Welfare for the Wealthy?

I’m assuming that a lot of you have already been sucked into countless arguments driven by the daily happenings of what has become the most heated political season in recent memory, so I fully understand how hard it would be to have you turn your attention to actual problems. Unfortunately, that’s exactly what I need you to do as you get ready to read this post. Today I want to share with you a piece of reality very often overlooked, and I don’t think I exaggerate when I think of this as one of the greatest public policy travesties in American history. My hope is that by the time you are done reading, you will begin to reconsider your views on whatever you think the government is doing with your tax dollars, because whatever you believe now might actually be somewhat far from the truth.

Regardless of where you stand in the political spectrum, you won’t be able to deny that over the years the United States has implemented numerous policies that could be referred to as ‘socialist’ policies. Socialism occurs when the state collects money from its citizens in the form of taxes and spends that money through various social programs in an effort to guarantee the well-being of its people. These programs are collectively known as the “welfare state”. Social Security, Medicare, Medicaid, or TANF (Temporary Assistance to Needy Families) are the four most recognizable examples of such policies. So yes, there is socialism in America. Tons of it, in fact. But this shouldn’t come as a surprise to you. There’s been welfare in this country since President Roosevelt signed the Social Security Act into law in 1935.

These programs are designed to help improve the quality of life of those who find themselves in a disadvantaged position. For example, through the Social Security Administration, Americans 65 or older and disabled individuals can receive monthly benefits in the form of pensions or disability benefits. In the healthcare arena, Medicare provides health insurance to the elderly and also to younger people with disabilities, while Medicaid is designed to provide insurance to low-income families.

And these are not the only programs in place. There are also subsidies to aid the needs of hungry families (i.e. food stamps) or even of those who lost their jobs (i.e. unemployment benefits).

As you can see, the United States, the world’s foremost capitalist economy, has put in place major social programs to combat poverty and ensure that millions of Americans have access to a very basic but decent way of life. But I won’t lie to you, as much as these programs have done to improve the quality of life of many Americans, most adults don’t qualify to receive a lot of these benefits for matters of age and income.

If you take a look at the chart below, you will notice that the cost of the ‘welfare state’ in America constituted nearly 60% of the $3.8 trillion federal budget for 2015:

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By now it should’ve become clear to you all that, in many ways, the United States is a socialist nation. But that’s no travesty! Most industrialized nations have implemented similar programs, and more ambitious ones too (universal healthcare, anyone?). The travesty unfolds not when the government collects taxes to finance its much-needed social agenda, but rather when it intentionally doesn’t do so for the benefit of a small few.

I assume most of you haven’t heard of the hidden welfare state before. This is a term coined by political science professor Christopher Howard, and it refers to the revenue the federal government forgoes in the form of tax expenditures for the benefit of certain segments of the population. This occurs when the government refrains from taxing certain individuals who have proven a determination to use their taxable income for purposes deemed ‘socially valuable’ by the government. This might look good on paper, but the truth is people who benefit from these tax breaks are mostly wealthy individuals (shocker!).

The most common tax expenditure is the home mortgage interest deduction. This deduction allows people who own a home to pay less on their taxable income. The reduced amount is determined by the current interest being paid on their loan. I’ll give you an example. If you are a homeowner paying a 3% interest on your loan, and you are required by the IRS to pay 15% in income taxes, the home mortgage interest deduction will bring down your debt with the IRS to 12%. That’s a pretty sweet deal, huh?

According to a study by The Wharton School at the University of Pennsylvania, mortgage interest deductions for households with incomes between $40,000 and $75,000 average just $523, while households with incomes above $250,000 enjoy an average write-off of $5,459, or more than 10 times as much. To claim the deduction though, you must itemize your deductions on very specific IRS forms. If you choose to do so, you can also deduct the interest paid on a second home. The wealthy do both, but most of the middle class does neither.

The home mortgage interest deduction is nothing more than a tax break for the wealthy. But that’s not all. The tax code also includes many other tax expenditures associated with charitable contributions, retirement savings, and even higher education. Again, a series of activities low-income Americans often cannot engage in.

I consider this to be an extremely serious topic, and that’s why I want to share with you the whole truth about the hidden welfare state. These deductions often benefit the wealthy, true. But there are some tax breaks available for low- and middle-income families as well, and the earned income tax credit or EITC is perhaps the most prominent. The EITC is designed to provide tax credits to working individuals with very few means to get by, particularly those with children. The EITC can ease the tax burden of a lot of Americans, and it is specially helpful in combating poverty in this country.

So yes, there are some exceptions to the rule, but the cost of the EITC ($66.7 billion in 2014) is nothing compared to the total cost of tax expenditures, which amounted to a total of almost $1.2 trillion in 2014.

And let me be clear, tax expenditures, no matter what type, always entail a cost. From a government spending perspective, not wanting to collect certain taxes is no different from directly spending public money. If someone owes you $50 but you choose to forgo their debt, you’re still losing money, right? Similarly, when the government issues tax breaks, it chooses to give up tax revenue for a specific purpose – so both spending and tax breaks mean less money in the treasury.

What I’m trying to convey here today is that the United States is spending trillions of dollars on tax expenditures that, for the most part, benefit the wealthiest among us. Can you imagine what this country could do with $1.2 trillion every year? Bernie Sanders has stated countless times that he wants people in America to have access to universal healthcare and a public education, and often the reaction to his proposal is that America is too big a country, that the government cannot afford it. To those of you who want to see these policies implemented and who often bring up the cost of defense as proof that this country does have the means to make this utopia a reality, be sure to comment on the $1.2 trillion a year the United States government spends on tax breaks next time someone questions the viability of these seemingly radical proposals.

