Paul L. Caron
Dean



Thursday, October 8, 2020

The American Dream Is Tax Reform’s Biggest Obstacle

New York Times op-ed:  The American Dream Is Tax Reform’s Biggest Obstacle, by Christopher Faricy (Syracuse University; Co-author, The Other Side of the Coin: Public Opinion Toward Social Tax Expenditures (forthcoming 2020)):

Much of the commentary on the fresh revelations about President Trump’s tax returns has focused on how they illustrate the vulnerability of the federal tax system to exploitation by the ultrarich. This is for good reason: Mr. Trump aggressively used a set of tax breaks popular with real estate developers to pay no taxes in 11 out of the previous 18 years, and just $750 for both 2016 and 2017.

But the most expensive subsidies in the federal tax code are not used by real estate developers, energy chief executives or bankers. They are used by upper-middle-class households under the guise of earned economic security. The main obstacle to reforming the tax code is not Mr. Trump, but rather the upper-middle-class American voter.

There are close to 300 subsidies in the tax code that, in total, cost the federal government over a trillion dollars each year. According to the Congressional Budget Office, in 2019 more money was lost to the federal government through the nation’s regressive tax breaks than was spent combined on Medicare and Medicaid.

And six out of 10 of the most expensive federal tax subsidies — including the exclusion for employment-based health insurance, benefits for company pensions and the charitable contribution deduction — are commonly used by wealthier suburban families. In sum, they drain close to $680 billion annually from the U.S. Treasury.

These subsidies are sold as providing necessary assistance — affordable housing, health care and higher education — to middle-class families. But they also apply a veneer of political legitimacy to a system that shovels billions of taxpayer dollars every year to the wealthiest families and corporations in America. ...

In a forthcoming book on public opinion toward the tax system, co-written with the political scientist Christopher Ellis, we argue that federal tax subsidies, even those that provide the most benefits to the top 1 percent, are wildly popular with the public. It is the peculiar political nature of the American masses that creates strong incentives for policymakers to use the tax code to finance popular social goals. This is the manifestation of a phenomena described by studies for more than 50 years: A large segment of the electorate can be described as “symbolically conservative but operationally liberal.” They report hating government while favoring federal assistance for more affordable health care insurance, old-age pensions and child care.

Tax subsidies are amenable to the American psyche because they provide social insurance that doesn’t feel like government welfare. In our research, we found that many respondents viewed tax subsidy recipients as more deserving of government aid than beneficiaries of identically described programs where the assistance was provided through direct checks. ...

If we want policymakers to create a fairer tax code, we must outgrow our prolonged fiscal adolescence. We must stop acting like any increase to our taxes — whether through a reduction in tax breaks, or a slight increase to marginal rates — is a bigger threat than climate change, a crumbling national infrastructure, or an inadequate public health system.

https://taxprof.typepad.com/taxprof_blog/2020/10/the-american-dream-is-tax-reforms-biggest-obstacle.html

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Comments

Maybe The Times an its friends are the problem.

Posted by: Mike Livingston | Oct 8, 2020 2:23:56 AM

Faricy's op-ed is a short, punchy version of what Richard Reeves put into his book Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It.

Posted by: Gerald Scorse | Oct 8, 2020 7:02:49 AM

One of biggest lessons sales people learn is knowing when to stop talking. You had me until that last paragraph. Stay focused dude. Once you have made your closing pitch, shut up.

Posted by: Dale Spradling | Oct 8, 2020 8:52:08 AM

Define rich, or wealthy upper middle-class? We pay most of the taxes to subsidize healthcare for those unwilling or unable to work, college for illegal immigrants while our children wallow in debt unable to find a decent job. In the good ole USA it's best to be either filthy stinking rich or dirt poor. Otherwise you are just a hamster running but getting no where. Our children will suffer the same fate.

Posted by: Donya Oneto | Oct 9, 2020 7:37:52 AM

And six out of 10 of the most expensive federal tax subsidies — including the exclusion for employment-based health insurance, benefits for company pensions and the charitable contribution deduction — are commonly used by wealthier suburban families. In sum, they drain close to $680 billion annually from the U.S. Treasury.

Only if you believe that all income belongs to the government. Don't all tax reductions "drain" income from the Treasury??

Posted by: aircav65 | Oct 10, 2020 6:56:28 AM

And yet, the Times argued against the Trump tax law changes capping SALT deductions, which made the wealthy liberals they're complaining about feel the pinch and pay more in taxes.

And the top 20% of households still pay all net federal taxes. There wouldn't be a federal government without their income.

But who needs to be consistent these days?

Posted by: MM Classic | Oct 10, 2020 8:26:23 PM

Faricy actually missed the biggest subsidy of all. The 37% top FIT rate operates to distribute the remaining 63% disproportionately to high income earners. But for this no doubt Donya Oneto’s hamsters would at least be put out of their collective misery.

Posted by: Mike Petrik | Oct 11, 2020 3:55:03 AM

The "tax subsidy" argument is invariably built on the false premise that tax rates would be the same in the absence of deductibility. They would not. Rates would be lower if not for widely used deductions.

Posted by: AMTbuff | Oct 11, 2020 7:10:02 PM

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