | Report abuse

True story. I once worked for a tiny non-profit that did not deduct health insurance premiums pre-tax. The accountant, a 70-year-old woman, had been with the non-profit almost since the beginning. She claimed it would *cost* the organization money in order to deduct the premiums pre-tax (I think I was paying about $100 a month, two pay-periods). My father happens to be a CFO. He looked into what the actual steps were for an organization to do this. Turns out they were nothing. A piece of paper signed by the employees agreeing to have this done (kept on file in the office) and then it just should have been done by our 70-year-old payroll accountant.

Since I didn't itemize tax deductions she probably cost me $400 a year in REAL money by not doing this for me. She probably would have saved our organization $500-1000 a year if she had! Just proof how people don't always understand this benefit.

Posted by: NewsCat-VA | January 6, 2011 11:12 AM | Report abuse

Actually, I think the Tax Policy Center has estimated the sizes of the various tax expenditures. For example, in tax year 2007 (CY 2006), the exclusions for the following cost us:

Health insurance: $138bn
Retirement plan contributions: $127bn
Lower taxes on capital gains and dividends: $96bn
Mortgage interest deduction: $92bn
Charitable contributions: $43bn

Child tax credit: $45bn
Earned Income Tax Credit: $44bn

The first 5 are regressive, meaning that they benefit higher income payers more. The lower tax rates on capital income is especially regressive. The last two are very progressive, since they mostly benefit low income families. The 2008 report was the latest one I could easily find.

http://www.taxpolicycenter.org/UploadedPDF/1001234_tax_expenditures.pdf

Posted by: weiwentg | January 6, 2011 4:38 PM | Report abuse

staticvars: I said they are tax expenditures--I am not saying any tax expenditure is inappropriate. All tax expenditures can be defended by somebody. If it's income to somebody, and it's not taxed or preferentially taxed, it's a tax expenditure in my book. If you want to reduce them, consider each and every one's merits.

Posted by: pjro | January 6, 2011 7:22 PM | Report abuse

While we're on the topic of tax subsidies and incentives, I'd like to point out that the $750 tax penalty for not having health insurance that is considered unconstitutional by some is *exactly equivalent* to a $750 tax subsidy for health insurance combined with a an equivalent decrease or elimination of the personal income tax exemption. You're up $750 if you have insurance, you're down $750 if you don't. There are multiple ways to work a $750 incentive for health insurance into the the tax code, and still make it comprehensive. Only this one method gets the label of unbridled unconstitutional government power.

Posted by: witt_jeff | January 7, 2011 3:17 PM | Report abuse

I'm not as sure as you seem to be on getting rid of the the tax exclusion for employer-based health care. I'm not as sure it's as big a boon for the middle class as you seem to think it is either. In my own experience, every employer has had a progressive premium rate for health insurance. Admittedly, my spouse and I earn more than the median American income, but when you look at that structure, it seems that removing the favorable treatment for health insurance may very well hurt the poor more than the middle or upper classes. I will give you an example. At my company, if you make less than $35000/year, you can get insurance for your family of 4 for about $35/pay period. If you are earning $100,000, that is about $250/pay period. More than $250,000 and it goes up to $600/pay period. Admittedly, the poor face lower tax rates, but they are getting far more in terms of what would be taxed and this kind of change would impact them more. I don't know how many companies use this kind of an income-based premium charge, but if it's prevelant, I'm not sure how much more you're going to get in terms of taxes by changing the law and I think you are going to hurt those who can least afford it...never mind the cost of administering this.

Posted by: MS19721 | January 7, 2011 11:19 PM | Report abuse

I'm not as sure as you seem to be on getting rid of the the tax exclusion for employer-based health care. I'm not as sure it's as big a boon for the middle class as you seem to think it is either. In my own experience, every employer has had a progressive premium rate for health insurance. Admittedly, my spouse and I earn more than the median American income, but when you look at that structure, it seems that removing the favorable treatment for health insurance may very well hurt the poor more than the middle or upper classes. I will give you an example. At my company, if you make less than $35000/year, you can get insurance for your family of 4 for about $35/pay period. If you are earning $100,000, that is about $250/pay period. More than $250,000 and it goes up to $600/pay period. Admittedly, the poor face lower tax rates, but they are getting far more in terms of what would be taxed and this kind of change would impact them more. I don't know how many companies use this kind of an income-based premium charge, but if it's prevelant, I'm not sure how much more you're going to get in terms of taxes by changing the law and I think you are going to hurt those who can least afford it...never mind the cost of administering this.

Posted by: MS19721 | January 7, 2011 11:20 PM | Report abuse

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