As I stated at the beginning, the US continues to enact socialist policies, and has done so under every president since the 1930s, therefore no one should be outraged by Sanders’ ‘radical’ plans.

The hidden welfare state serves as proof that the federal government has the means to considerably improve the lives of its citizens, and that in the end it all comes down to what our priorities ought to be. Do we spend more on defense and tax breaks for the wealthy, or do we make an effort to ensure that needy Americans have access to free healthcare and tuition-free public colleges?

The choice is yours.

13 thoughts on “Welfare for the Wealthy?

    1. Thank you so much for reading! I’ve been meaning to write an article on the issue for some time now, but needed to get my hands on the facts. This is definitely something we should be talking about during an election year. It’s too important to be ignored.

      Liked by 1 person

      1. we can start by sharing this information with the people we know. I would love to see what presidential candidates have to say about this.

        Liked by 1 person

    1. That’s right. As unfair as many of these tax expenditures are, the people who benefit from them will never allow changes to the tax code. It’s all about personal gains.

      Liked by 1 person

  1. This article speaks to the contradiction of the American taxpayer (and overall mentality). Everyone wants these lovely things like universal healthcare, sound infrastructure, free public universities, a better safety net (the welfare reform act by Pres. Bill Clinton gutted a lot of the programs), better housing subsidy etc., BUT no one wants to pay for it. These things aren’t really ‘free’ and they aren’t cheap. Everyone revels at how the Scandinavians do it and how they aren’t bitter and angry about it…it’s easy, they handover over 60% of their earnings to the state to redistribute it to everyone else, including the person that is handing it over (even the very rich get things like child benefit, and maternity/paternity leave etc.), the result is the 1% are fewer and so are people living in poverty, which in turn gets rid of a whole host of social problems which come with extreme wealth disparities. They got rid of the mentality of there are people who “contribute” and people who “take”, everyone who exists in their society are contributors (and takers) in their own way. And the mortgage deduction tax credit you point to as one small example, if we got rid of that, there would be an uproar and that’s just ONE benefit. People buy homes to just to get that deduction to minimize their tax liability. We are told and brainwashed over and over again by financial advisors and experts of all stripes to minimize our tax contribution (legally) as much as we can. Government just wastes our money on stupid things like war, and welfare to the needy and stupid museums in hick towns that no one visits. We as Americans are told we know how to spend our own money best (do we really?). To give it to government to redistribute it to other people is foolish and stupid because those people whom we distribute it to will never be able to ‘repay’ that back because they are too poor to contribute to said system. The fact that anyone needs public assistance to begin with points to their neediness. And if I am honest, I am not sure if I’d be too happy if my mortgage interest deduction was taken away, it’s the thing I look forward to when I do my taxes. Though I am not opposed to a better social safety net for all people, I am unsure if I want to handover so much of my hard earned money (and disposable income) and herein lies the conundrum.

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  2. Thank you for reading and for your very thoughtful contribution to the conversation! You are right that nothing is free. Just because we call it universal healthcare doesn’t mean we are not going to be paying for it. Of course we are! That’s why we pay taxes. And therein lies my point. We already pay a load of taxes every year, taxes of all kinds. It’s all about the government choosing where to spend our tax dollars. If we got our priorities straight, we might not even have to raise any more taxes. Now, I’ll admit there are a lot of people (including you) who benefit from certain tax expenditures like the mortgage interest deduction. And I’m not advocating getting rid of all these benefits. My goal is to start a dialogue about the fairness of the current tax code, because it seems to me that, ultimately, the people who truly benefit from these tax breaks are the rich.

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    1. I think we have a serious mentality problem of those who contribute and those who take. And if we reform the system where even those who contribute, even the super wealthy 1% also ‘take’ or benefit from the system, such as child care benefit and universal health care – even if they don’t need it, they won’t feel like they are paying all of these taxes for nothing. That’s how a lot of people feel in this country, not even 1% but just people who are well-off (middle to upper-middle class people) , where the heck is my tax dollars going to? What do I get out of it? I fork over 20-35% of my income to the government but there’s a giant pothole that’s been on my street for years, I still pay out of pocket for health insurance, and God forbid I ask my local government for any assistance, they take one look at my pay stub or tax returns and tell me to get out…The super rich won’t care because they won’t ever need to access public services, but the mid-to upper income people will.

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      1. The government is so huge that sometimes it’s hard to know what exactly it does with tax money. But you certainly have a point. There should be more transparency in the system. Also, I believe public services should be available to everyone. It should be our choice whether then we want to have access to public or private healthcare.

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      2. A good example is if one goes to a food bank and one is of moderate income but insufficient to keep up with rising costs of living, some places ask you to provide bank statements, pay stubs, how many cars you own etc…to get 2 grocery bags of food. I get that they are trying to cut out fraud etc., but access to food and clean water, in my view, is one of the most fundamental rights of people and access should never be hindered.

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      3. That is yet another tragedy, but then again if you make access to certain benefits, say food stamps, easy you will have people who will surely try to take advantage of the system. I agree with you that access to the most fundamental needs shouldn’t be hindered. Unfortunately, we don’t live in a world where people are ready to respect one another. Everyone is looking out for their own interests. When the sense of community disappears, making public services work efficiently becomes harder and harder

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