It’s Hard to End Subsidies for Millionaires

December 9th, 2011 at 12:26 pm | 21 Comments |

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Steve Moore and Walter Williams’ proposed “Millionaire Subsidy Elimination Act” , floated in today’s Wall Street Journal, surely has a lot to recommend it. People who make a huge amount of money surely don’t deserve any true individual benefits from the state.

Nice as it sounds on paper, however, making the idea work in practice seems to present a lot of practical and logistical hurdles. None seem insurmountable but all would have to be dealt with in some way. Here are four:

1) Timing of benefit loss: While nobody who realizes a $1 million yearly income is poor, a fair number of people who earn very high incomes do so only for a few years or, quite often, one year. A married couple of reasonably diligent savers earning a good-but-not spectacular income of say $100,000 combined and sell a paid-off house while realizing capital gains from 401(k) asset sales can easily have an income of $1 million in one year. Such a couple, however, is almost certain to continue to rely on Medicare and, to a lesser extent, Social Security to live in retirement.

Do they give up benefits forever? Just for the year? This could make a large difference. If they have a strong reliance interest on the benefits but have to pay out of pocket for similar services (or, say, remain enrolled in Medicare but have to pay the full cost) during the year that they earn an unusually high income, then isn’t that really just a surtax on wealth for some people? If they lose benefits forever, then it’s a huge invitation to shelter income in various ways.

2) Unless all subsidies for everything are eliminated, the eliminating subsidies for the wealthy alone could end up actively punishing achievement: Plenty of heavily subsidized activities–energy production, education, farming–are obviously worthwhile. Receiving subsidies gives individuals and firms an advantage. Cutting them off to only firms/people with incomes over $1 million could actively discourage growth beyond and risk taking beyond a certain level.

3) Unless all subsidy programs are actually cut, the plan won’t save money: The way a great many subsidies are structured, narrowing the range of people eligible for them won’t actually save a dime. The actual budgets of the subsidies would need to be cut at the same time as it was eliminated. This would require a lot more than a single law and would require significant political tussling. And, of course, program budgets could always be brought back up to their previous levels.

4) By Grover Norquist’s definition, the plan is probably a tax hike: Many subsidies are provided through the tax code. If wealthy individuals are denied these tax benefits, then they will pay more taxes and whatever negative consequences come from hiking taxes on the well off will take place anyway. If these benefits aren’t denied to the well off, then the plan will produce less savings than promised.

Eliminating subsidies for millionaires is a good idea but presents logistical and ideological hurdles. It’s worth study and investigation but, in reality, it probably can’t save anywhere near the $200 billion that Moore and Williams say it would.

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21 Comments so far ↓

  • sweatyb

    If I were you I would have left #4 out, because it’s so embarrassing.

    Sure, this whole list is ridiculous. What do you think federal legislation looks like? Congress passes bills that are hundreds of pages long because they address all these niggling little questions like #1-3. The tax code is as complex as it is, just so we avoid situations where people can increase their tax burden more than their income.

    But #4 just takes the cake. Making a really really stupid promise to someone does not indemnify you from the consequences of that promise. And sticking to that promise does not make you look noble.

    • Ex Cathedra

      Number 2 is embarrassing. Phasing out deductions does not punish success. It merely raises the effective tax rate. Paying your fair share is not punishment.

    • Ex Cathedra

      Number 2 is embarrassing. Phasing out deductions does not punish success. It merely raises the effective tax rate. Paying your fair share is not punishment.

      BTW, this is one of the s l o w e s t websites around.

    • Ex Cathedra

      Number 2 is embarrassing. Phasing out deductions does not punish success. It merely raises the effective tax rate. Paying your fair share is not punishment.

      BTW, this is one of the s l o w e s t websites around.

  • Graychin

    “A married couple of reasonably diligent savers earning a good-but-not spectacular income of say $100,000 combined and sell a paid-off house while realizing capital gains from 401(k) asset sales can easily have an income of $1 million in one year.”

