By: Pat Oles, MSW, ACSW
As calls for reducing the federal deficit and debt gain momentum in Congress, social workers concerned with justice face difficult choices. The fiscal issues are complicated, bitter partisan politics make thoughtful discussion difficult, and the emerging consensus about reducing federal spending targets programs assisting populations of special concern to social workers. Moreover, as members of the middle class, social workers also face an ethical burden insofar as progressive changes in federal tax policy may not be in social workers’ personal interest.
In principle, reducing the federal deficit is easy. It involves closing the gap between revenues and expenditures. There are only three ways to reduce the deficit—increase revenues, decrease spending, or develop some combination of increased revenues and reduced spending. However, in practice, reducing the deficit is a complicated political challenge. Increasing revenues would mean someone pays more taxes, and reduced spending would mean someone gets fewer benefits. No one volunteers for a tax increase or a spending cut.
This article considers the underlying logic of the tax reforms proposed in The Moment Of Truth: Report of the National Commission on Fiscal Responsibility and Reform (2010) from a social work perspective. President Obama organized this commission of Republicans and Democrats and charged them with identifying “policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run.” The report recommended eliminating tax breaks for business and taxing interest and dividend income at the same rate as wages. These reforms would increase revenue and, along with some spending cuts, would reduce the deficit. Congress did not vote on the proposals, but the report will provide the basis for future discussions. It is imperative that social workers understand the tax system, especially tax expenditures.
The tax system is complicated, with thousands of arcane and specialized rules, and most citizens recoil from discussions about tax policy. However, an understanding of tax expenditures (“tax breaks”) is crucial to a discussion of the budget deficit and the proposed reforms.
The Congressional Budget and Impoundment Control Act of 1974 defines tax expenditures as “revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability.” In plain English, tax expenditures are the equivalent of federal spending insofar as they further a public goal. However, rather than collecting revenue and spending the money on a program, the government provides a tax break to reward individuals or businesses whose behavior advances the policy goal. For example, the federal government wants individuals to save for retirement, so individuals who save in a retirement plan get a tax break. The federal government has not “spent” money on an individual private retirement plan, but it has allowed individuals to pay less tax. In this regard, the tax expenditures supporting retirement savings increases the deficit just as much as spending.
There is nothing wrong with tax expenditures per se, as the tax code may effectively and efficiently promote the goal as intended, and because tax breaks reduce how much of a person’s income is subject to taxes, they are popular. However, because tax expenditures favor upper- and middle-class taxpayers, they reduce the progressive nature of the tax code. And, because some tax expenditures provide upper- and middle-class taxpayers with support for important expenses such as health care, tax breaks reduce support for social welfare programs such as Medicaid. In a classic article in the social work literature, Everyone Is on Welfare, Abramovitz (1983) outlined how the system works to the disadvantage of the poor and working class.
In fiscal year 2011, tax expenditures will total more than $1 trillion, an amount equal to three-fourths of all corporate and individual income tax revenues, and an amount more than one-and-a-half times the cost of all federal domestic discretionary spending (Batchelder & Toder, 2010). One trillion dollars nearly equals the federal deficit. Burman and colleagues (2008) concluded that tax expenditures equal an amount sufficient to finance a 44 percent across-the-board reduction of income tax rates.
A brief consideration of the most expensive tax expenditures illustrates how the system works. Thirty-six percent of tax expenditures subsidize employee benefits. The tax-favored treatment of employment-based health insurance benefits is the largest ($177 billion, or 16.7 percent of the total and 46.5 percent of all employee benefits-related tax expenditures) and employment-based retirement plans ($112 billion, or 10.6 percent of the total amount and 29.3 percent of all employee benefit related tax expenditures) is the second largest. The federal government spends an amount equal to one quarter of the federal deficit on health insurance and retirement plans for middle- and upper-class taxpayers with health insurance and retirement savings while entertaining serious calls for reducing Social Security and Medicaid.
The home mortgage interest deduction costs just over $100 billion annually. The home mortgage interest deduction permits taxpayers to claim an interest deduction on mortgages as large as $1 million. This means taxpayers who can qualify for a million dollar mortgage benefit more than taxpayers who can only afford a smaller mortgage. It means all taxpayers who own a home get more help from the government than those individuals who do not own a home. Taxpayers in the top fifth of the income distribution are more likely to itemize deductions, have larger mortgages, and have a higher marginal tax rate (Toder, Turner, & Getsinger, 2010). In other words, taxpayers who earn the most and who have the most expensive homes get the biggest tax breaks, and it means that homeowners pay lower taxes than renters, even if they make the same income. Most taxpayers who claim the mortgage interest deduction see the benefit of the tax break on their tax bill without realizing how the wealthiest claim an even larger benefit.
The influence of the tax expenditure is insidious. The common advice to people buying homes stresses that mortgage debt is “good” debt, because the interest on a mortgage is low when compared to other debt, and homes are an appreciating asset. Taxpayers are encouraged to build wealth and improve their standard of living by buying the most expensive homes they can possibly afford. The banks and home construction industries benefit, but it means the government has less revenue to support programs for the most vulnerable. With the advantage of hindsight, it is now also clear that the mortgage interest deduction inflated housing prices, encouraged debt, and contributed to the housing bubble at the heart of the recent recession. That recession and high unemployment has left millions of individuals at risk, diminished federal revenues further, and is one of the principal reasons the federal deficit increased rapidly in recent years.
