Tuesday, October 9, 2012

Middle-Class Welfare

One example of middle-class welfare is the Home Mortgage Tax Deduction.  

In my previous posting, I was musing about my explorations of our welfare system - something I have never had personal experience with, but am learning about, firsthand, as I try to figure out how to avoid evicting my tenant.  Welfare can be a pretty sweet deal, but of course to get the swag, you have to be dirt poor - or at least appear to be so.  And the amount of swag is pretty paltry, too - on the order of a few hundred dollars a month, at most.  And yea, there is a bureaucracy to go through, and waiting lists to get on.  It is not such a lucrative deal as you might think.

And it isn't just the poor that benefits from government spending and incentive programs.  The middle class gets its share of government booty, and by some accounts, most of it.   We pay higher taxes, well, at least a little higher.   But a lot of that is offset by the more lucrative tax deductions we get to take.  Yes, the poor can take a deduction on their home mortgage, too.   But they are less likely to own a home, and the deduction will be worth less to them - and may be in fact, worthless.

You see, if you are in the 25% tax bracket, when you deduct your home mortgage interest (which for the first ten years of a mortgage, is pretty much the whole payment) you get 25% off on your taxes.  So a $1000-a-month mortgage payment costs you, effectively, $750.   For a poorer person in the 15% bracket, the same house would cost him $850.  He pays more for the same house than a richer person does.  Or looked at another way, if both people had the same house payment, the guy in the 25% bracket could afford to buy more home.

And speaking of home mortgages....  Who do you think guarantees most of the home mortgages in this country?  Yea, our friends at Fannie Mae and Freddie Mac.  These are the folks who opened the floodgates of "funny money" that allowed speculators to buy condos in Vegas and Ft. Lauderdale, and ordinary middle-class people to buy overpriced and overwrought mini-mansions.   The GOP would have you believe that it was all poor people taking out those bad loans.  But the poor were not the ones buying the $800,000 brick-and-vinyl "look at me!" houses in foreclosure mews.

But wait, it gets better.   Not only can you deduct the interest from a home mortgage on your taxes, you can deduct the interest on your vacation home on your taxes as well.   So people who are upper-middle-class or just plain rich, can write off the interest on two homes on their taxes.

And as I noted before, you can still rent out your vacation home, and make some money from that.   The only downside is that, profits from the sale of your vacation home are taxable, as Capital Gains (but losses are not deductible, as I sadly found out).  But clever homeowners can declare the vacation home as their "primary residence" for three years and avoid that problem as well.

Wait - it gets better!  What is a vacation home?  Anything with a bathroom and a kitchen, including a Yacht or a half-million dollar motorcoach.   So, you can buy that yacht, and write-off the interest!    A pretty sweet deal for the guy making $100,000 a year, but it kind of sucks for the guy making $50,000 a year.

As I noted before, deductions like this tend to be more worthwhile to folks in higher income brackets.   If you make a combined income of $69,000 a year, you might be in the 15% bracket.  The guy making $100,000 a year has to pay 25% on that last $31,000 of income, along with the 15% on the first $69,000.   But if he has $31,000 in deductions, not only is he knocked into a lower bracket, he pays the same amount of tax as the chump making $69,000, with no deductions.

So, a guy making a six-figure salary can buy a yacht or a vacation home, which combined with his primary residence, provides him with enough deductions to bring his income tax down to the level of a poorer person who has neither a yacht or vacation home.  Pretty sweet deal!

Or better yet, he can buy an investment rental property, rent it out, make a small profit, and deduct all the expenses and depreciate the property and end up paying even less in taxes!  The list goes on and on.

But in addition to deductions, the middle class gets a lot of other booty from Uncle Sugar as well.   Republicans are whining like little babies about Medicaid, and how it is bankrupting the country.   Who is getting Medicaid?  The poor?

Try Again.

As I noted in another posting, many middle-class people will make themselves look poor in order to qualify for Medicaid.  MediCARE will not pay for nursing home care, but MediCAID will, provided you are destitute.  So many middle-class people deed their house to their kids, or put their assets in to a "Medicaid Trust" or make other dodges that make themselves, on paper into paper paupers.  Medicaid then picks up the bill - often $5000 a month or more (far more), for the nursing home care.

The people doing this are retired Doctors and Lawyers, and former executives, or just plain union laborers, or clerks or whatever - middle-class to upper-middle-class people who have money, but would rather have the government pay for things, than pay for them themselves- so their kids can inherit.

So, the next time some idiot whines about "Poor people on Medicaid" tell him to look in a mirror.  Chances are, when he's 70, he'll be playing these games, too - unless they are outlawed by then.

