Is Every Tax Deduction A Government Benefit? 3

My car is doing just fine, thank you very much. It’s a Subaru Impreza, with close to 100k miles, plenty of hail damage, and a sun visor that won’t stay up. It’s a great car, and I have no desire whatsoever to trade it in for something nicer.

But let’s say I did. Let’s say I wanted to get a new Subaru Outback (I’m in Colorado, where Subaru is King). In doing my research, I find two places with the model I want, one listed for $20,000, the other for $15,000.

Since I prefer not to frivolously spend money, I’d check out the $15,000 car first. I head to the dealership, test out the car, and decide that it’s the machine for me. Then, when I sit down with the salesperson, I’m given an hour-long speech about how they’re doing me such a great favor for selling me a $20,000 car for $15,000. No matter what I do, he won’t shut up about it. I finally get so fed up with his self-deemed benevolence that I flip him the bird and run out without buying the car.

At the second dealership, I find the same car and go right for the sale. All the paperwork is written up, I sign the final document, and I hand over $20,000 (in cash, of course, since this is all made up). The salesperson smiles at me, and says, “You know what, you’ve been such a good customer, here’s $5,000 back.”

I smile back, jumping with joy as I grab the cash and head out to my new ride.

That is a sexy, sexy midsize crossover. In a practical color, no less.

That is a sexy, sexy midsize crossover. In a practical color, no less.

Benefit Or Advertised Price

Last Friday I found a Tax Policy Center article by Howard Gleckman discussing how all Americans get government assistance. He starts out mentioning a list of benefits with which I more or less agree, before moving on to tax policy and government subsidies.

While I agree with most articles coming out of the TPC, the argument presented here didn’t ring true. His contention, if you’re too lazy to click through, is that we should lump tax deductions and credits with other government expenditures to come up with a big pool of government benefit.

On some parts of his analysis, I agree. Most deductions do help wealthier people more (though some of that is just simple math). And the EITC and other refundable credits are a government expenditure, so grouping that in the government benefit category makes sense.

But all deductions? Or at least all itemized deductions. Are those ALL government benefits?

What is considered a “government benefit” when it comes to so called tax expenditures? If the government allows you to keep more of what you earned on your own, is that a benefit?

Whether or not these deductions and nonrefundable credits are government benefits is an important question, since it fundamentally frames the way our two political parties currently lean. Yet this article, and so much of the political debate, makes an assumption and runs with it like they stole it, never addressing the concerns of the other side.

Let’s say your effective tax rate is 15%. Does that mean 15% of every dollar you earn actually belongs to the government, or does it mean that it belongs to you, and you give it to the government in exchange for being a upright citizen of the country?

It seems like a trivial difference, but it’s not. If the former is true, that a percentage of your income belongs to the government (or, in the extreme, it all belongs to the government and they just let you keep a portion), then any “tax expenditure,” including any carved out deduction or nonrefundable credits, would be benefits from the government.

This viewpoint is consistent with a typical view of tithing in the Judeo-Christian world to which much of Western Civilization owes its heritage, though it’s traditionally applied to churches rather than governments. That it’s been moved to apply to governments strikes me as. . .odd. Especially since it’s typically done by the less religious.

The latter argument, that it’s all our money and that we agree to pay in, implies that we’re just paying the advertised price. We’re not given a gift, we’re not given a benefit, we’re just paying exactly the agreed upon price. Any manipulation to that price is done behind scenes, and while it will affect us, it affects us in the way a store changes its sale price, that we can accept or reject based on where we shop (or live).

Part of the confusion likely comes from the various definitions of “benefit.” One definition is just something that is advantageous or good. Another is a payment.

Can a deduction be advantageous and good without being a benefit? Yes, if you mean payment definition benefit. So a deduction could be a good thing without being a benefit. A deduction is not a payment, so it doesn’t match that definition. Whether or not the deduction is a good thing is a story for another time.

My Money Vs Your Money

Let’s go back to the car example for a minute. In both cases, I’d ultimately pay $15k, but how I got to that price is totally different. In the case with the $15k advertised price, I agreed to $15k before I even walked in the door. I got pissed at the salesperson because he insisted that he was doing me this great favor, even though it was that low advertised price that got me there. With my money, I was agreeing to pay $15k, so his talk of a higher price rang hollow (and self righteous).

At the second dealership, I agreed to pay $20k before I walked in the door. That the salesperson gave me back $5k is a benefit from her to me. It was then her money that she was under no obligation to hand back.

With taxes, if I’m handing the government my money, I am paying the advertised price. Any deduction the government set up is a sale of sorts, an agreement they made behind the scenes with no consideration of my particular dollar. If they wax eloquent about how they’re doing me some great favor for getting me that deduction, I’d think they’re an ass (and I don’t mean the symbol for the Democratic party).