    This column about tax policy is an embarrassment, because the author displays his total confusion about American income taxes.

    Gain on sale of a principal residence normally is not taxable income. And whether the house is “paid off” cannot possibly be relevant to the amount of gain realized. (Duh!)

    And capital gains realized within a 401(k) plan normally are not taxed. These funds are not taxed until withdrawn, usually little by little during retirement years.

    Therefore the couple described in the column has zero chance of being dinged by “benefit loss.”

    The only valid point made in the column is that Congressional Republicans will never vote for anything like what is being described – because it might upset Grover Norquist.

    Pathetic.

  • LFC

    First, bring back the itemized deduction phase-out.

    Second, create a bill of tax expenditures, both personal and business, to be cut. Force an up or down vote with no funny business.

  • AC

    Too bad you didn’t emphasize your second point and perhaps analyze it a bit more. Yes, lots of productive activity is subsidized. But how economically productive an activity is it if it is subsidized? Nearly all of it shouldn’t be.

    Let’s cut out all subsidies for all types of energy production. If gas prices rise so be it. Then people learn the true cost of consuming a particular type of fuel. Let’s cut out all agricultural subsidies. Somehow farmers (family or corporate) manage to produce unsubsidized crops just as well as subsidized crops. Let markets determine what people will, or won’t, pay for a particular crop.

    As for Grover Norquist, he can get bent. Just because a particular industry managed to successfully lobby for a subsidy or tax exemption doesn’t mean they get the preferential treatment forever. Eliminating a subsidy is not a tax increase.

  • lucidconfusion

    The problem here is that we decide if someone is rich or poor by what income they had this year. I think one should change the alternative tax laws. It should specify a flat tax with no deductions.

    The regular tax then can become like to old “soak-the-rich” tax. The poor get subsidized with low taxes and deductions with low income but then have to pay higher taxes than the flat tax if they have high income. If a poor person becomes rich, he can switch to the flat tax when he has paid back his subsidy, not when his taxes are first lower under that flat tax.

    If a rich person becomes poor he can switch to the regular tax but then can’t switch back until he pays back any subsidy. The high rates in the regular tax system only affect poor people paying back their subsidy. Rich people with low income are not treated as poor people who get the low rates of the regular tax system. A poor person who wins the lottery or gets an inheritance does not get the low rates of the flat tax.

    This gives the rich the efficiency of a flat tax but allows the poor their subsidies.

  • Rabiner

    “2) Unless all subsidies for everything are eliminated, the eliminating subsidies for the wealthy alone could end up actively punishing achievement: Plenty of heavily subsidized activities–energy production, education, farming–are obviously worthwhile. Receiving subsidies gives individuals and firms an advantage. Cutting them off to only firms/people with incomes over $1 million could actively discourage growth beyond and risk taking beyond a certain level.”

    Don’t we already punish achievement with programs with the poor that are means tested like food stamps, Medicaid, CHIP, and welfare? What’s the problem with doing it for other programs that the wealthy can still benefit from?

    • Frumplestiltskin

      I don’t consider Medicare a subsidy but instead a basic right. Frankly, I think health care for all should be a basic right, but maybe it might be my traditional Christian teaching coming through which is at odds with the Republican desire for the poor to just die.

      I don’t think Medicare should be means tested at all. These people paid their taxes their working lives so they are entitled to a retirement free of fear of financial ruination due to a lengthy illness, and no insurance company will sell to an 85 year old.

      This is nothing but a Republican trojan horse to get the well off to stop supporting medicare. It is absolute rubbish as far as policy goes.

      • beowulf

        Exactly right, the intent here isn’t to raise a dime in revenue but to convert the wealthy into viewing the now- universally popular Medicare as the equivalent of the far less popular Medicaid (i.e. a welfare program).

