This is part three of three pieces I'm putting together in celebration, dread, anxiety, relief, stress recognition of tax day. If you are curious about some more detailed, substantive tax policy from my perspective, explore this and this. Tuesday's post is here, and Wednesday's post is here.
The title for the piece is my fanboy homage to the economist Dean Baker. As one of the people trying to get our leaders at the Fed, Treasury, Congress, and the White House to do something about the housing bubble, and as an economist interested in communicating in language accessible to the general public, he's been good for more than a few money quotes.
By the early 2000s, Baker was so convinced that the policy makers were setting us up for a catastrophe that he put his money where his mouth was, selling his home in the DC area and renting for several years. Upon taking advantage of the part of the bailout of the housing industry we call the $8,000 first-time homebuyer tax credit to re-enter the ranks of homeownership last year, Baker stated eloquently:
This is a questionable redistributive policy to homebuyers who have higher incomes on average than renters. (Full disclosure: I benefited from this tax credit -- thank you very much, suckers!)
Personally, I don't own any real estate. I'm not particularly wealthy financially, either in terms of high income or in terms of asset ownership. I'm not self-employed, don't have any ownership interests in a small business, and am not a beneficiary of any trusts. I don't have major credit card debt or health problems, and I own both my car and my education outright. So my taxes are pretty simple and straightforward. But even in my situation, I was still able to claim some tax breaks of dubious societal value.
Most of the time, I'm interested in aggregate data, in The Big Picture. But today, I thought I'd share a personal anecdote. My 2009 taxes.
Savings for my next car
My car celebrates its 10th birthday this month (at least, according to the sticker, it was manufactured in April 2000 - I bought it in December of 2003). So for the past couple years, I've been setting aside a little bit of money each month for the inevitable day when the next repair bill is more than the car is worth. Well, I earned $33 worth of dividends off of that savings in 2009. That's income - money that I received during the year - and I should be taxed off of it. But some of it is in an arbitrary category called qualified dividends. Because of this, I got to deduct $11 from my tax liability. It took me about half an hour to fill out the paperwork, which is the equivalent of $22 an hour. Not a bad payout considering it's tax-free. But here's the question: what did society gain from this tax expenditure? I would have had precisely the same amount of money invested in precisely the same balanced mutual fund even if all of the dividends had been taxed at my marginal income tax rate.
But wait, there's more!
The real kicker is that about 10 months ago, I decided I wanted to have the money in my savings account, so I sold the shares in the mutual fund. You see, I had made a calculated bet that after the first leg down for stocks and bonds, our political leaders wouldn't let the system 'crash' - especially in an election year - and having some savings in stocks and bonds, I judged, was a good hedge against the outcome I was afraid would happen, namely, that we would socialize the losses, because the vast majority of my wealth is basically tied up in my future wage potential. That's not exactly positively correlated with trickle-down economics (unless I end up running a major multinational one day, of course). It was a bet I could afford to make because if I lost money, I was ready to accept the consequences: getting less car when it came time for the inevitable purchase.
Well, my gut instinct was right, but my timing was wrong. If I'd put the money in at the beginning of 2009, instead of the beginning of 2008, I would have made a few thousand dollars (I might even have bought a new car instead of a used one!). Instead, I lost a couple thousand dollars. And guess what? Our tax code loves capital so much that it even pays for you to lose money. That's right, my tax bill was lowered because I lost money on a bet I took knowing full well that losing money was a potential outcome. In the end, the value of this tax expenditure dwarfed my meager qualified dividends. I got about $500 from this giveaway; where's the societal value in that?
My Roth IRA
After wages from my day job, the gains in my Roth IRA (individual retirement account) were my next largest source of income in 2009. Of course, our tax code shelters such income from taxation, so this saved me a boatload of taxation. Thanks for a tax break worth over $1,000 to me. If you like the idea of beefing up my retirement account, please email me and I'll let you know how to make a gift by check or cash. I'll even accept gold.
My 403(b)
After the day job, Roth IRA, and a second job, the gains in my 403(b) (nonprofit retirement plan analogous to the 401(k)) were my fourth biggest source of income in 2009. Because tax benefit is upon payment, rather than withdrawal, the mechanics are a little different. But again, basically, this was a tax break worth over $500 to me to engage in behavior I would have done anyway. It is worth noting a couple unique items here, too. First, this is dependent upon my employer, and second, I only invest here because of the combination of my employer and the tax code. How is it in our collective interest to create products tied to employment - the employer-based insurance system is precisely what's collapsing around us.
