Senator Tom Coburn released a report, Subsidies of the Rich and Famous, detailing a list of subsidies, transfers, and “tax breaks,” that are paid to individuals with Adjusted Gross Income (AGI) of over $1 million.  The report found that millionaires have received at least $9.5 billion in “government payments” since 2003 and $113.7 billion in “tax breaks” since 2006.  Accordingly, Coburn concludes that many of these tax deductions should be eliminated, while benefits for the rich should be means-tested or reduced.

As our debt approaches $15 trillion, Coburn’s heart is undoubtedly in the right place; however, many of his proposals are misguided.  While some of the deductions enumerated in this report should be eliminated immediately, most of the savings will come from revoking universal tax deductions from those who already have the highest tax burden.  Additionally, while some of the subsidies, such as the farm and green handouts, should be abolished, most of Coburn’s savings on government benefits would come from reducing Social Security payments to the rich.  Social Security payments, unlike welfare and other subsidy programs, represent real money that was paid into the system through payroll taxes.  Any effort to deny those payments from the rich would engender further redistribution of a program that was not conceived for redistribution.  Also, it would ostensibly be a 12.4% tax increase on those high-income earners, as they would pay the tax without receiving the retirement checks.

Let’s drill through the numbers of the report.  Here is a list of government payments that Senator Coburn has identified as subsidies for the rich:

As you can see, $9 billion of the $9.5 billion in government payments to the rich were nothing more than Social Security checks – the same payments that every American retiree enjoys.  Unlike the farm and conservation payments (which are relatively small), Social Security payments come (or at least, are supposed to come) directly from the 12.4% payroll tax.  Are the rich not entitled to Social Security?  Should they pay into the system without receiving their due benefits?

In regard to Medicare, Senator Coburn was unable to obtain the cost of benefits for millionaires, but he suggests that they be means-tested like Social Security.  The problem is that upper-income earners are the only ones who, on average, earn the full cost of their Medicare benefits.  As we noted a few weeks ago, due to the lack of income caps on Medicare payroll taxes (unlike Social Security taxes), those making more than $130,000 every year of their career will earn their benefits.  Again, should the rich pay into the system without receiving their due benefits?

Senator Coburn seems to think so.  He asserts that Social Security was never intended to be a universal insurance program, but “a safety net for low-income earners.”  He concludes that “returning the purpose of the program to a need-based service instead of one available universally may help keep Social Security solvent for future generations.”

There are several problems with this approach.

First, Social Security was never sold as a welfare program for low-income earners.  In all of FDR’s speeches, he referred to the system as a universal insurance program for all retirees.  In a 1936 campaign speech, FDR promised that payroll taxes would be “held by the Government solely for the benefit of the worker in his old age.”  He referred to Social Security as an insurance program numerous times throughout the speech, concluding that “in effect, we have set up a savings account for the old age of the worker.”  This description of Social Security cannot possibly be misconstrued to define a transfer program similar to Medicaid and Food Stamps.

Second, since the inception of Supplemental Security Income (SSI) in 1972, we already have a means-tested program for retirees.  That program costs us $56 billion a year and is already funded by general revenues, 36.7% of which comes from the top 1% of earners.  If we have SSI for the poor, why should we double-dip on wealth redistribution by turning Old Age and Survives benefits into a means-tested program?  Moreover, it is precisely low-income earners who are the only true beneficiaries of the current Social Security system.  According to most studies, middle and upper-income earners actually lose money off the program, when the expectation for reasonable interest returns is factored in.

Third, collecting payroll taxes from millionaires without granting commensurate benefits is ostensibly a massive tax increase.  Such a proposition would also inject more progressiveness and redistribution into a system that is already one of the most progressive in the world.  Presumably, the good senator opposes an outright increase in the top marginal income tax rates.  So why would he support this de facto increase of the payroll tax.  Or put another way, if he believes that making the rich pay more is a fair and perspicacious way to deal with the debt, why not directly raise taxes on the rich?

This brings me to the second half of the Coburn report – tax deductions for the rich:

As conservatives, we can all agree that green social engineering must be eliminated from the tax code – for everyone.  Senator Coburn has done yeoman’s work exposing the folly of ethanol and green handouts.  However, regarding the mortgage interest deduction, why should we eliminate that for the rich?  Many (but not all) conservatives argue that we should institute a low flat tax, but eliminate this deduction because it distorts the market.  Nonetheless, the revocation of this deduction should be universal, and it should not be implemented before comprehensive tax cuts are enacted.

The same thing holds true for the Rental Expenses Deduction.  That is a universal deduction for any property owner who puts money into his property.  Most of these people are already paying up to their noses in taxes.  Moreover, this deduction is pro-growth because it encourages property owners to hire many new workers.  The contractor that is now making $100,000 more as a result of the owner’s rental expensing will also pay more taxes.

What about the Gambling Losses Deduction?  This is not a handout to the rich.  One can only deduct gambling losses from gambling gains, which are completely taxable.  Anyone who is in the highest income tax bracket would pay 35% on their gambling earnings.  The Gambling Losses Deduction merely allows them to reduce their taxable gambling earnings, not their general taxable income.

If there are a few individual millionaires who pay little or no income taxes as a result of quirks in the system, then it should be dealt with in a broader reform of the tax code.  However, the overwhelming majority of millionaires pay more in taxes than any other group.  Again, in 2009, the top 1% paid 36.7% of income taxes, even though they only earned 16.9% of AGI.  Does Mr. Coburn agree with Democrats that they don’t already pay enough?

The bottom line is that our debt problem is not the result of a dearth of means-tested programs or an insufficient tax burden on the rich.  If we confiscated the entire AGI of those who earn over $1 million (roughly $730 billion), we would still fail to cover the $950 billion (and rapidly growing) price tag of the 185 means-tested programs.  At best, these “reforms” would trade small, short-term deficit reductions for long-term economic decline.  Clearly, if redistribution was the solution to the debt crisis, Europe would be in great shape.

We certainly don’t need more redistributive taxes to fund more means-tested programs.  Instead, we need a reduction in subsidization that is balanced with a reduction in taxation, regulation, litigation, along with an American energy production program, free-market healthcare reform, and private retirement accounts.  An authentic reduction in dependency, together with a transformation to a free-market society, would foster such economic growth and prosperity that we would no longer need welfare programs beyond the most basic and limited safety net.  The rest would be dealt with through the civil society.

Undoubtedly, as a good conservative, Senator Coburn agrees with the aforementioned objectives.  In fact, his previous magnum opus, Back in the Black, seeks to accomplish just that.  Unfortunately, the good senator perceives those goals as out of reach.  Consequently, he is willing to do anything that would result in deficit reduction, even if it is short-lived and exacerbates the redistributive socialism in our society.

I understand where he is coming from, but strongly urge him to consider this rule:  Don’t show your cards on willingness to raise taxes and means-test universal insurance programs until Democrats show as much alacrity to diminish the welfare state.

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