Tax expenditures influence decisions about buying a house, saving for retirement, and health care. Changing tax policy will change the incentives and support for these decisions. People may spend less on homes, save less for retirement, and make more price conscious decisions about health insurance. In addition, most proposals for eliminating tax expenditures also propose lowering tax rates. As a result, it is difficult to predict the effect of eliminating tax expenditures. Thus, it cannot be assumed that eliminating tax expenditures will result in a dollar for dollar reduction in the deficit. However, tax reform that includes eliminating tax expenditures is the most progressive means available for increasing federal revenue.
The Moment Of Truth argues for protecting “the truly disadvantaged,” stating that the United States “must ensure that our nation has a robust, affordable, fair, and sustainable safety net. Benefits should be focused on those who need them the most” (p. 13). The report goes on to advocate that the tax code “maintain or increase progressivity.... Though reducing the deficit will require shared sacrifice, those of us who are best off will need to contribute the most. Tax reform must continue to protect those who are most vulnerable, and eliminate tax loopholes favoring those who need help least” (p. 29).
The Moment Of Truth raises revenues by cutting all tax expenditures for businesses and taxing interest and dividend income at the same rate while simultaneously lowering tax rates. These reforms are progressive and consistent with the values elaborated in the report. The tax rates applied to interest and dividend income are lower than the rate applied to wages and business related tax expenditures, which oftentimes go to successful businesses. To the commission’s credit, the proposal retains the Earned Income Tax Credit (EITC), the child tax credit (CTC), and the small Health Coverage Tax Credit (HCTC). These are relatively small programs compared to other tax expenditures, but extraordinarily important to poor and working class households.
Eliminating business related tax expenditures, taxing dividends and interest at the same rate as wages, and retaining tax expenditures for the most vulnerable reflect an impressive commitment to change. However, the proposal reduces tax rates so aggressively that the reforms only increase revenue by $84 billion, not enough revenue to meaningfully reduce the deficit or protect social welfare spending. In this regard, the proposals are a disappointment.
Most social workers will happily eliminate tax expenditures for businesses in service of protecting social welfare spending. However, tax expenditures for business account for only 11 percent of the total tax expenditures, whereas tax breaks for individuals account for almost 80 percent of the total, according to the GAO. The only way to make the tax code genuinely progressive and raise sufficient revenue to meaningfully protect social welfare spending and reduce the deficit is to eliminate or limit tax breaks for employer provided health insurance, home mortgage interest, retirement savings, charitable deductions, and other programs popular among middle- and upper-class taxpayers. Retaining these tax breaks avoids political conflict from well-organized and powerful interests, but retaining these tax breaks results in sustained political pressure to reduce Social Security, Medicare, and Medicaid in service of reducing the deficit.
Social workers should support fiscal reform based on the values specified in the commission report. However, protecting entitlement programs and other social welfare spending critical to our clients’ well being requires reducing the tax expenditures for the middle and upper class. It requires advocating for changes in the tax system that many social workers rely on for help with their own health insurance, retirement savings, and home finance. In this regard, social workers face a unique and challenging ethical dilemma. Resolving that dilemma in favor of our nation’s most vulnerable populations is an opportunity to lead.
Abramovitz, M. (1983). Everyone is on welfare: “The Role of Redistribution in Social Policy” revisited. Social Work, 28, 441-445.
Batchelder, L., & Toder, E. (2010). Government spending undercover: Spending programs administered by the IRS. Washington, DC: Center for American Progress.
Burman, L., Toder, E., & Geissler, C. (2008). How big are total individual income tax expenditures, and who benefits from them? Washington, DC: The Urban Institute.
Joint Committee on Taxation. Estimates of federal tax expenditures for fiscal years 2010-2014 (JCS-2-08, (December 14, 2010).
Office of Management and Budget. (2009, May). Budget of the United States Government: Fiscal Year 2010. US Government Printing Office.
Toder, E, Turner, M.A. & Getsinger, L. 2010. Reforming the mortgage
interest deduction. http://www.taxpolicycenter.org/UploadedPDF/412099-mortgage-deduction-reform.pdf.
Pat Oles. MSW, ACSW, is Associate Professor of Social Work at Skidmore College. Before joining the Skidmore faculty in 1985, Pat worked as a child and family therapist and then as a senior administrator in residential child welfare programs. Pat also served as Dean of Student Affairs for ten years at Skidmore, returning to the social work faculty in 2009. Pat has published articles in Social Work, Journal of Social Work Education, Qualitative Sociology, Families in Society, Journal of Gay and Lesbian Social Services, Afflia, and Arete. His current interests include social policy, politics, and college student culture.
This article appeared in THE NEW SOCIAL WORKER, Fall 2011, Vol. 18, No. 4, pages 18-20.