Many people complain about government handouts. Many people consider government handouts to be a form of socialism. Most of these people think most handouts go to the poor. Indeed, many people are enraged that their tax dollars are funding people who do not work. This is true. Some tax dollars do support people who do not work, but many of these people are unable to work because of poor health or because they cannot earn enough to pay someone to watch their children while they work and for other reasons. But many people imagine that most of these recipients of government handouts are lazy and are unwilling to work. Indeed, political parties all over the world take advantage of this angst. In the United States, the Republican Party takes advantage of this outrage by continually trying to reduce government payments to the poor to fund big tax breaks to the wealthy. But it may surprise you that most of the government handouts – and the best government handouts — go to wealthier people, even the richest people! On the other hand, the Democratic Party wants to help most the people by reducing their taxes, helping people in need, and by increasing the minimum wage so that people can earn enough to live (otherwise, they will need government handouts to live).
Republicans constantly harp about the Democrats' attempt to redistribute the wealth from the rich to the poor. But anyone who knows how the tax system really works can easily see that the tax code redistributes the wealth from working people to the wealthy, by taxing income earned from work at a higher rate than income earned from investments or income received from inheritances, the types of income that accrues mostly to the wealthy. Although marginal tax rates have been much higher in the past, there were always plenty of tax loopholes that the wealthy exploited to reduce their effective tax rate, their actual tax rate. Nonetheless, the tax code effectively redistributes the wealth from working people to the wealthy. Indeed, it can be considered a huge handout to the wealthy.
What most people do not seem to understand is that lower tax rates or tax credits are as much of a government handout as welfare. This is easier to see with a hypothetical example:
Consider 2 groups of taxpayers, Group A and Group B, who are both taxed at 50% of their income. Now suppose that Group A convinces Congress to lower their own taxes so that they pay an effective tax rate of 25%. Since the government needs all the revenue that it has been receiving, it will need to increase Group B's taxes to compensate for the lower tax rate on Group A or increase its debt. Is this not redistributing the wealth from Group B to Group A?
Some people may argue that this is not a handout. To better see that it is, indeed, a handout, let's change the above scenario slightly. Instead of lowering the effective tax rate on Group A, Congress decides to collect its taxes at the same rate from both groups, but then just gives half of the money collected from Group A back to Group A. Note that this has the same effect as the 1st scenario for both the taxpayers and the government — Group A gets to keep the same amount of their money, and the government will have to collect the money for the handout from Group B. But in this scenario, Group A is clearly receiving a government handout! But instead of food stamps or welfare, Group A is getting the greatest benefit possible — cold, hard cash, which, in many cases of individual taxpayers using the unified tax credit, is worth millions of dollars!
Now consider a tax example based on the current tax code. In 2018, a taxpayer works to earn $11 million, while another taxpayer receives $11 million as an inheritance. The taxpayer who worked must pay about 1/3 of his income in taxes, or almost $3.7 million, while the taxpayer who received the inheritance pays 0. (Indeed, Joe Biden, who was 1 of the Democratic presidential candidates for 2020, earned slightly more than $11 million in 2017 on which he paid $3,744,640 in taxes, yielding an effective rate of about 34%.) So here is an example that conforms to the actual tax code, where the beneficiary receives the equivalent of almost $3.7 million as a handout from the government — this is to a single individual! And Republicans complain about people receiving food stamps!
During the 2012 presidential election, wasn't Mitt Romney secretly recorded as saying that 47% of Americans will vote for Barack Obama because they depend on government handouts, because they don't take responsibility for themselves? And yet, isn't forcing lower-income people to pay higher effective tax rates than wealthy people a handout to the wealthy? And wouldn't more of those lower-income people be able to take greater responsibility for themselves — to not be so "dependent on the government" — if so much of their hard-earned money were not taxed away by the government, money that has a much higher marginal utility than it does for the wealthy? Indeed, is not the amount of these handouts to the wealthy in the form of lower effective tax rates far more valuable than any handouts to welfare mothers, to Social Security recipients, or to combat veterans who risk their lives for our country? And if the poor were permitted to keep more of their money, wouldn't that money be far more valuable to them than it is to the wealthy?
