Senate Tax Reform Bill to Eliminate Bike Commuter Benefit

[cvcalhoun]

“Social engineering” is pretty much the major function of government. For example, in their natural state, humans murder, rape, steal, etc. We do our best to engage in social engineering to prevent this sort of thing.

And we can’t avoid social engineering in the tax system. Take the taxes on married couples, for example. We’ve got two alternate principles at play here. The first is that single people should be taxed the same as married people. The second is that if a couple has, say, $100,000 in income, they should be taxed the same regardless of whether one of them has $100,000 in income, or each of them has $50,000 in income. Those two goals are incompatible. With respect to single people, we tax each on their own income, so two people with $50,000 in income pay less total than one with $100,000 and one with none.

In that area, what we’ve ended up with is a kludge. Married couples are taxed the same on their joint income if each has $50,000 or if just one has $100,000. But the rate of tax is higher on a married couple with $50,000 each in income than if they were two single people with $50,000 each in income.

This is, however, social engineering. There are expenses associated with working (all the time, and particularly if there are children), so it is more economic if one earns $100,000 than if each earns $50,000. So the tax system encourages a model in which one earns $100,000 and the other earns nothing. And frankly, it’s a terrible model. It means that if they get a divorce, one of them has been out of the workforce, and is more likely to need social services than if they had both continued their careers. And given that the one who has been out of the workforce probably gets custody of the children, it contributes to child poverty.

Similarly, let’s look at the deductibility of interest. On the one hand, there is the principle of taxing people on net income. So, for example, if you take out a loan with an interest rate of 4%, and you are able to invest that amount to earn 6%, you should be taxed only on the net 2% net that you earn. On the other hand, there is the principle of fairness. Do we really want a system in which people who are rich enough to have investments get to deduct interest, while those who are struggling to get by and have no investments don’t?

So the question isn’t whether the government should be engaged in social engineering, or whether the tax system should be part of that social engineering. It’s really a question of effectiveness.

And the effectiveness of using the tax system for social engineering varies. The earned income credit, for example, is an example of efficient use of the tax system. If you’re trying to provide a subsidy to the working poor, it’s more efficient to do so via a tax credit than to have them standing in line at the welfare office.

For many other benefits, the tax system as currently structured is not terribly efficient. Let’s take the bicycle benefit as an example. Bicycling is already less expensive than driving, so people who would be motivated to bicycle by economics don’t need a tax benefit. So the vast majority of the benefit goes to those who would be bicycling anyway. And because it’s not a reimbursable credit, but an exclusion from income, its benefits go only to those with incomes high enough to pay tax, and the benefit is highest for those in the highest tax brackets. That’s a fairly inefficient use of resources.

Conversely, the parking benefit is useful as a matter of social engineering. In the absence of a parking benefit, it is more costly for employees to work in the city, where they have to pay for parking, than in the suburbs, where they get free parking. This means that employers are motivated to move to the suburbs, or to set up offices in the suburbs in the first place–which in turn tends to contribute to poverty in the inner cities. The parking benefit eliminates at least some of the disparity.

So, I would like to see deductions intended for social engineering purposes looked at more carefully, to determine the extent to which they serve their purpose, as opposed to the extent to which they just provide a benefit skewed toward those with higher incomes without actually serving their purpose.

However, that’s not what this tax bill does. Instead, it eliminates deductions willy nilly in order to lower taxes on the rich. And in doing so, it not only fails as social engineering, it fails in accurately measuring income.

Take, for example, the current deduction for medical expenses above a certain amount. Even with a semi-private room, the average nursing home cost in 2012 was $81,000 a year. I think we can all agree that someone who has $80,000 in income and lives independently is financially better off than someone who has $80,000 in income and has to dip into savings even to manage living costs, let alone any incidental expenses. Yet the current bill would tax the two people exactly the same. So leaving aside any social engineering aspects, eliminating the deduction for medical expenses fails the basic tax principle of taxing people based on their actual economic situations.

