The wealthy and middle classes get welfare—but they don't think of it that way.
The federal government and the state of California are on the verge of paying me a fair chunk of change. I didn't do any work to earn this money. I performed no services for them. It's just free money. Even more strangely, no legislator is trying to prevent me from using this money to
eat lobster. Nobody is calling for me to be
drug-tested. Hell, if I lived in Kansas, I could even
spend my government money on a cruise ship (if I could find one in Kansas, but that’s beside the point). And if I did, conservatives would probably celebrate me for it and say that I deserved to treat myself to whatever I liked with my no-strings-attached free ride from the state.
No, I'm not on food stamps. I'm employed fairly consistently at a decent wage, so I'm not getting a welfare check. So what's going on? Well, the government is paying me simply to invest my own money.
More below the fold.
It's a commonly used part of the tax code—line 32 in this year's federal 1040 tax return form, the IRA tax deduction. IRA is short for Individual Retirement Account, and they're really easy to open: You can just walk into your local bank branch and open one up, or use any number of online brokerage services if you feel like investing in stocks with it. How much you can contribute to one per year depends on how old you are and whether you already have a retirement plan: for me, it's $5,500 for the 2014 tax year. And for every dollar up to your legal limit that you contribute, you can deduct that amount from your taxable income. For instance: if you made $50,000 in 2014 but contributed $5,000 to an IRA, you only pay taxes as if you made $45,000. Now, there is a caveat: once you put money into an IRA, you can't take it out before age 59-½ without a substantial tax penalty. But that point notwithstanding, the government will charge you less in taxes just to invest your own money.
For the 2014 tax year, I took full advantage of the amount I’m allowed to deduct—it's a lot less than the numbers above for complicated reasons, but I'm still paying less in taxes than I otherwise would have as a result. In essence, the government is paying me to invest in Wall Street.
Now, a lot of people feel that there's a distinction between getting a tax break and getting welfare, but really, there isn't much of a difference. When a state issues a welfare check or a food stamp, it's a very visible, direct benefit to the recipient, and everyone understands exactly what it is. But when the government pays you through the tax code, it doesn't have the same feel, even if the effect is exactly the same. Mentally, we have no problem calling this what it is when it works in reverse: this year, many people who don't have health insurance will have to pay a fine to the government. Technically, it's administered through the tax code and people who are subject to the fine will have to pay it when they file their tax returns. But in our minds, we have no problem calling it a fine. Somehow, though, when we take advantage of tax credits or other government programs that don't come in the form of welfare checks or debit cards, we don't view it as the government paying us. But we should.
It’s a phenomenon that Cornell professor Suzanne Mettler has called the "submerged state." It's a network of programs and benefits that provide government aid to the middle and upper classes. But because the aid is administered through the tax code, or because the people who receive the handouts in question feel that they deserve them, they're politically palatable and nobody is seeking to put restrictions on how the recipients of this middle-class welfare are allowed to spend the aid they get. And the amounts of money we're talking about are staggering.
Let's take one of the biggest ones: the mortgage interest tax deduction. When someone buys a residential property, they have to take out a mortgage loan to be able to pay for it. And just like the IRA contributions discussed above, the interest the buyer pays on that mortgage is tax-deductible, which can result in a substantial handout in the form of tax savings. In 2010 alone, the federal government subsidized home buyers in this way to the tune of $80 billion. That’s roughly four times the amount the government spends on so-called "Section 8" housing subsidies for the poor. And there are plenty of subsidies out there that we don't even realize are subsidies: as Ezra Klein noted, the cost of the tax break for employers who provide health insurance to their employees is far larger than the entire cost of the Affordable Care Act. But because the subsidies available under Section 8 and the Affordable Care Act are intended for the poor, it's politically palatable, if not advantageous, to oppose them. But good luck opposing the tax breaks for mortgage interest or employer-based health insurance.
Now, the mere fact that they're subsidies for the middle and upper classes doesn't necessarily mean that these things are bad public policy: given how important real estate is to the economy, there’s an argument to be made for subsidizing home purchases. The same goes for subsidizing small employers who provide health insurance, or people who are saving for retirement through IRA contributions or college tuition for their children through a 529 plan.
It's not a question of whether the subsidies are good policy. What matters is whether we recognize them for what they are. If people in the middle and upper classes realized that they get subsidies, handouts, and free money just like those with lower incomes, they might be less inclined to pass laws that seek to humiliate and punish the poor. As it is, though, people who get the subsidies that I do don't think they're subsidized—they think they earned the handout they're getting. But truth be told, a wealthy homeowner doesn't deserve to have his house purchased subsidized any more than a lower-income person deserves a Section 8 voucher. It's a handout, regardless of whether you call it welfare or whether you call it a tax break.
We should have an honest debate about whether the middle and upper classes should get a handout from the government if they invest in Wall Street. But we'll never have that debate for real until we start calling these subsidies what they are.