One huge tax credit that benefits the wealthy is the unified tax credit, worth more than 4½ million dollars. Why, then, do Republicans still whine when families receive food stamps or when people receive the premium tax credit so they can afford health insurance? The very generous unified tax credit has not only recently been doubled, by the Tax Cuts and Jobs Act, passed at the end of 2017 by the Republicans, but, unlike the Child Tax Credit, is adjusted annually for inflation.
And what about this big government handout? The home sale exclusion allows homeowners to receive a capital gain of $250,000, or $500,000, if married filing jointly, completely tax-free? Is this not a HUGE government handout? Think about it: $250,000 taxed at 40% would yield $100,000 of tax revenue, and for couples who file jointly, the revenue would be $200,000. So this is a government handout of $100,000 or $200,000 to people who are fairly well-off and the only thing that they really have to do is live in their house for 2 years, then sell it. They can claim this exclusion every 2 years. Furthermore, wealthier taxpayers who own more expensive homes, in the multimillion-dollar range, could easily claim most or all of the exclusion within a short time. Since the disposable income of the average American household is less than $50,000 annually, most taxpayers must work longer than 5 years — at a job that they probably do not like! — to receive the disposable income available to these homeowners after living in their residence — and doing nothing more than living in their residence! — for a period of 2 years. In the case of a couple married filing jointly, the average family must work for more than 10 years to receive the same disposable income! And wealthy people with expensive homes can do this every 2 years!
A Tale of 2 Government Handouts
Now let's do a detailed comparison between a handout that goes to many poor people and a handout that benefits mostly the wealthy. Some people consider the child tax credit to be a government handout, as evinced by the fact that the Additional Child Tax Credit has an explicit work requirement. I do not know if the Republicans have a unified view of the child tax credit, but since they oppose abortion, they should, at least, help people to afford those children. (The Republicans have also greatly increased the income limits for claiming the child tax credit, so that a couple filing jointly can earn almost $400,000 and still claim the credit, which means that most members of Congress will also be able to claim the credit. I guess we can call this a government handout to members of Congress!)
So let's compare the child tax credit with the very generous unified tax credit:
The child tax credit:
- is not adjusted for inflation;
- has an income limit;
- has a work requirement; and
- the maximum credit is $2000 per child, although the full credit may only be claimed if there are sufficient earnings from work.
By contrast, the unified tax credit:
- is adjusted for inflation;
- has no income limit;
- has no work requirement; and
- the maximum credit in 2019 was $4,505,800, which can be used to offset $11.4 million of gratuitous transfers from each individual, so parents can give $22.8 million of their wealth to their children tax-free, and that's not even considering the many tax loopholes that allow even more wealth to be transferred tax-free.
The Biggest Government Handout Ever!
But the biggest government handout ever goes, not to the poor, but to the wealthy. That is the unified tax credit, which in 2019, was — exactly — $4,505,800, allowing a wealthy person to transfer $11,400,000 of their wealth to others, completely tax-free. And just to remind you that this is, indeed, a government handout, this credit is completely equivalent to the scenario where the government collects the $4,505,800 in taxes and just gives it back to the wealthy. It also means that when the government does not collect this money, then it must get the money from somewhere else, which is why taxes on work are higher than on any other form of income.
But let's consider just how generous this credit really is. If the government handed out this money over a 100-year period, that would equal $45,058 annually, more than what many people make working. If this money were handed out over a 50-year period, which is longer than most people's working lives, it would equal $90,116 annually, which is much more than what most people earn. Over a 40-year period, which is the typical working life for a college graduate, the annual amount is $112,645!
Or look at it this way. Democrats want to provide free college education, free medical care, and increase Social Security payments, especially to the poor. Many people think that is too generous! Let's look at the math to see exactly how generous it is, and if it even remotely compares to the generosity of the unified tax credit. According to various news sources, the most expensive schools in the country, such as Columbia University or Dartmouth, cost about $60,000 annually, for a total cost of $240,000 for a four-year college degree. And suppose you incurred $600,000 of medical care over your lifetime. Several estimates from several sources indicate that there is a 5% chance that the healthcare cost for a couple may exceed $570,000, so $600,000 is more than what most people will incur in medical costs over their lifetime. And suppose that you collect the maximum monthly Social Security income of $3770, starting at age 70 until you turn 100 years old. That yields $3770 ×12×30 = $1,357,200.