If they take my money and give it back, though. Well, they may still be an ass, but it’s also a benefit. It’s their money, given to me.

Ultimately, the debate is jumping straight over whose money it is and attacking other based on their opinion of the first. Which is too bad, because I think deciding whose money taxes belong to is an interesting debate. If you couldn’t tell from my argument above, I’m in the camp that its our money and we’re paying an advertised price, no matter how illogical the deduction may be that the government set up (and some times it is very, very stupid).

If someone wants to make the opposite argument, I’d be glad to hear it. I think there are even some valid points to consider. But until I’m convinced, and until more of the country is convinced, any contention that all deductions are a government benefit will be met with a head scratch and a blank stare.

  • Jason Hirst

    First of all, Tim, you’ve always loved Subarus, even before you moved to Colorado. Your love affair continues because a Subaru was your first.

    Since you asked for an opposing argument, and I’m a lawyer and love to play devil’s advocate, here it goes:

    In your example about buying a Subaru from the dealership, does it matter who the $5k legally belongs to?

    Let’s say that instead of the dealership giving you $5k for being such an easygoing person, there was actually a $5k rebate that they were legally obligated to give you. But you didn’t know about that walking in there, you had already accepted the $20k price as a given. You just took their fulfilling their legal obligations as benevolence. So perhaps they didn’t really “give” you anything, but you sure benefited from that transaction. Sometimes the perception is more important than the reality.

    If we are to continue to analogize to your dealership example and viewing the tax deductions as part of the “advertised price”, we need to acknowledge that there are some important distinctions between a car dealership and the Internal Revenue Service.

    First, the dealership in your example involves a voluntary transaction. Unfortunately, paying taxes isn’t something that you can just decide to walk away from (at least not for long). This sounds like an important distinction, but it’s actually not relevant for my argument. OK, it is important, but you’ll see why later.

    Second, tax obligations are much more complex than a dealership’s “advertised price.” In your example, you walked into the dealership knowing the price before you were going to buy it. Most people, even sophisticated business people (and accountants) don’t fully understand the tax laws before they engage in a transaction. The advertised price was probably on a sticker on the windshield, but tax obligations are torn from volumes of archaic prose and olde English.

    Third, tax obligations can change at any time. While perhaps the dealership could have changed their price, the time from going to the dealership and closing the sale was so short it wouldn’t happen. In real life, taxable events are often the product of years of work, and tax laws can change during that time. You may have started an LLC to take advantage of favorable tax laws upon the sale of your business, but then before you actually sell it, the tax laws change. Or after starting a lucrative career with long hours, but enticed by low marginal tax rates, the tax rates could increase and now the marginal after-tax pay just isn’t worth the additional hours you put in.

    Fourth, tax laws change completely outside of your control. There is no possible negotiation. In fact, you have no guarantees that you will get to keep any of your money. It could be that the government decides to take every dime that you make over $450,000. That possibility is open, and there’s nothing you can do about it. This is a HUGE difference, because even though the government lets you keep your money for now, there’s nothing you can do to stop them from taking it away from you, if they decide to do so.

    So in reality, with taxes, the “advertised price” is pretty weak. Sure, they may tell you what deductions you can take a year in advance, but there’s no guarantee that it will remain. If the price tag on that subaru jumped to $100,000, there’s no way you’d buy it. But if your taxes increase by that amount, you can’t just walk away.

    If you view your tax obligations as a contract, then they are a contract with one of those clauses that says “We can amend this contract at any time, in our sole discretion.” That doesn’t really give you much of a contract. Likewise, with taxes, you don’t have much of a contract.

    So whether or not that tax expenditure is yours in the first place, the fact is, the government could take it if it wanted, and you can’t negotiate around that. The distinction of whether or not it is the government’s or yours is illusory, because if the government wants it, all they have to do is file a tax lien, freeze your bank accounts, and seize your assets and put them up for auction.

    Of course, there would be no distinction between what is a deduction and what is your otherwise base tax rate. But if the government wants to say it is giving you a gift, they can do that. Because if they don’t think you are grateful enough, they can take your car, your house, your business, and declare prima nocta.

    • First, I feel like responding to your post in a list, since that’s how you presented it.

      Second, the offer’s still open if you ever want to write a guest post on here, it’s all yours. I think you even have a login. Just keep it tax related.

      Third, any analogy taken too far falls apart.

      Fourth (that’s how many you have above, right? So it’s time to actually address the points now), you have some valid arguments, and I think this is a very fertile debate, which is part of the reason it’s disappointing that it’s generally glossed over.

