Monday, September 10, 2012

I knew Time was left wing, but...

kw: politics, language

How you say something reveals how you think about it. In the most recent issue of Time, dated Sept 17, 2012, the cover article is titled "One Nation on Welfare: Living Your Life on the Dole", by Michael Grunwald. His attitude is simple: the Government owns you, and any "benefit" you receive is a subsidy. The article is illustrated with four large photos, littered with yellow squares. Some of them state:
  • At least $15 billion goes each year to farm supports.
  • The IRS allows a $3,800 tax exemption per child and more for child care.
  • Deductions for health care expenses cost the Treasury $184 billion a year.
  • Charitable tax deductions cost the government about $40 billion a year.
  • Depreciation of business property like computers and other capital goods cost the feds $5.7 billion in 2011.
  • The home-mortgage-interest deduction costs the Treasury $84 billion a year.
Let's look at one word used in four out of these six items (the number of yellow boxes totals 17). That word is "cost". Folks, let's be clear, the deductions and depreciations mentioned do not cost "the government" anything! The author's language implies that we, the taxpayers, are reaching into the pocket of "the Feds" and taking money out.

Wrong! Taxes are when "the Treasury" reaches into your pocket. A deduction is a statutary provision that "allows" you to reduce what "they" take, because you are behaving in a way "they" think is worthwhile and want to encourage, or because you have incurred an unusual expense, and "they" are in part giving you recompense. Two examples will suffice.

When I first began doing my own taxes in 1967, all consumer interest was deductible from income taxes: home mortgages, car loans, and credit card interest, for example. Two things were changed about ten years later. First, all consumer interest other than mortgage interest was removed from the list of allowed deductions. In particular, that part of the deduction was thought to be driving a rapid increase in people getting deeply into debt via credit cards, revolving-charge accounts at retailers, and unsecured loans. The change in the law did make a dent in unwise borrowing, but consumer credit has continued to increase anyway. It was also considered "unfair" that rich people with a dozen homes scattered about the country (or the world) were deducting huge amounts of interest from their income taxes, so the law was changed to allow the deduction only for a primary residence and a secondary one (such as a vacation home). The deduction for house 1 and house 2 was retained, because it is desirable to encourage home ownership. People who own their own home usually take better care of it than renters (as every one of my friends who is a landlord will attest). Occupant-owned houses simply last longer and cost less in the lifetime of the structure, than rented properties.

Secondly, in 1967 nearly all medical expenses were deductible. At the time, there were no HMO's or other vestiges of socialized medicine. "Traditional" health insurance was "Major Medical", which paid for hospitalization or visits to the emergency room. When you went to see your family doctor, or bought pills or had an injection, you simply paid for it. If you were a sickly sort (or hypochondriac), you might spend a lot more than the average. The medical deduction partly offset this. Though an increasing set of limiting thresholds has been imposed, now about 7%, before you can deduct anything, the principle is the same.

Let us recall that a deduction is not a tax write-off. If you had "extra" medical expenses of $10,000 last year, over and above the threshold, and you are in the 20% bracket, taking the deduction will yield a $2,000 reduction of your taxes owed. I don't call that very generous, but it is what it is. Also, if you had mortgage interest of 4% on a $150,000 loan, or $6,000, in the same tax bracket, that deduction will reduce your taxes by $1,200.

For people who take the time to think it through, the mortgage interest deduction can allow them to buy a slightly better home. If you can afford a payment of $6,000 per year (ignoring escrowed taxes and insurance), working the math backward means you could afford an up-front payment of $7,500, and at 4% the loaned amount would then be $187,500. That's enough for an extra bedroom or a nicer neighborhood. Now your deduction is $1,500 instead of $1,200. Is this money "taken" from the government? No. On average, you are among those who are increasing in prosperity, earning more, spending more, and particularly in this case, supporting home builders at a higher level than you might have done without the deduction. The extra $37,500 (at least; we've ignored down payment) in the cost of the home went into someone's pocket, who had it to spend and make their own contribution to the flow of cash in the economy.

This is not to say that all tax offsets and genuine subsidies (many of which are in the form of direct payments) are good. Some are "special interest" items that benefit a few who really don't need it. But let's consider one more, farm subsidies. In the author's yellow box, these are pegged at $15 billion. In a $3.8 trillion federal spending spree (there is no budget, for three years running), that is a rounding error-sized amount. It comes to about 2.4% of the total amount we spend on food in America. While not all of this little nest of subsidies is well spent, the main effect has been to allow larger numbers of small farmers to stay in business. This, again, is a case of encouraging behavior that is better for the country. So not all subsidies are "bad things".

But to state that we are all "on the dole"? Ridiculous! Consider the Interstate Highway System and Air Traffic Control. These are examples of what President Obama was actually talking about when he said, "You didn't build that". While the way he said it was a monumental gaffe, just think what life here would be like without them. Prior to President Eisenhower's initiative in the 1950s, the best road from where I live to my cousin's home in Bucks County, PA was the road now called Route 202. You can still go that way, if you want to spend an extra hour on the road. But it's better to take the Interstate and the feeders attached to it, also built with federal funds. And if air traffic were strictly a state-by-state system, probably with conflicting standards, could we support 3 million daily flights around the country? Are you on the dole when you take a road trip, or fly somewhere? No.

"The Dole" properly refers to support for those who cannot support themselves. As a society we have the Welfare system, administered at the state level. Of course, because no law is perfect, there are abuses, which various "workfare" bills have attempted to address. But there is no question that some folks simply can't make it without help, and as a civilized people, we have decided to help. "The Dole" is not properly applied to publicly supported infrastructure that enable more efficient economic activity. If federal money was used to improve the local sewage disposal system, or the township's water supply (true in both cases), are all of us living here "on the dole"? Hardly! We paid the taxes that were used to pay for those projects. In such cases, yes, dammit We Did That! It was just indirect.

And so, finally, even in the case of Interstate highways and air traffic control, every dollar used to create those systems was taken from the American people. We Did That. Or, more properly, Our Parents Did That. To keep those systems running well, we continue to pay taxes to "the Feds", which uses them to pay for infrastructure maintenance. It is not "the dole" if you pay for it.

To avoid going on and on, and so I can have my lunch before the end of the day, I'll stop here.

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