You see, in America, we have a system where we try to accomplish significant social goals (making sure people have access to healthcare, helping people get an education, expand middle-class homeownership, giving assistance to low-income parents, etc.) not by funding and administering them through the government as is done in most other wealthy democracies, but through a complex and elaborate system of tax breaks and writeoffs. So we have a tax breaks for just about everything under the sun, even though our social safety net is theoretically small - for example, millions of citizens go without healthcare, housing costs are out of control, and college students are now virtual debt serfs, unlike residents of countries such as Germany, Italy and the Netherlands..
The U.S. offers huge amounts of what Kirkegaard calls “tax breaks for social purposes,” including the Earned Income Tax Credit, tax-exempt pension contributions, and new tax breaks for Americans to buy health insurance. In contrast, many European governments give services or cash benefits directly to their citizens, but then take some of that money back by taxing those cash benefits, or the person’s spending more generally.Why do we do this? Is it better? More efficient? Less costly? Does it get superior results than the other approach? Actually, quite the opposite about which more below.
No, we do this simply out of an ideological distaste for government. The idea is that keeping "your own money" is better than the government "theft" through taxes. This allows advocates of "small government" to pretend that the government oversees a laissez-faire, hands-off economy where the unregulated free market reigns supreme and people sink or swim based on their own merit. This a complete and total fabrication, of course, but it works. As I've written before, it means that people believe that the government has no role in their lives whatsoever, and thus allows the 24-7 government bashing that is part of the air we breathe.
Put another way, if you get a check from the government to help you afford your home, that's perceived very differently than a tax-writeoff. So it's no secret which politicians of both parties prefer.
But here's the thing: when you take into account how much of spending goes to these tax cuts, you find that we spend as much as European social democracies, while getting vastly inferior results:
...including both taxes on government benefits, which tend to be higher in other countries, and the cost of tax subsidies like the deduction for company-provided health insurance, American public spending on social insurance rises to almost 21 percent of G.D.P....That is above the O.E.C.D. average...That is above the O.E.C.D. average, ahead of Norway and no longer that far behind Denmark...In fact, counting private expenditures along with public ones, the United States spends more on social insurance than every O.E.C.D. country but France.For example, right-wingers believe the government should stay out of health care, just like now. But government is intimately involved, just under the surface. The way we fund health care is via tax deductions, unlike other countries, and that is mainly a historical accident:
Employer-provided health insurance is often portrayed as a result of serendipity. In 1942, the National War Labor Board allowed employers to get around wage and price controls by luring scarce workers with fringe benefits. In 1943, the Internal Revenue Service cemented its popularity by allowing employers to contribute to the health plans tax-free.
But though the health insurance tax break has since grown into the nation’s costliest tax expenditure, it is only one of many. Tax deductions for mortgage interest and charitable contributions were born with the income tax code in 1913. The government later added breaks for retirement savings. More recently, the earned-income tax credit for the working poor was created in 1975 and broadly expanded by President Bill Clinton with his first budget. In response to the rising cost of higher education, Washington provided a deduction for college tuition.
While the progression might seem like a chain of historical accidents, it adds up to a strategy.And what strategy is that? Preventing the government from getting bigger for ideological reasons:
In the early years of the Reagan Revolution, Senator Robert Packwood ...offered a robust — if unusual — defense of the tax exclusion for employer-provided health insurance: It prevented the government from getting bigger....This reasoning drives American policy making to this day. Whether he realized it or not, Mr. Packwood was effectively explaining why the United States has, alone among advanced nations, built a government on the idea of keeping the government at bay....In her book “Degrees of Inequality” ... Suzanne Mettler ...quotes Dick Morris, President Clinton’s campaign adviser, defending the political superiority of tax benefits...“Politically, people want us to downsize government,” he argued, “so we are developing ways of cutting taxes but achieving social good at the same time.”
But the strategy carries a cost. Such spending through the tax code not only offered the false promise of smaller government. Its most insidious effect was to hide what the government does and, notably, to shield from political debate which people it benefits most. That is clearly not those of middle and low income, who don’t earn enough to qualify for many tax deductions and often don’t even claim them....Built in the shadows, protected from democratic accountability, the government developed into a Rube Goldberg contraption that has only a weak claim to a defensible social purpose. It might not be the smallest government in the advanced world, but it can lay claim to being among the least efficient and the most unfair.
There’s a clear political rationale behind the American system of giving people tax breaks on their health care spending, rather than having the government give them health care: The public pays fewer taxes, and the government doesn’t appear to be spending money.
...Thus we have the "Keep government away from my Medicare!" Tea Party crowd.
Professor Mettler argues it has helped cement the image of a government that most Americans wrongly consider largely irrelevant to their lives. “I see it as a case of smoke and mirrors,” she argued.
