We’re all on welfare: a look at tax expenditures

I like to start many of my social policy semesters by asking my students what kind of welfare they receive (I figure they might as well know, from the beginning, how it’s going to be!). When I inevitably get some uncomfortable looks in response, I start in on the welfare that my own household receives, most of it in the form of tax expenditures, those nearly-invisible ways in which the U.S. government and the state of Kansas subsidize my family’s most important economic activities.

After all, the generosity of the federal government and my fellow taxpayers makes it possible for us to:

  • Own a home, deducting all of the interest we pay on our mortgage
  • Save for my kids’ college educations, deducting our 529 college savings plan contributions from our state taxes
  • Save for retirement, excluding all of our 401(k) contributions AND deducting our Individual Retirement Account savings
  • Pay for medical care with pre-tax dollars
  • Take child credits for our three children
  • Deduct our state and local property taxes for the home for which (see above) we’re already receiving a subsidy
  • Support our favorite charitable causes, with favorable tax treatment for all of those contributions

    Pretty nice, hunh?

    And we’re not alone. The 2008 Tax Expenditure Budget looked like this.

    All of those economic activities are things the government has an interest in us continuing–as a nation, we want people to save for their retirement, and for college, and to support nonprofit organizations, and to have health insurance. We do, and we are quite richly rewarded for it, in terms of serious reductions in the taxes we would otherwise pay.

    The big problem, of course, is in the framing: while two-thirds of tax expenditures go to American households in the top 20% of incomes, there’s still a perception that it’s low-income people who receive the most “subsidy” from the federal treasury. And it’s not small change we’re talking about here: we spend about $900 billion each year on tax expenditures (and it really is “spend”–we’d otherwise be collecting all of that in taxes and then turning around and allocating it to other spending).

    Because tax expenditures are not refundable, for the most part, one only benefits if the taxpayer has a tax obligation; that’s why the vast majority go to those with over $50,000/year in income. Those tax expenditure subsidies, of course, are above and beyond the many benefits we receive from the tax system just by living in this society, which are substantial. This is actually money put in our pockets and, so, if we’re going to call means-tested benefits for low-income households “welfare”, it’s only fair to own up to the ways in which the government enriches the welfare of our own households, too.

    So, this year, when you complete your taxes and notice all of the places you get to subtract, think about the message that sends to you, as a taxpayer, and about the ways in which we use federal tax and spending policy to provide incentives for certain behaviors (the Earned Income Tax Credit is the primary example of a tax expenditure that, while much smaller in size than the ones listed above, is targeted at lower-income families who are working), whether through the tax code or through direct entitlement or discretionary spending.

    I own the fact that we’re, in so many ways, on welfare, that there’s really no such thing as being completely “self-sufficient”, and even that our family would have a hard time sustaining the lifestyle we do without these considerable tax benefits. And, so, if anyone ever asks me what kinds of welfare I receive, I’ll be ready with a list. It’s right there, on my 1040.

    Happy Tax Day!

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