- Now, add it all up: $1,357,200 + 240,000 + $600,000 = $2,197,200.
- Compare it to the unified tax credit: $4,505,800 - $2,197,200 = $2,308,600.
Note, too, that Social Security is financed by employment taxes, which mostly falls on the worker (for an explanation of why this is, read my article on tax incidence), and most people incur medical costs when they are eligible for Medicare, which is also paid for by taxes on work. So, not only is this total benefit $2,308,600 less than the unified tax credit, but the unified tax credit was given as a free gift from the Republican Party. Neither the taxpayer nor the beneficiaries have ever paid a penny toward this very generous credit! In fact, this credit is so generous that it exceeds what most people will ever receive in wages, fringe benefits, food stamps, welfare, Social Security, Medicare, plus any other government benefit over their entire lives!
And the unified tax credit is cold hard cash. This is the best type of handout to have! The wealthy can spend their $4.5 million as they please: they don't have to use it to pay for food, or for education or to pay for medical care or to even pay for a farm or business. And there is certainly no work requirement, as there is for the child tax credit. It is a free gift from the Republican Party.
Work Is the Most Heavily Taxed Form of Income
The tax code provides many provisions benefiting the wealthy. I have only scratched the surface in this article. But I will point out another simple example. A married couple filing jointly could earn more than $100,000 in qualified dividends without paying a single penny in federal taxes, including employment taxes. And to earn at least $100,000 in qualified dividends, that couple would need to own about $5 million of stocks. People who work, by contrast, would probably have to pay at least $30,000 in taxes, including employment taxes on earnings of about $100,000. Not only would they pay much more in federal taxes, but they would probably pay more state and local taxes, since most states and localities also tax work more than other forms of income. So we can conclude that the wealthy couple earning $100,000 of qualified dividends is receiving a government handout of at least $30,000 every single year! And what problem was the government trying to solve when they decided to give this very generous tax break to people who are fairly well off.
So it is easy to see that a wealthy individual receives far more — and far better — government handouts than any poor person, so if government handouts are a form of socialism, then it is the wealthy who benefit the most from socialism. The irony of all this is that Republicans continually argue that they want a tax system that promotes work. Here is an idea. To promote work, why not start by taxing work the least instead of taxing it the most, then poor people will be able to keep more of their money, allowing them to pay their bills, thus reducing their need for government handouts. They would even work more, thus increasing the wealth of the economy. And if the Republicans were willing to do that, then more poor people might even start voting for them. That would be a good tax policy.
If a poll were taken of who would support tax fairness, the majority would probably support tax fairness. At least that’s what they would tell the pollster. But the fact is, many people actually support tax unfairness if the unfairness benefits them. It is human nature.
Many people try to rationalize their tax benefits. For instance, many people justify not taxing inheritance because it would be double taxation. Although the double taxation argument is dubious, what about the argument that poor people need the money to live. Is that not a much stronger argument for giving more tax benefits to the poor? This is especially true considering that many people, especially Republicans, oppose abortion. People often get an abortion because they cannot afford to have children. If they can keep more of their money, then they can more easily afford to have children. When the Republicans oppose raising the minimum wage and other benefits for the poor, then they make it much more difficult for those people to afford children, which is a major reason why many children live in poverty.
So when a politician, Democrat or Republican, complains about the cost of food stamps or welfare, then ask yourself, where is their concern about the cost of the unified tax credit or the home sale exclusion? Many people want these benefits, of course, but then they should never complain about the cost of food stamps or welfare.
Tax benefits for the well-off have real costs. Even if you support the unified tax credit or the home sale exclusion or the other tax benefits for the wealthy, or if you believe in the specious double taxation argument, it cannot be denied that these tax benefits have real costs, costs that easily exceed all of the government handouts to the poor.