And the biggest kicker is - unlike in other countries, these benefits flow disproportionately to the already wealthy rather than the rest of us! This makes sense - obviously a tax cut benefits those with the most money to tax, and the more wealth, the bigger the cut:
For instance, President Obama’s American Opportunity Tax Credit to subsidize college tuition has particularly benefited families making from $100,000 to $180,000, where the subsidy is cut off. Many economists have exposed how the mortgage tax deduction, which rises in value for those in higher tax brackets, does little to further its ostensible purpose: expanding middle-class homeownership. Over all, the Congressional Budget Office shows how the richest fifth of Americans get more than half of the benefits from the costliest tax breaks.
For most voters, however, it’s just too hard to tell how much the government spends on these priorities and when the playing field is tilted toward those at the top...Consider spending on health care, which by some accounts wastes as much as 5 percent of the nation’s G.D.P., or about $800 billion. The government spends more on health, per person, than every O.E.C.D. nation except Luxembourg and Norway. Yet too much of that enriches doctors and other health care providers while American rates of infant mortality and premature death are off the charts compared with other wealthy nations.So really, we spend as much of our GDP on social purposes as even Nordic Countries, we just funnel is predominately to the wealthy and through private sector competition which is enormously wasteful and inefficient.
The American system also does less to redistribute wealth from the rich to the poor, since the private sector mostly depends on individuals and households to spend money, and people can’t spend money they don’t have...The result is that the U.S. spends a lot on social services, and still has relatively high levels of inequality....
But the Peterson study suggests this system merely hides the true level of government spending. Tax breaks for lunches eaten on business trips are rarely given the same amount of scrutiny as the use of food stamps at the grocery store, but the ultimate cost to the government is the same...So the U.S. actually spends a lot on social benefits – and...we aren’t getting that much of a return on our investment....So the "small government" idea is just an illusion provided by the submerged state, which delivers awful outcomes, and showers benefits on those who need it the least. And because of it's complexity, its hidden from the low-information voters of the Heartland, who are allowed to indulge their limited government fantasy even as they are paying for it nonetheless. I like this summary from someone on Reddit: "...the political strategy of shrinking government through tax breaks on the front end helps to cloak aggressive wealth transfers, which lead to more problems and greater social/government spending on the back end." Well said.
Here are just a few of the outrageous benefits we give to the rich via the complex tax code:
1. The mortgage interest deduction for big houses and second homes.
Thanks to this tax break, the 5 million households in America making more than $200,000 a year get a lot more housing aid than the 20 million households living on less than $20,000. Deductions for mortgage interest incentivize people already capable of buying big homes to buy even bigger ones. This tax break applies as well to second homes (you only get one second home though!). Note: In the eyes of the Congressional Budget Office — the official word on this in Washington — the mortgage interest deduction is equivalent to the government offering you money, not you keeping your own money.
2. The yacht tax deduction.
If you’ve got a boat and you’re paying interest on it, that interest is tax-deductible – provided your boat is really, really big. If it has sleeping quarters, a kitchen and a toilet – e.g., it is a yacht – then it can be considered a second home and any interest you pay on it is deductible. But if you just have a garden-variety fishing boat or canoe, sorry – no deduction for you. Beyond that, if you have a yacht you can loan it out to a charter business for part of the year, and keep it for personal use the rest of the time. This allows you to deduct the purchase price, insurance, maintenance and slip fees too.
3. Rental property.
If you're a landlord, which you probably aren't if you're very low-income, you can deduct many of the expenses you incur renting a home, including repairs, advertising, HOA fees and — again — mortgage interest. If you happen to rent out either your first or second home for 14 days or less — because, for example, Augusta National Golf Club is hosting the Masters nearby — you get to just pocket all that income without paying taxes on it at all.
4. Fancy business meals.
Talking business over an expensive dinner? That's tax deductible, too, a fact that puts taxpayer spending on food stamps into relief. This is a good deal for, say, a CEO presiding over actual filet mignon at a five-star restaurant.
And more: Taxes on investment dividends and capital gains currently max out at about 24 percent ...So investment income is taxed at a much lower rate than regular income. ...You can deduct your gambling losses up to the value of any winnings you earned. More gambling winnings mean more gambling deductions, incentivizing you to keep gambling more to at least break even...Social Security taxes only apply to income up to $118,500 – anything after that is Social Security tax-free. So the more money you make, the less your effective Social Security tax rate is, making this tax about as regressive as they come....The federal government incentivizes retirement by allowing you to reduce your taxable income by saving money in 401(k) plans or IRAs. But employer-sponsored retirement plans only benefit those people with employers that offer them...The rich get government handouts just like the poor. Here are 10 of them. (Wonkblog)
We claim we want a small government and an efficient private sector, but we have a smoke and mirrors illusion that provides neither. In other words, much like our health care system, we have the worst of all possible worlds - a big government that is inefficient and acts as a sort of Robin Hood in reverse, even as our citizens are becoming ever poorer!
