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<text> <title> (Feb. 22, 1993) Welfare For The Well-Off </title> <history> TIME--The Weekly Newsmagazine--1993 Feb. 22, 1993 Uncle Bill Wants You </history> <article> <source>Time Magazine</source> <hdr> COVER STORIES, Page 36 Welfare For The Well-Off </hdr> <body> America's comfortable classes may think Clinton is putting the squeeze on them, but he's barely touching billions of dollars in subsidies and tax breaks By DAN GOODGAME/WASHINGTON--With reporting by Jon D. Hull/Chicago Most of the patrons come to Chicago's Metropolitan Club for the prime beef and the 67th-floor panorama of the city by the lake. But the exclusive, oak-paneled club also offers an excellent view of America's welfare culture. That's what Mary Grigsby learned as she waited on tables for the corporate executives, lawyers and politicians who frequent the club. She watched them carefully keep track of their receipts so they could write off their cocktails and meals as a "business expense," subsidized by average taxpayers who enjoy no such deduction. Grigsby, 40, a single mother who lost her job after an injury and supports herself and four children on welfare, recalls that many of her customers "think you're scum if you're on food stamps, but they're the first to cut corners. I'd see them writing off `business' dinners with their girlfriends or wives. I finally realized that they're on welfare just like me, only they don't call it that." President Clinton may champion welfare reform for the poor, but he plans to cut only a fraction of the far more expensive federal handouts enjoyed by well-off Americans. As Clinton drafts a plan to slice $145 billion from the annual deficit by the end of his term, he is considering--and mostly rejecting--suggestions from his economic advisers and independent budget analysts that the U.S. could save more than $60 billion a year by digging deeper into the federal-spending programs and tax breaks that largely benefit the wealthiest 10% of Americans, which means households earning more than $75,000 a year. Even the middle class enjoys an assortment of tax breaks on such items as vacation homes, health care and retirement benefits. "You can't balance the budget just by cutting benefits to the wealthy, but you can get a lot further than they would like you to believe," says a White House official. Rather than a sharp rise in the overall tax rates, which would spur the wealthy to seek tax shelters abroad, a cut in the spending programs and tax breaks enjoyed by upper-income Americans would better serve economic efficiency and incentives, argues a Clinton aide. "Rich people don't care about higher top rates because their lawyers and accountants can always find ways around them," the official says. "What they care about is their deductions and entitlements." In many ways the current system allows the wealthy to claim more than their fair share of benefits. Robert Shapiro, a budget expert at the Progressive Policy Institute and a campaign adviser to Clinton, points out that the most affluent 4% of American families, who earn more than $100,000 a year, collect more than 8% of all federal subsidies for retirement--equal to about $30 billion a year. According to Shapiro, Clinton could address this imbalance by stating that "those who can take care of their own health care and retirement are obliged not to claim a disproportionate share of federal benefits." Clinton's top economic advisers emphasize that he will propose some "means testing" of tax breaks and spending programs that benefit the wealthy. But in general, like other politicians in both parties, Clinton is finding it easier to pitch for reforms in the main welfare program for the poor (Aid to Families with Dependent Children, or AFDC, budgeted at $16 billion a year) than to dismantle the subsidies now taken for granted by campaign contributors and other members of the comfortable classes. Here is where the money is, some of which Clinton is pursuing, but much of which is nearly untouched: SOCIAL SECURITY SUBSIDIES Many retirees believe they are only getting back what they've paid in Social Security taxes over their working lives. The truth is that because of the rapid rise in benefits in recent decades, the average person retiring today at 65 gets back all the money he paid into Social Security, with interest, by age 71. "After that," says Paul Hewitt, a budget expert at the National Taxpayers Union, "you're on welfare." And the average retiree lives until 81. These heavily subsidized benefits are financed by regressive Social Security taxes--payroll deductions apply only to the first $57,600 of income this year--that have more than doubled over the past decade and that fall most heavily on younger and lower-paid workers who will not get out of the system what they are paying in. The subsidizing of retirement benefits can be justified for the elderly poor, but not so easily for seniors who can afford to finance their own retirement. At present, couples who earn more than $32,000 in retirement income (and who typically own their homes and other assets worth several hundred thousand dollars) are taxed on 50% of their Social Security benefits. Clinton is leaning toward a proposal to tax those couples on 85% of their benefits, which would save $5.8 billion a year over the next five years, and would affect only the wealthiest 25% of retirees. Example: a couple with $61,000 in retirement income, including $10,000 in Social Security benefits, would see their taxes rise by about $980 a year. Clinton could go further by removing the cap on income subject to Social Security taxes, and using the proceeds to cut those taxes on middle- and lower-income workers. HEALTH-CARE SUBSIDIES Like Social Security, the Medicare program pays benefits (for hospitalization and other medical treatment) to all retirees, regardless of their income. As with Social Security, retirees collect far more from Medicare than they paid in taxes to the program. Taxing even half this subsidy for the wealthiest one-fourth of retirees would raise $5.4 billion a year. An additional premium charged to couples who earn $125,000 a year, for doctors' services received through Medicare, would net $1.9 billion more a year. When an American receives health insurance through his employer, that benefit is not taxed as income. This exemption costs the Treasury $65 billion a year and subsidizes corporate executives and janitors