Friday, March 15, 2013

The Tax Subsidy Smell Test

Thinking about tax advantaged retirement accounts has led me to ponder what is a quick and easy way to communicate why these, and other tax subsidy programs, rub me the wrong way.

I think a simple test is to think about these as straight subsidies. What if the program simply cut you a check instead of reducing your taxable income? Both would have an equivalent impact on deficits and the debt (well, to a rounding error since the withholding would apply at a different time than the check).

With a 401k what we'd have is many poorer people receiving no check at all, middle income people receiving small checks, and very wealthy people receiving rather large checks every year. Not only that but if someone makes $30,000 a year and puts $5000 into their 401k they'd receive a check at the end of the year for $750 while someone making $500,000 a year that puts in the same $5000 (they're not very financially savvy despite their income) would receive a check for $1980 (using income tax figures only for easy math).

Is this really the best way for the US government to spend its money?

If we're not comfortable with how a tax advantage would work as a direct subsidy, perhaps we should question the existence of that tax deduction (home mortgage deduction would look just as awful, if not worse).


  1. Perhaps the inequity of tax subsidies is a feature, not a bug. That is, if a government program was an overt subsidy, the inequity would be obvious. And it wouldn't pass. But as a tax break, the inequity is far less obvious. (It may even be sufficiently un-obvious that the politicians voting for it didn't notice. But the guys who actually wrote the legislation probably did.)

    1. I agree that it is probably seen as a feature by those seeking to pass it. But it doesn't mean that we, the general public, should put up with it and not point out the deeply flawed logic behind these policies.