In fact, they want the tax system to be necessarily complicated, all the better to foment hostility toward taxes. This article by Slate points out that tax collection could be done far simply and more efficiently, with less misery and complexity for most people. Why isn't it? Well, one, because the enormous tax preparation industry would be far less needed, and they block any attempts to simplify the tax code (think of the jobs!). But an even more pernicious reason is that in order to foster hatred of the government, the Republicans intentionally try to make paying taxes as difficult and onerous for the average person as possible! If this sounds crazy it's because it is. If this sounds like a government deep in the grip of failure and dysfunction, it's because you're right:
As a technical matter, it would be relatively simple for the Internal Revenue Service to turn income-tax payments into a quick and basically automatic process for the vast majority of Americans. It would cost the government a bit of cash upfront but would save citizens tons of time, hassle, and money spent on tax preparation. And there’s the problem: One man’s wasteful expenditure on tax preparation is another man’s income. The entire industry of mass-market tax preparers—Intuit, H&R Block, Jackson-Hewitt, etc.—doesn’t want the government to help you out. Even worse, they’ve been joined in their crusade by conservative anti-tax activists who’ve decided, without any real evidence, that the best way to shrink the state is to make paying taxes as annoying as possible.
How would the IRS do your taxes for you? It would work in much the way that most jurisdictions collect property taxes. The tax authority would tell you how much it thinks you owe in taxes, and you’d write a check. The main difference would be that thanks to tax withholding, many people overpay their income taxes and would receive a check from the government rather than write one. If you looked at your tax bill and thought you were being overcharged, there’d be a dispute process through which you could plead your case. For the majority of Americans who have regular jobs and who take the standard deduction rather than itemizing, that would be it most years. And, it’s important to note, anyone who wanted to could always do their own taxes rather than have the IRS do them.
Many people react to this proposal by saying they wouldn’t trust the tax man to do their taxes for them. But in fact, you already do. The way it works now is that absent you filing a protest, you end up paying what your W-2 says you should—which is what the IRS thinks you pay.
So why don’t we use this automatic tax filing everywhere? In part, lobbying. ProPublica’s Liz Day wrote in March about how much Intuit, the maker of TurboTax, spends on blocking this kind of initiative. But lobbying alone rarely explains anything. .... Conservative activists like Grover Norquist have gone all-in to keep the federal tax process annoying. You can see the logic: If you think taxes are bad, then paying taxes should be annoying to maintain the viability of anti-tax politics. But think harder and this looks nuts. Nobody likes filing their taxes, but you can think of lots of arbitrary ways to make it harder. We could ban tax-prep software. We could demand that the money be paid by shipping boxes full of nickels. The forms could be written in Chinese. But why do that?The IRS Should File Your Taxes for You (Slate) Tax filing could take five minutes, but a perverse alliance of tax-prep lobbyists and conservative activists is keeping it hard. For example, in Spain "they send you a summary of what taxes they figure you owe. If it looks right, you check a box and you're done."
We've examined this Rube-Goldberg contraption before - it's called the kludgeocracy. It's the deliberate use of solutions that preserve this illusion of small government while trying to avoid the horrible social outcomes that small government philosophy generates in practice.
Conservatives over the last few years have increasingly worried that America is, in Friedrich Hayek's ominous terms, on the road to serfdom. But this concern ascribes vastly greater purpose and design to our approach to public policy than is truly warranted. If anything, we have arrived at a form of government with no ideological justification whatsoever.
The complexity and incoherence of our government often make it difficult for us to understand just what that government is doing, and among the practices it most frequently hides from view is the growing tendency of public policy to redistribute resources upward to the wealthy and the organized at the expense of the poorer and less organized. As we increasingly notice the consequences of that regressive redistribution, we will inevitably also come to pay greater attention to the daunting and self-defeating complexity of public policy across multiple, seemingly unrelated areas of American life, and so will need to start thinking differently about government.
A "kludge" is defined by the Oxford English Dictionary as "an ill-assorted collection of parts assembled to fulfill a particular purpose...a clumsy but temporarily effective solution to a particular fault or problem."..."Clumsy but temporarily effective" also describes much of American public policy today. To see policy kludges in action, one need look no further than the mind-numbing complexity of the health-care system...or our byzantine system of funding higher education, or our bewildering federal-state system of governing everything from welfare to education to environmental regulation. America has chosen to govern itself through more indirect and incoherent policy mechanisms than can be found in any comparable country.Kludgeocracy in America (National Affairs)
Another pernicious outcome of trying to make dealing with the government as difficult as possible on purpose for ideological reasons is David Graeber's Utopia of Rules, a “fusion of public and private power into a single entity, rife with rules and regulations whose ultimate purpose is to extract wealth in the form of profits.”
