Personal Finance

Are you middle class enough to deserve a tax break?

Ron Lieber
Rep. Brady: Health care reform not slowing down tax reform

Something fascinating happened during the most recent rewrite of the Obamacare repair bill: Its authors tried to define who is middle class enough to be deserving of a big tax handout.

When a draft of the bill leaked late last month, it looked as though everyone who didn't get health insurance from an employer or government program would get a tax credit to help buy coverage. But the bill that Republican leadership introduced this week now limits full credits to single people with $75,000 of income and under or married folks who make $150,000 or less. The credits phase out from there at higher income levels. House Republicans referred to those potential recipients with their six figures in earnings as "middle income."

So while we await word from the Congressional Budget Office on just how much lower-income people might lose under the current version of the bill (compared with the existing Affordable Care Act) and ponder the nearly $600 billion in savings that the wealthy will reap if the proposed tax cuts stick, we should also stop and ask ourselves an inconvenient question that lingers in nearly every debate over tax breaks: Just how long do we want to keep subsidizing people whose incomes seem quite healthy?

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Whenever we've asked this question in the past, we've often used people's earnings as our baseline for capping tax benefits. There's not much consideration of region, demographics (aside from age) or net worth. That can be a problem, given how much geography, discrimination, debt and inheritance can influence our financial lives. Meanwhile, most major tax breaks come with entirely different definitions of deserving.

Even within a single category, there are variances. Take individual retirement accounts. In fact, take four of them: regular ones where you have a full-time employer, regular ones where you don't, the Roth variety and a "simplified" one called the SEP-IRA. There are different income caps for tax deductions with these, though you're generally out of luck much above $200,000 in income or so.

The cynic in me says that you probably shouldn't be developing tax proposals based on the friends you hang out with.
Mark Mazur
former Treasury and IRS official at Urban-Brookings Tax Policy Center in Washington

Now, consider another theoretical (so far) exercise: Ivankacare. At her urging, her father made a child care tax break a part of his campaign platform, proposing that individuals earning up to $250,000 and couples making up to $500,000 be able to deduct the average cost of child care in their state.

The hat tip to regional costs is a nice touch, but the income caps the Trump team still tosses out here are more than double the ones that apply to the various flavors of I.R.A.s. Also, should people pulling down half a million dollars each year get help making the babysitter bill?

"The cynic in me says that you probably shouldn't be developing tax proposals based on the friends you hang out with," said Mark Mazur, a former Treasury and Internal Revenue Service official who now runs the Urban-Brookings Tax Policy Center in Washington.

Then again, Ms. Trump and Jared Kushner lived in New York City before they moved to Washington. The cost of living is quite high in both cities, though nobody has to reside in their pricier precincts, and cue 1,000 small violins as the six-figure set laments the cost of a family-size residence therein. Undergraduates and economics professors in the Midwest have drawn ridicule in recent years for insisting that $250,000 doesn't really get you all that far.

As for our current legislative drama, it starts with a fairness problem that doesn't get enough attention: If you get health insurance from your employer, you're not paying taxes on the value of the policy. Holman W. Jenkins Jr. of The Wall Street Journal's editorial page memorably referred to this mammoth giveaway as something that "perversely treats the richest taxpayers as the neediest." Hence the original desire to give tax credits to everyone shopping for insurance on their own.

Then, however, the congressional maneuvering takes an interesting twist. If the Obamacare replacement bill had come forward (and become law) without any income caps on the health insurance tax credits, there was a good chance that employers would have stopped offering insurance to millions of employees. Not a good look. (The reasons are a bit complicated, but Christopher Jacobs of Juniper Research Group wrote a helpful explainer on it in The Federalist.)

But why the $75,000 and $150,000 benchmarks? There are two possible explanations. The first is principles: Congressional staff might have made a concerted effort to figure out at what income people might be able to afford future premiums without any help, given their other budgetary needs.

The second is practical and mathematical: Giving away tax goodies to even more affluent people would have cost enough to throw the numbers off when the Congressional Budget Office analyzes the bill in the coming days. A spokeswoman for the Ways and Means Committee said that both, in fact, were in play.

So, about those $150,000 families: Is that "middle income" label that the Republicans used truly applicable? Some experts do use income to define the middle, with the Pew Research Center putting "middle" in a range from 67 percent to 200 percent of median household income. That works out to roughly $48,000 to $145,000 for a family of four, based on numbers that the federal government published in 2015. Edward Wolff, a New York University economics professor, prefers a net worth measurement and a "middle" range up to $400,000.

Cohn: When we're done with health care reform, we'll get to taxes

Curious about where you stand? There are online calculators that will put you in your percentile based on household income. And the Henry J. Kaiser Family Foundation whipped up a tool this week to help people visualize the impact of the proposed tax credits.

Still, demographics do not capture feelings. Plenty of people with incomes above $200,000 are one missed paycheck (or a four-figure health insurance premium spike) away from real financial trouble. Sometimes they are to blame for picking an expensive community or getting into too much debt. But often they or their family members have fallen gravely ill, or an unexpected, undeserved and extended job loss has left them vulnerable even after they return to six-figure status.

Our tax breaks reflect our values, whether we acknowledge it straight up or not. So how about we simply declare what matters most and dole the breaks out accordingly?

My guess is that a majority of us would agree that health care is a bit more important than retirement savings and I.R.A.s, which in turn are more important than mortgage interest deductions for most people's long-term financial security. Encouraging homeownership, meanwhile, is probably a higher priority than the fat tax breaks that higher income people can take advantage of with 529 college savings plans (though there was a near-revolt two years ago when President Barack Obama tried to mess with that system.) The charitable deduction belongs somewhere in there, too; insert it where you will.

If we agree that health care is most essential — and that the federal government's role in it is appropriate (or at least permanent, political realities being what they are) — then those $75,000 and $150,000 numbers may actually seem a bit low.

This is not a case for helping ever more affluent people at the expense of people with much less. Instead, it's a question that is as much moral as it is fiscal: If health is our highest priority, then shouldn't we commit to paying for it by reallocating the tax breaks accordingly, so that more people get more of them when they are trying to afford insurance?

Or perhaps this must also be about tax rates, not just tax breaks. "This is why you need periodic tax reform," said Mr. Mazur of the Tax Policy Center. "Does the current system with all its nips and tucks make sense anymore?"

I think we know the answer to that question now. And if we ever finish fighting over health insurance, we'll have tax legislation to look forward to afterward.

Watch: Tax reform by September unlikely

PwC Chair: Tax reform by September unlikely