Thursday, 25 Apr 2024

Opinion | The American Dream Is Tax Reform’s Biggest Obstacle

Much of the commentary on the fresh revelations about President Trump’s tax returns has focused on how they illustrate the vulnerability of the federal tax system to exploitation by the ultrarich. This is for good reason: Mr. Trump aggressively used a set of tax breaks popular with real estate developers to pay no taxes in 11 out of the previous 18 years, and just $750 for both 2016 and 2017.

But the most expensive subsidies in the federal tax code are not used by real estate developers, energy chief executives or bankers. They are used by upper-middle-class households under the guise of earned economic security. The main obstacle to reforming the tax code is not Mr. Trump, but rather the upper-middle-class American voter.

There are close to 300 subsidies in the tax code that, in total, cost the federal government over a trillion dollars each year. According to the Congressional Budget Office, in 2019 more money was lost to the federal government through the nation’s regressive tax breaks than was spent combined on Medicare and Medicaid.

And six out of 10 of the most expensive federal tax subsidies — including the exclusion for employment-based health insurance, benefits for company pensions and the charitable contribution deduction — are commonly used by wealthier suburban families. In sum, they drain close to $680 billion annually from the U.S. Treasury.

These subsidies are sold as providing necessary assistance — affordable housing, health care and higher education — to middle-class families. But they also apply a veneer of political legitimacy to a system that shovels billions of taxpayer dollars every year to the wealthiest families and corporations in America. For example, the top 1 percent receive benefits from their tax claims that equate to nearly 10 percent of their income and account for nearly a quarter of the total tax benefits distributed to households. In comparison, the middle class claim tax benefits that corresponds to 5.5 percent of their annual incomes and account for only 11 percent of total tax benefits distributed by the federal government.

So why does the public support regressive tax subsidies that primarily benefit the rich? After all, it’s not as if the rich are popular with the American public: A majority of survey respondents report resentment toward the rich, fueled by the perception that the rich abuse the tax system for their personal gain in ways that exacerbate inequality. At least two-thirds of the public have consistently reported that the rich and corporations do not pay their fair share of federal taxes.

But while the majority of Americans may report dissatisfaction with an overly complex and unfair tax system that’s prone to exploitation by the wealthy, their resentment is purely abstract: Americans love the very provisions that create this complexity and inequity.

In a forthcoming book on public opinion toward the tax system, co-written with the political scientist Christopher Ellis, we argue that federal tax subsidies, even those that provide the most benefits to the top 1 percent, are wildly popular with the public. It is the peculiar political nature of the American masses that creates strong incentives for policymakers to use the tax code to finance popular social goals. This is the manifestation of a phenomena described by studies for more than 50 years: A large segment of the electorate can be described as “symbolically conservative but operationally liberal.” They report hating government while favoring federal assistance for more affordable health care insurance, old-age pensions and child care.

Tax subsidies are amenable to the American psyche because they provide social insurance that doesn’t feel like government welfare. In our research, we found that many respondents viewed tax subsidy recipients as more deserving of government aid than beneficiaries of identically described programs where the assistance was provided through direct checks.

There are no bigger supporters of the current tax system than the exemplars of the American dream: middle-class and upper-middle-class families living in large homes, with multiple children and employment-based insurance. We find in our analysis that these characteristics — more than partisanship, ideology or political values — predict strong support for a range of the most expensive and regressive subsidies in the tax code. This support is politically weighty since this group also votes, donates and volunteers on a consistent basis.

Is there anything that can end the American love affair with the regressive subsidies embedded in the tax system? We may find the answer in President Trump’s tax policies.

The 2017 tax bill, formally called the Tax Cuts and Jobs Act, cut taxes for everyone. But its main provisions slashed taxes for corporations and millionaires, making it one of the most unpopular pieces of legislation passed in the last 50 years. Recent surveys by The Economist/YouGov and Monmouth University found the bill had 34 percent approval.

Because the tax law increased the standard deduction and reduces marginal tax rates, fewer middle-class households will itemize their taxes; those that do will save less money. So the law severs the alliance between the middle class and the wealthy, kicking them out of the first-class cabin where there are major tax benefits to itemize, back to the crowded coach section, where everyone uses the standard deduction.

Our analysis predicts that as fewer middle-class households claim the regressive tax benefits, these programs will become less popular and politically vulnerable over time.

So policymakers looking for federal money — to shore up Social Security and Medicare, expand health care insurance and pass green energy initiatives — may find it easier to increase revenues. They can strengthen the I.R.S., giving it the resources necessary to pursue wealthy tax cheats and eliminate regressive tax breaks without worrying about a middle-class revolt at the ballot box.

Taxpayers, too, must change. If we want policymakers to create a fairer tax code, we must outgrow our prolonged fiscal adolescence. We must stop acting like any increase to our taxes — whether through a reduction in tax breaks, or a slight increase to marginal rates — is a bigger threat than climate change, a crumbling national infrastructure, or an inadequate public health system.

Christopher Faricy is associate professor at the Maxwell School of Citizenship and Public Affairs at Syracuse University and co-author of the forthcoming book “The Other Side of the Coin: Public Opinion Toward Social Tax Expenditures.”

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