Living in a Western capitalist state means spending more of our lives filling out paperwork, re-submitting internet forms, and waiting on hold listening to Bono wailing than our grandparents ever had to. Even if—particularly if—you rely on welfare and spend your life dealing with accountability professionals, who demand you fill out forms, every day, all of the time, to ensure the money keeps coming.http://www.vice.com/read/the-dark-side-of-bureaucracy-190
Whenever you say that we should have free higher education or job training for everyone, that we should have health care for everyone, that we can create jobs for the unemployed, that we can rebuild our crumbling infrastructure, that we can have affordable day care, or that we can fund decent retirements for people, you run up against the same two ideological arguments: "we can't afford it!" or "big government!!!" But the above demonstrates that both of those excuses are bullshit.
The money is there. We're already paying for it, we're just not getting the benefits. As I've pointed out before, we already spend enough money trying to make college "affordable" to give everyone a free education (without billion dollar campuses and seven-figure athletic coaches), and we spend more government money on health care than nations with universal single-payer systems that leave no one in the lurch when they get sick. We've spent enough on a plane that doesn't fly to give every homeless person a house, and the plane isn't even making us safer. We've got plenty of money, it' just being funneled to the rich in a million different hidden ways.
“The main thing here is not about not spending enough,” Mr. Kirkegaard said. “It is about the distribution of this spending.”...As Americans file their tax returns and Congress debates the federal budget, Republicans are once again appealing to the public by proposing to sharply cut the scale of domestic spending, which would mostly fall on the poor. But their plans fail to recognize that Americans actually prefer a strong safety net...Washington might be better occupied culling the many goodies hidden in the tax code that serve little or no social purpose other than coddling well-connected constituencies. Those billions could then be used to provide regular American families the social insurance they really need.Nice way to end the column. But from the standpoint of the one percenters, such outcomes are a feature, not a bug.
Finally for tax day, Vox has an article pointing out the fallacy of the narrative that the rich pay nearly all of the taxes in this country, and the rest of us are just a nation of useless ditzy housewives being supported by their largesse. It turns out that the focus by the right wing is always and forver on INCOME taxes, and all the other forms of taxation, from investments to social security to sales taxes are intentionally ignored to maintain the narrative:
Typically when politicians fight about taxes, they fight about the income tax. That is to say, they fight about the tax that rich people hate — not the taxes poor people hate.The greatest trick the rich ever pulled was making us believe they pay all the taxes (Vox). Still, I think the greatest trick the rich ever pulled was convincing us that they are necessary "job creators" and that we would all be helpless without them.
This leads to a really perverse dynamic, wherein the taxes the privileged pay are worthy of attention and the ones the poor pay are ignored. It paints a picture where the government is being supported on the backs of the wealthy, and the poor and middle class are free-riding. It leads to plans for various kinds of tax cuts and tax reforms that matter massively for the rich and very little for the poor.
The issue here is the ceaseless focus on the federal income tax. A report from the Joint Committee on Taxation found that most Americans (65.4 percent of filers) pay more in payroll taxes than income taxes. It's only once you start looking at folks making over $200,000 a year that most people are paying more in income taxes.
The numbers here are surprising if you think about tax systems as something people only pay into, rather than get anything out of. But because so much of US social policy is structured as tax credits, a lot of people get more money back from income taxes than they put in. The JCT finds that people making under $40,000 get $81.1 billion more back from the income tax system than they put in — largely because of refundable credits like the Earned Income Tax Credit and the Child Tax Credit.
But that same group pays $121.5 billion in payroll taxes. They still, on net, contribute billions to the federal government every year. Of course, this doesn't even count the sizable contribution of the poor and middle class in state and local taxes, which are actually higher for the poor than they are for the rich.
Top incomes soared as tax rates fell (Al Jazeera)
Corporations used to pay almost one-third of federal taxes. Now it's one-tenth. (Vox)
Corporation Surprised To See Its Tax Money Circle Back Around To It So Soon (The Onion)
How rising income inequality affects state tax revenue (Equitablog)
The Republican Party's top priority is to raise taxes on the poor. Literally. (The Week)
Republicans push for a permanent aristocracy (Washington Post) Must read.
It’s Not Your Money (Ian Welsh)
BONUS BONUS: Ancient Receipt Proves Egyptian Taxes Were Worse Than Yours (Live Science). You knew I had to put some historical context in there, didn't you :)