23 Dec 2013: Hidden Welfare for the Rich
Posted by: Frank Moraes
If there is one issue that I find most difficult to get across to conservatives, it is the idea that tax deductions are a form of welfare. The best example of this is the mortgage interest tax deduction. Conservatives almost always say something like this, "Allowing people to keep more of their own money isn't welfare!" Sorry, but that just ain't true. There are laws saying that we must all pay taxes. If two people who make the same amount of money pay different amounts just because one of them is buying a house, then he is getting welfare. The government might as well be sending him a check each month to help with the mortgage.
I didn't learn this from some freaky liberal sociology teacher in college. I learned it from about the most conservative man of his generation, Milton Friedman. But I understand the difficulty with the concept. Most conservatives have this weird idea (that most won't admit to) that taxes are a form of theft. And this idea has only gotten stronger as tax rates have gotten lower. But unless you are going to claim full anarchy with absolutely no taxes—not even for the military or police—then you agree that we have to tax.
People also get confused about how taxes are applied. A common bit of folklore goes something like this, "I got a raise, but because it put me in a higher tax bracket, I'm taking home less!" No, that's not the way it works. The year before last, I made about $20,000. In a tax system with no special deductions (like the mortgage interest deduction), even someone who made $20 million would pay the same amount of taxes on that first $20,000. But as I know, because of the various special deductions and tax rates, that year, I paid roughly 13% in federal taxes. Mitt Romney, who made a thousand times as much paid roughly the same rate. So clearly, he was paying next to nothing on that first $20,000. That's welfare, folks!
I bring this up because of a really interesting article by Matt Bruenig over at Demos, Here's Why the US Spends More on Social Needs Than You Think. In it, he shows that if you take into account this kind of welfare, the United States spends about as much as Sweden does relative to GDP. So how is it that Sweden doesn't have all the terribly poor people that we have? Bruenig focuses on how poorly our social spending is structured. The most notable example of this is our healthcare system where we spend almost twice as much as comparable countries, yet provide mediocre quality care to our people and none at all for about 15% of us.
But it is bigger than that. Our social spending is set up in a way to hide what's going on. And this allows us to not provide welfare for the poor, while we provide plenty of it for the rich, like Mitt Romney. It's interesting, because we would have a much better government if we just simplified the tax system. Yet I am absolutely against doing that. Those words—"simplify the tax system"—are code for, "Raise taxes on the poor and lower it on the rich."
But it would help a lot if we made what is going on explicit. Instead of Mitt Romney getting taxed at only 15% on his capital gains, he would be forced to pay the normal marginal rate (39.6% on most of it). And then, the federal government could send him a welfare check for $5 million. At least then, people could decide for themselves whether it was fair that we were paying Mitt Romney a half million a month while people were living on the street—cold and hungry.
If we did this, I think things might change.
I haven't read the research that Bruenig is writing about, so exactly what shows up as "social spending" may be different than what I'm talking about. For example, I suspect it does not include the extra money we give out as welfare for people who make money by owning instead of working. But that doesn't change the argument.
 The main reason Romney paid so little was that he didn't work for his money. It was almost all capital gains that for some reason we think should be taxed less than money earned through work.