      I think we’re going separate ways on what I meant by advertised price. I’m not talking so much about long term planning, I mean year to year. If, for that year, the tax system allows anyone can take a deduction for their mortgage, and you take a deduction for your mortgage as the government said you could, this is not a government payout or benefit. It’s something offered that you accepted.

      Maybe it makes more sense if I put it another way. The argument presented behind the home mortgage interest deduction is that home ownership is a “good,” so the government should encourage home ownership. The argument for the vast majority of deductions are similar: charitable contributions, tuition deductions, etc. (I’m not saying I necessarily agree with any of the individual arguments, especially mortgage interest, just that those are the contentions made to keep those deductions on the books)

      The argument behind government benefits is a very different one. The contention here is that we are taking from one group and giving to another who do not have the means to subsist on their own.

      Now, I do think that this potentially leads to some cases where you could argue that tax deductions and credits are a sort of handout. The Earned Income Tax Credit is the most obvious, and I actually agree that that one should be lumped in with government benefits. I’d also say there’s a strong argument that the heavily neutered Medical Expense Deduction is a government benefit.

      But having it both ways is a cheap political trick. Creating a deduction on the basis that we believe citizens can spend their money better than the government (since that’s essentially what a deduction is) then claiming it’s some great magnanimous bestowal by our politicians is trying to take credit twice for the same thing. I mean, like the old saying goes, what is the government but the people? If we, the people, believe that the government can spend out money better than we can, then let’s remove the deductions and let them spend the money as they see fit, including on our houses, charities, etc.

      Besides, it creates a baseline issue. If the government lowers everyone’s tax rate by 1%, the logical conclusion of this argument would be that the lower tax rate is a government benefit. But for how long? For now and forever? For just one year? Does that mean we’re all receiving government benefits because the tax rates were higher in the 80’s. Or that we’re all getting screwed by the government because there was no income tax before 1913?

      And that, if we take it way too far, implies all money is the government’s money, and they simply allow us to keep most of it. I don’t think many Americans would make that claim, but certainly other governments around the world have at various times.

      If we don’t like the way people are taking deductions, it’s absolutely within the government’s right to change the way they’re collected. But if along the way we’re claiming we’re trying to create the best revenue system that creates the best results, then turn around and claim that taxpayers should thank the government for every dollar they don’t have to pay in, it seems a bit. . .insincere.

      Or typically political.

      • Jason Hirst

        In the end, this is all semantics. We aren’t changing the substance of what is happening, we are just debating what we should call it. It’s an interesting philosophical point, but how politicians describe something often has very little ties to reality.

        Of course, I’m all about semantics and trivial or meaningless distinctions, so this is right up my “alley” (I hesitate to so obviously say “back alley” because that could be construed as something entirely different and inappropriate).

        As is quite often the case, I agree with your argument and I don’t view a deduction as the government giving me money. The government may take my money from me, but it’s not theirs until they actually take it. And they have the constitution and political processes they have to go through. So the argument “well, the IRS could have taken that money if they didn’t give you that deduction” is pretty weak. In theory they could have taxed you at your marginal rate with no deduction, but they didn’t. Tax reforms don’t come in isolation, and they are a process of negotiation and compromise. It’s very possible the tax rate is where it is only BECAUSE the home mortgage interest deduction (or other taxes and credits) was also included.

        Another issue is whether, in fact, the deduction is a benefit to the taxpayer – or if it is actually targeted at someone else. Just as the EITC and Child credits are really welfare administered through the tax system, are some deductions actually a subsidy to another industry?

        I think the answer is mixed. Clearly, the taxpayer gets some benefit, but part of that benefit may be absorbed by someone else.

        In the case of the energy credits, it seems to me quite clear that the main effect is to subsidize the renewable energy industry. If I get a credit on my tax return for installing solar panels, the effect is to lower the effective price of solar panels, increasing the amount of solar panels that will be purchased by consumers. Solar industry wins.

        It’s not quite as clear, but I think the effect is the same, with charitable deductions. The government is really trying to increase charitable donations, not reward taxpayers that are charitable. If you took away the deduction, charitable contributions would in all likelihood plummet. People usually aren’t giving money just to get the deduction. Unless they just hate giving money to the IRS – which some do), because they have to give up a buck to get a quarter. They are giving money because they want to contribute to a cause they believe in, with the additional benefit that they save on taxes – so they can contribute more than they otherwise would.

        Anything else that is deductible – whether it is home mortgage interest, accountant’s fees, or anything else – is going to influence market prices, and have an effect on an industry. Either companies will raise their prices so that the after-tax cost is the same, or they benefit from increased demand (and, in fact, most of these deductions (if not all) were lobbied for not by individual taxpayers, but the industries that are affected.