alike. Clinton is considering, but is unlikely to announce till later, several proposals to tax employer-provided health insurance above the cost of basic coverage. One option would tax as income all employer-provided health insurance that costs more than $335 a month for family coverage (top-rate premiums often cost companies as much as $1,000 a month) and would raise $18.6 billion a year. HOUSING SUBSIDIES Less than 20% of the poor (below the poverty line of $13,924 for a family of four) receive federal housing aid, while a large majority of those who make more than $100,000 do so, mainly through tax deductions for payment of mortgage interest and local property taxes. During the 1980s, federal housing aid for the poor was cut 73%, to $9 billion, while the cost of deductions for mortgage interest and property taxes more than doubled, to $47 billion. This deduction is targeted to relatively prosperous taxpayers. Consider: only half of American families own their homes, and only half of those take the mortgage-interest deduction. (Most of the others have paid off their mortgages, or earn too little to itemize their taxes.) As a result, nearly a third of the tax subsidies for home ownership went to the 4% of taxpayers who earn more than $100,000 a year. Clinton is considering several options for curtailing this tax break. One proposal would limit the mortgage-interest deduction to $20,000 a year for couples filing jointly, and would save the Treasury $4.7 billion a year. A tougher option would allow upper-income taxpayers in the 28% and 31% brackets only about half the deduction they now enjoy. This proposal would net $15 billion a year and would hit only the top 13% of taxpayers. Real estate dealers, housing contractors and mortgage lenders argue that the mortgage-interest deduction encourages home ownership and stable neighborhoods. But such countries as Australia and Canada have about the same home-ownership rate as the U.S., without any mortgage deduction. Economists also contend that the mortgage-interest subsidy encourages Americans to buy more costly homes than they would otherwise. That tends to reduce their savings and financial investment, and is one reason that Americans lead the world in 3,000-sq.-ft. homes, while the Japanese and Germans lead in manufacturing. BUSINESS MEALS AND ENTERTAINMENT These expenses are 80% deductible to businesses. Reducing the deduction to 50%, which Clinton is considering, would net $3.1 billion a year. Eliminating the deduction would produce several billion dollars more. INHERITANCE Current law provides a tax break for wealthy inheritors of stocks, bonds, real estate and other property. When a person dies and passes on those assets, there is no tax on their appreciation or capital gains. Ending this exemption could net $3.4 billion a year. AGRICULTURE Farm-aid programs initiated in the Great Depression and intended to help small family farmers through hard times now pay nearly half their benefits to farmers who earn more than $100,000 a year and who own assets worth more than $1 million. During the 1980s, farm subsidies swelled from $4 billion to $21 billion, and the wealthiest 15% of farmers collect two-thirds of that money. Meanwhile, scarce water from federal dams and irrigation projects, often worth $100 an acre-foot at market prices, is sold to farmers for $7 to $25 an acre-foot. Such subsidies often encourage farmers to use marginal, desert land to grow crops like cotton, which already are in surplus. The government provides similar federal tax breaks for grazing leases. Adopting the modest reforms of agricultural subsidies suggested by experts at the Congressional Budget Office would save $6 billion a year. OIL, GAS AND MINING Special tax breaks for depletion of mineral reserves and for expensing of drilling and mining equipment could be repealed to save $1.7 billion a year. UTILITIES Founded in the 1930s, the Rural Electrification Administration may have outlived its usefulness in an age when 99% of rural America has electricity. The program now acts mainly as a subsidy for utility companies. Privatizing it would save $2 billion a year. Privatizing the Tennessee Valley Authority would save another $2 billion. Charging market prices for electricity from federal dams would net $1.6 billion. Another way to trim subsidies for the well-to-do would be an across-the-board reduction that might be called the 15% solution. Under current law, any amount of itemized deductions is worth twice as much to the highest taxpayer as to the lowest taxpayer. For a couple earning $200,000 and paying taxes at the top marginal rate of 31%, a deduction for $10,000 in mortgage-interest payments reduces their taxes by $3,100. But a couple earning $30,000 and paying the lowest marginal tax rate of 15% could spend the same $10,000 for mortgage interest but would save only $1,500 on their taxes. This inequity could be redressed, in essence, by cutting in half the benefit of itemized deductions for upper-income taxpayers. Such a move would save the Treasury a whopping $61 billion a year, enough to meet Clinton's goal of cutting the deficit by $145 billion over four years, with money left over to finance most of his program of new "investment" in public works, job training and education. Because only 1 in 4 taxpayers claims itemized deductions, and because half of those are in the lowest tax bracket, this proposed limit on deductions would hit only the highest-paid 13% of taxpayers. That group, however, wields clout far out of proportion to its numbers. Thus the 15% solution is fiercely opposed by a wide range of lawmakers such as Senate Finance Committee chairman Pat Moynihan. Not only would this drastically discourage charitable giving by anyone above the lowest tax brackets--thus hurting churches, schools, symphonies and all other charities--it would mean in effect that wealthier people would have to pay tax on more than half the value of their legitimate deductions. Though reducing subsidies for the well-off would spare the majority of Americans, a Clinton adviser surmises that "the problem is [the cutbacks] hit almost every member of the political class: in Congress, the Cabinet, the White House staff, the national news media, the business managers and professionals, the campaign contributors." Clinton, however, may have no choice but to further squeeze the well-off if he can't raise the money he needs from all his countrymen. </body> </article> </text>