        Of course the Democrats are idiots for not making Medicare universal instead of creating Obamacare. Republicans are smart (if cynical) to do whatever they can to kill the Medicare brand name before the Democrats wake the hell up on this point.

      • Rabiner

        Frump:

        I disagree. So people paid their taxes their whole lives, it doesn’t entitle them to a retirement of healthcare that exceeds the taxes they paid for the past 30 years. Medicare recipients on average receive about 3 times the services than the taxes they paid into the system. That’s just not sustainable so of course it should be means tested. The issue is how do you means test medical services without seriously delaying the billing process or taking into account that retired individuals typically aren’t making that much money, but rather they’ve already accumulated all that wealth over their lives to be wealthy.

        Social Security even more so as I’ve always thought of it as retirement insurance than an entitlement. It is called Social Security Insurance in its official name of course, just no one uses the last word when referring to it.

  • nvrbl

    Someday these politicians who have put a pledge to a lobbyist -Grover Norquist- above their oath of office and the American people will be called out for what they are. What do you call someone who sells out their office to the benefit of a few and the detriment of the majority of the American people and the country itself? I don’t have any polite language for it.

  • baw1064

    #2 You mean that if it weren’t for subsidies, there would be no food, energy, or literacy?

  • valkayec

    Mr. Lehrer, I propose that you spend considerably more time reading Alice Rivlin at the Bipartisn Policy Center. It might answer many of your questions.

  • nhthinker

    The sentiments in this essay is why Republicans actually have a chance to lose in 2012…It is totally top hat and monocle in its perspective.

    1) Timing of benefit loss:
    No one (except the top hat and monocle types) have any sympathy for those that are making $1M a yearly income and are taking government handouts.
    There are no realistic hardship cases that would ever be imagined as a counterweight to this.
    The ONLY caveat is inflation- a million might only be a quarter of its value 10-20 years from now. All income limits in all tax law should be inflation adjusted.
    Government benefits received in year would need to be refunded for any year of more than 1 million in income. (Also note, that people should be paying their estimated tax throughout the year!)

    2) Unless all subsidies for everything are eliminated, the eliminating subsidies for the wealthy alone could end up actively punishing achievement:

    Total whinny crap…”actively punishing” is rhetoric that is WAY beyond the pale. It’s the equivalent of the wealthy whinny about “fairness”.
    I want tax accountant and lobbyist industries to implode.

    3) Unless all subsidy programs are actually cut, the plan won’t save money:

    That is more crap. The plan would save some money- in many areas ONLY the rich get a substantial portion of the benefit. But even if it did NOT save much money, it is about moral consistency. The nation can no longer afford rich people trying to get as much tax credit and benefits out of the government as possible- rich people do it much more effectively than the middle class does and the middle class are not going to take it any more.

    4) By Grover Norquist’s definition, the plan is probably a tax hike

    Currently revenues are less than 16% of GDP, while spending exceeds 22% of GDP.
    The vast majority of Americans want a plan that gets us in the 18-20% range for both revenues and spending and want a balanced budget.

  • LauraNo

    “… then they will pay more taxes and whatever negative consequences come from hiking taxes on the well off will take place anyway.”

    Didn’t even bother trying to defend this one I see. “Whatever” should read, “what, ever?”. Because, what? ever was a negative consequence from hiking taxes on the well off? History has no good examples that I can think of…They have been known to cheat on their taxes, and to off-shore their winnings but if we thought those were negative consequences, surely we would charge them with their crimes, no?

  • Houndentenor

    So once any cut, deduction or subsidy is put in place it can’t ever be eliminated because that would be a “tax increase”? That’s a load of crap.

  • bamboozer

    Reason Number Four really gets me, apparently theres been an additional amendment to the constitution and Grover The Great is now enshrined as gospel, at least for the Republicans. Fortunately the GOP has started a conversation that essentially means the end of the Reagan Supply Side Tax Cut. It’s not hard to end subsidies for millionairs, it’s just hard to make the far right realize it’s coming.