Welfare for Millionaires: Awful and Wasteful, but Not That Important

A new report indicates that very wealthy Americans dodge $30 billion per year, but eliminating those loopholes won't be easy

300 tax the rich REUTERS Shannon Stapleton.jpg

Senator Tom Coburn (R-OK) is sick of the government coddling the rich. He surely isn't alone -- thousands of Occupy Wall Street protesters across the U.S. would likely join in his rallying cry to cut subsidies that very wealthy Americans enjoy. In a new report, he outlines the subsidies that millionaires receive. Unfortunately, cutting these subsidies won't make a huge dent in the deficit, and cutting some of the biggest items could be very controversial.

How Big of a Break Are Millionaires Getting?

Coburn's report is a little confusing as presented, because he shows the subsidies and tax breaks over the span of different amounts of time depending on the item. So to simplify things, I averaged each one to show the annual subsidy or tax break that he documents. Here's the full list:

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How significant is $30 billion? It certainly sounds like a lot of money. Looking at 2009 tax returns, it would raise millionaires' effective tax rate from 29.2% to 34.0%. That's a pretty big bump.

But it wouldn't have a particularly dramatic effect on deficits. An additional $30 billion of revenue in 2009 would have reduced the deficit by just 2.1%. Clearly, the Congress is going to have to rely on a lot more than cutting subsidies and tax breaks for millionaires if it really hopes to fix its deficit problem.

Digging Into the Big Subsidies and Tax Breaks

Let's begin with the subsidies. Of the subsidies shown above, 93% come from Social Security benefits provided to millionaires. Really, the other items in that top box are virtually insignificant from a budgetary standpoint.

The first three tax breaks are much larger, however. They make up 99% of the sum of the breaks shown, making the others negligible. So let's focus on these four items, as the other nine items would only provide an additional $417 million in revenue (0.03% of the 2009 deficit).

Social Security Retirement Benefits

The idea of means testing Social Security is not a new one. From a practical standpoint, it makes sense to deny wealthier Americans their Social Security benefits. After all, they don't need them. But in principle, if these Americans dutifully paid into Social Security for decades, probably often at the maximum contribution rate, then they should be entitled to collect this money. An additional $1.5 billion in revenue attained by compromising the legitimacy of Social Security might not be sensible when that money could easily be brought in by a slightly higher tax rate on wealthy Americans.

Mortgage Interest Deduction

Arguing in favor of the mortgage interest deduction for wealthy Americans is a pretty tough thing to do. In fact, you could easily argue that it should be eliminated for all Americans. Unfortunately, Congress is having trouble even convincing itself to allow conforming limits for mortgage guarantees to fall to $625,500. So reforming the mortgage interest deduction won't be easy.

Rental Expenses Deduction

This one is tougher. If you assume that renting out property that you own is a legitimate business, then shouldn't landlords be able to deduct expenses just like other businesses do? Moreover, a clear worry here is that rents will increase if this deduction is eliminated. If the costs involved with renting out a space can't be deducted from taxes, then they will fall on the shoulders of renters instead. Considering that Americans who rent are often poorer than those who own a home, eliminating this deduction could have an undesired consequence of making it harder for relatively poorer Americans.

Gambling Losses Deducted

How can anyone justify this deduction? Its existence is bizarre. Why should gambling losses be deducted from taxes? Gambling is a leisure activity that often involves a cost. It is not a legitimate investment strategy. Since gambling involves winning and losing, the logic must go that only net income should be taxed. So we're talking about gross losses here, as net losses cannot be deducted from other income. Coburn's assertion must be to tax gross winnings instead of net winnings. The logistics here could be difficult -- after playing blackjack for four hours at a casino, how do you know what your gross losses are?*

So of those four significant items only the mortgage interest deduction and the gambling losses deduction should clearly be eliminated for millionaires -- and getting rid of the mortgage interest deduction could be politically impossible. The revenue provided by those two items combined would be $6.75 billion per year. To be sure, that additional money would be great for the federal government to have. But when it must cut debt by trillions of dollars, this is hardly a solution to the broader budget issues the U.S. faces. Tougher choices must be -- like raising taxes broadly and/or cutting entitlements aggressively.


* Update: As a commenter points out, you cannot deduct gambling losses that exceed your winnings, which is to say that you can't deduct a net loss from non-gambling income. This has been revised to indicate that.

Image Credit: REUTERS/Shannon Stapleton