And what is the point of these games?  In most cases, to preserve a legacy - an inheritance - for the children.   To allow dynastic wealth to propagate among the middle-class and upper-middle-class.

Of course there are a host of other "government programs" that the middle-class takes advantage of, but rarely realizes they are beneficiaries of.   Most middle-class parents are freaked out about sending their kids to college.  They squirted out a couple of babies, which seemed oh-so-cute at the time.  Then they turned into sullen and angry teenagers, and the parents start to wonder, when will they ever leave?   And they watch, in horror, as their friends' children move back in and live off their parents, well into their 30's.

So college seems like the ticket to get junior an education and most importantly, get him out of the house.  But how to do this, when college is so expensive?  Well Pell grants and Student Loans are one answer, and the latter is guaranteed by the government, which makes the interest rates artificially low (except for odious "private" loans, which you should never, ever, take out).

Of course, given the bear-trap nature of student loans - they can never be forgiven, even in bankruptcy - one wonders why they need government guarantees at all.   After all, they basically are a mortgage on your life, right?  And yet so many young people sign the papers - into perpetual slavery.

But they are a government benefit, and one that benefits the middle class the most.

And of course, there is Social Security.  Most of us don't consider this a "benefit" as we "paid in" to the program.  And I have analyzed this from both angles, and some readers have pointed out that basically, the poorer you are, the more it is a government "benefit" and the richer you are, the more it is just a tax.

My former cleaning lady will get the minimum benefit, based on the income that I, and a couple of other of her employers, actually reported.   She will likely get out a lot more than she paid in.   As a member of the middle class, I will likely get back more than I paid in, but  only about what I paid in, plus 4% in compound interest.   Someone paying in at the very top (once you make more than $108,000 or so, you pay no more Social Security taxes) will likely get out far less than they paid in).

And of course, how much you "get back" depends on how long you live.  And if you are middle-class and become disabled, or have a child who is disabled, well, you qualify for Social Security disability payments.   It is a government program, and represents a huge chunk of our budget.

And most of us in the middle class might not "need" Social Security.  But we plan our retirement based on this supplement to our income.  And perhaps if it were not there, we would save more and spend less.  Perhaps.  And we also plan on having that as a "safety net" if, for some reason, we lose it all and end up destitute.   So this is a government program that the middle-class benefits from.

And in terms of the amount spent by government on the middle class, it is a staggering number - far more than that spent on the poor.  For starters, there are a lot more middle-class people in America.  And they take out more, in actual dollars, than do the poor.

But as this article notes, since most of these expenditures are in the form of "tax breaks" most of us don't see them as government programs.   These are not checks you get from Uncle Sugar, but rather a decrease in the amount you pay to him:
The costs are significant. Huge, in fact. Tax expenditures now cost the federal government $1 trillion annually -- more than Medicare and Medicaid combined. And they’re regressive.
There is also a pattern to these programs: The more a government social program benefits wealthier Americans, the less obtrusive it is. We design policies for the poor in ways that make it hard to escape the knowledge that the government is providing help. But richer Americans rely on programs that are “submerged.” The Tax Policy Center estimates that eliminating all individual-income tax expenditures would raise levies on the bottom 20 percent by $931. For the top 1 percent, the tax increase would be almost $280,000. (Notably, both President Barack Obama and Mitt Romney have talked about cutting back on tax expenditures for the wealthy, but neither has provided details.) Even so, many middle class and wealthy beneficiaries have no idea that they’re receiving any government assistance at all.
Ironically, many in the middle-class or upper-middle-class are voting for Romney, based on the assumption that he will "cut entitlements" (which is a code word for getting black people off welfare).  But Romney is also promising to cut tax "loopholes" and deductions that are the red meat of the middle class, and upper middle-class.   Eliminating the home mortgage deduction could result in a $3750 tax increase for a middle-class family with a $250,000 mortgage.  That's a lot of money.

And Republicans never raise taxes, right?   Oh, no, they just want to eliminate deductions.   There is a difference and donchuforgetit!

The point of this posting - and the previous one and the next one (Corporate Welfare) is that there is no one group in our society that we can demonize as being "on welfare" - whether by socioeconomic, racial, or other criteria.   It isn't, as some would like to suggest (covertly) "all those black folks on welfare" that are dragging us down.  We all have our snouts in the government trough, and the middle class, having the most influence and money, grabs the largest share of the largess.

In order for us to have a reasonable debate about this issue, we need to realize this.   Blaming the poor, minorities, or immigrants for our problems is just scapegoating.  And we know, from history, how scapegoating turns out.  The bulk of our government expenditures are not to pay for "anchor babies" or ghetto kids.  Rather, it is money spent on you and me as I have noted before.