My FSA
At least with workplace retirement plans, there are some alternatives one can pursue if an employer doesn't offer a decent plan. When it comes to Section 125 Flexible Spending Accounts/Cafeteria Plans/Health Reimbursement Accounts, there is no alternative. If your employer doesn't offer this, you simply have no access to this tax break. Basically, you enter into a salary reduction agreement to create a pot of money that you can spend for certain medical expenses. The expenses that qualify are really arbitrary, which is a core problem with trying to create this kind of exhaustively detailed system. Dental work is generally covered, but toothpaste and toothbrushes aren't. Specific doctor-prescribed workout regimens are covered, but preventive working out to stay in shape isn't. And one of the fun ironies with the fake uproar about the government funding abortion specifically, and reproductive healthcare more generally, is that the government funds reproductive healthcare. You can literally get a tax break for buying condoms. As I am fortunately quite healthy, I don't put very much money into my FSA, and it's a little more complicated calculating the tax break because it involves more than income taxes, but I'd estimate the government paid me $40 in 2009 basically to get a physical and buy some drugs. Clearly, NyQuil needed the money to run all their Ohno ads.
My life insurance policy
This is not meant to be a discussion of who should have life insurance, or what kind to get, or how much to get. Life insurance is something that should be part of a purposeful, comprehensive financial plan, and it's not something that can be described in a sentence or two. The relevant point here is that I have an insurance policy (if you're curious, it's a variable universal life policy) and it, just like the Roth and 403(b), made up a considerable amount of lost ground in 2009.
What you may not know about life insurance is that the tax code gives it the same sweet deal as a Roth IRA: both tax-deferred gains and tax-free withdrawals (as long as you don't MEC the policy, turning it into a Modified Endowment Contract, or let it lapse, in which case tax-free loans can turn into taxable income). Again hard to estimate precisely due to trying to project the future, as opposed to taking a specific tax cut, but I'd say this tax break was worth about $400 in 2009. I'd really love to know the social worth of privately owned insurance policies.
My charitable contributions
I mention this because I don't get any tax break whatsoever for the money I give to educational, advocacy, and charitable organizations. The tax code is set up so that many expenditures are deductions, which means you have to have lots of deductions in order for them to add up to something greater than your standard deduction. In order to save $500 off my taxes, for example, I'd have to make contributions totaling over $7,000, more than 15% of my total pre-tax income. And it's not like those in the highest marginal tax bracket are particularly incentivized by the tax breaks to give much more, anyway; charitable giving in the United States is less than 3% of income.
Some closing thoughts
It takes a fair amount of wordage just to summarize the tax breaks inherent in even a fairly simple return like mine, and I hope that's a point that is quite noticeable (I say inherent, because there's a second level of tax differential involved here, between capital gains which can be delayed until being 'realized' so they can be smoothed over a period of years and wages which offer no similar option of smoothing). Taxes aren't complicated because they have to be; they are complicated precisely to hide just how expensive all the giveaways add up to be and how they almost all accrue to the very wealthiest Americans. I argue strongly that we should only use taxation to fund government programs. If we have other purposes, socially beneficial activity that we wish to encourage or socially harmful activity that we wish to dissuade, then we should directly legislate and appropriate funds for those goals. The net effect of our tax loopholes is that they give away huge amounts of money to the wealthy, or to say it differently, they are a direct assault on the fundamental concept of progressive income taxation.
Some tax cuts are better than others, as I discussed Tuesday. But my interest doesn't end at beating the GOP at their own game. My interest is in moving our rhetoric away from tax cuts entirely. If we believe in things like retirement security, or affordable housing, or accessible medical care, or a strong non-profit community, or diverse transportation options, or weatherization programs, or renewable energy, then we should directly fund federal programs to ensure the desired objective. Tax policy is an inefficient mechanism which ends up being gamed disproportionately by those with higher incomes and wealth.
We are best served by shifting from tax breaks built around 'my' stuff to government programs built around 'our' stuff.
You can read these words all over again at The Seminal at FDL.