Or take the provision in the current legislation to tax people on their college financial aid, even to the extent that financial aid represents merely a discount on tuition, not money for living expenses. If I go into a store and discover there is a sale on bread, I don’t get taxed on the difference between the sale price and the regular price. Yet with respect to tuition, taxing the discount is precisely what is proposed. So this fails not only as social engineering (making it impossible in many instances for people to improve their economic situation by going to college), but also as an appropriate method of measuring income.

But of course, the major purpose of eliminating virtually all deductions–as opposed to eliminating only those that neither result in more accurate reflection of income nor fulfill their social purpose–is to lower taxes, primarily on the rich. And as DismalScientist admits, the method chosen (favoring capital over labor in the tax system) is itself an aspect of social engineering.

Finally, the tax bill reduces taxes for most people, although more for the rich than for the poor. And that is the most harmful aspect of it. It means that the government has less money with which to alleviate the financial situation of the poor, via things like food stamps, Medicaid, etc. And at the same time, it means that there is less money to help the poor get out of their financial troubles through things like education. When income disparity has already increased exponentially over time, we really don’t want to foster a situation in which the rich get richer and the poor get poorer. That’s not good for the poor, obviously. It’s also less obviously not good for the rich. Sooner or later, saying “let them eat cake” leads to social upheaval. And even before that, lack of education means that employers have more trouble getting an educated workforce. Lack of medical care means that you end up with more people whose potential contributions are limited by disability. Plus, diseases don’t discriminate based on wealth. If the poor don’t get treated for communicable diseases, the rich are more likely to catch those diseases.

So, as I stated before, I’m not particularly troubled by the loss of the bike benefit. But I am profoundly troubled by this tax bill. And while the two versions differ enough so we don’t know precisely what will be in the final one, the general focus is obvious–and negative. And if we wait until the two bills have been reconciled, it will be too late to stop the bill as a whole.

[lordofthemark]

@DismalScientist 167999 wrote:

Such as ( other than changing the relative rates between capital and labor)?

In layman’s terms, the goal is to reduce the corporate tax rate (I don’t think this is the place for a debate on the incidence of the corp tax rate, of the impact of a large scale capital influx on the trade deficit, etc) and to eliminate the estate tax. In order to do that without a mind numbingly huge increase in the budget deficit, and just a very very large increase in the budget deficit, they scoured the code for everything they could find to add revenue. I don’t think they were particularly concerned whether what they found was about “social engineering” or was a “legitimate expense that in fact detracts from ability to pay”.

As for parking, I am curious how they implement it. My understanding is that the origin of the parking benefit is that in low density places, where the market price of parking is nominal, the expense of estimating/documenting its value means an administrative burden on employers that dwarfs the revenue. Now if you are going to tax free parking, you either need to A. Tax only in places (like downtown DC) where the garage is otherwise a public garage, and the benefit is cash or B. Waive need to estimate where the market value is small, and minimize documentation – which effectively means that parking benefits in places like Tysons (where free parking is of more than nominal value, but still fairly small) will effectively still be tax free or C. Make every damned employer with an employee only parking lot document that its of no real economic value

A or B will definitely favor suburban employers over employers in central city locations – C will add a significant administrative burden on employers in large parts of the country.

That is why, though a strong advocate for urbanism, I have never thought that abolishing the tax treatment of the parking benefit was the way to go – but rather to offset it with transit and biking benefits. So even aside from my issues with how the revenue is being used, I am not jumping for joy at this proposed change.

Plus I can easily see a scenario like that envisioned by MStone occurring.

[Judd]

@cvcalhoun 168020 wrote:

“Social engineering” is pretty much the major function of government. For example, in their natural state, humans murder, rape, steal, etc.

Very Hobbesian.

[cvcalhoun]

@Judd 168026 wrote:

Very Hobbesian.

Alas, just realistic.

[lordofthemark]

@Judd 168026 wrote:

Very Hobbesian.

Next Bicycle Fun Ride: Nasty, brutish, and short.

[Erin Potter]

@chris_s 167979 wrote:

I believe you’re thinking of the House Bill. My understanding is the House version kills them all, the Senate version ONLY kills the bike benefit.

That’s my understanding, too. Senate bill keeps the $255 commute benefit for parking cars.

[Author]

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