Public policy analysis for the elderly concerns itself almost exclusively with direct expenditure programs for the elderly. It seldom examines tax relief measures for the elderly. This article examines federal tax expenditures or subsidies directed toward enhancing the retirement income of the elderly. Such expenditures annually target tens of billions of dollars in benefits to the wealthiest segment of elderly population. The article examines the equity issues posed by these findings and recommends that these tax expenditures be examined on a case-to-case basis with direct expenditures for the elderly.
Tax Expenditures for the Elderly
Gary M. Nelson, DSW1
Public policy analysis for the elderly has concerned itself almost exclusively with direct expenditure programs such as Social Security, Medicare, and the Older Americans Act. It seldom examines specific taxes, tax preferences, or tax relief programs directed to the elderly in relation to whether these programs are either equitable or adequate for the job they were designed to perform. This article looks at federal tax expenditures for the elderly and examines their impact on the welfare of older people. Tax expenditures are public policy interventions, much like direct expenditure programs, which are designed to promote the welfare of specific segments of the population. Tax expenditures are simply another way of spending federal dollars. As such they are subject to the same questions which are often asked of direct expenditure programs concerning the equity, efficiency, and adequacy with which they serve the public interest. Our discussion of tax expenditures will focus primarily on the issue of equity in the distribution of these benefits. This article, in examining some of the policy implications of tax expenditures, organizes its presentation around four points. The four points addressed are as follows: 1) the definition and the overall context of federal tax expenditures, 2) tax expenditures and their place in public policy for the elderly, 3) a comparison between direct and tax expenditure programs for the elderly, and 4) a discussion of the implications of tax expenditures for public policy and the elderly.
Definition of Tax Expenditures
The Congressional Budget Act of 1974 implicitly recognizes that federal spending takes two distinct forms: 1) tax spending and 2) direct spending. The term tax expenditure is used to describe tax spending. The Internal Revenue Service administers and the tax writing committees of Congress keep track of tax expenditures. Tax expenditures are those special provisions of the federal income tax system which are designed to achieve specific economic and social objectives. Like direct ex-
'Assistant Professor, School of Social Work, University of North Carolina at Chapel Hill, 223 E. Franklin St., Chapel Hill, NC 27514.
penditures, tax expenditures are used to channel resources from one sector of the economy to another, to provide relief for one group or another in society. They seek to induce certain behaviors or activities on the part of individuals or groups which will result in promoting the welfare of certain segments of society or of society as a whole. There is often some uncertainty about whether a particular tax provision should be identified as a tax expenditure. The Congressional Budget Office uses the following definition for categorizing what constitutes a tax expenditure. "The general rule is that provisions that are part of the normal structure of the income tax — general rate schedules and exemption levels, deductions from the cost of earning taxable income, and the like — are not tax expenditures; only special provisions that have some purpose beyond simply defining taxable net income fall into this category" (CBO, 1981, p. xi). For instance, the additional exemption for the blind serves to channel more income relief to the blind. The additional exemption for the blind has nothing to do with the simple task of defining taxable income; it is explicitly used to promote the social welfare of blind individuals. What are the major types of tax expenditures? Tax expenditures may take any of the following forms: "(1) exclusions, exemptions, and deductions, which reduce taxable income; (2) preferential tax rates, which reduce taxes by applying lower rates to part or all of a taxpayer's income; (3) credits, which are subtracted from taxes ordinarily computed; and (4) deferrals of tax, which result from delayed recognition of income or from allowing in the current year deductions that are properly attributable to a future year" (Committee on the Budget, 1982, p. 3). For our purposes, the most frequently used types of tax expenditures to benefit the elderly are exemptions, exclusions, and credits. The amount of tax subsidy or relief per dollar of each exemption and exclusion increases with the taxpayer's marginal tax rate. For instance, the extra exemption allotted to a person 65 who is in the 50% tax bracket saves that individual $50 on every $100 of exempted taxable income. Accordingly, the extra exemption is worth twice as much to an individual in the 50% bracket as to one in the 25% bracket. A tax credit, in contrast, is subtracted from the
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individual's tax liability. The amount does not depend on the marginal tax rate. The marginal tax refers to the individual's tax bracket. The measurement of tax expenditures presents some problems. Tax expenditures are "estimated" revenue, losses that occur from the provisions in the tax code that give special tax treatment to certain taxpayers. In this manner tax expenditure revenue losses are similar to revenue losses that result from direct expenditure programs. Estimates of tax expenditures are based on samples of tax returns from previous years and other economic and demographic data. Generally the assumption is that tax expenditures can be estimated by comparing revenue raised under the current law" with revenue that would have been raised if the special tax provision had never existed. For instance, for special exclusions and deductions, the tax expenditure is calculated by adding the amount excluded or deducted from taxable income back into the taxpayer's income and then computing a new tax liability on that income; the tax expenditure is equal to the difference between the hypothetical tax liability so computed and the liability incurred under the current law (CBO, 1981). The exclusion of Social Security from taxation is one such example. The tax expenditure would be the amount of revenue gained if Social Security were added back as taxable income and taxed. A tax expenditure in the form of a credit, such as those for the elderly and child day care, is equal to the amount of credits claimed by the taxpayers against taxes paid by those individuals.
Overall Tax Expenditures
federal government in the effort to induce charitable contributions on the part of individuals and corporations. In order to arrive at an overall figure for tax expenditures, these expenditures are summed for all the functions and sub-items. In fiscal year 1982, the tax expenditure budget amounted to $253.5 billion. Of this amount $55.1 billion in subsidies or tax expenditures were made to corporations and $198.4 billion were made to individuals. Some of the largest and most well known tax expenditures for individuals in 1982 included deductions of mortgage interest on owner-occupied homes ($23 billion), exclusions for employer plans of pension contributions and earnings ($25.8 billion), and exclusions for employer contributions for medical insurance premiums and medical care ($15.3 billion). These tax expenditures enabled many individuals in society to obtain housing, private pensions in retirement, and medical care.
Tax Expenditures for the Elderly
The year 1967 was the first year for which a tax expenditure budget was compiled by the federal government. In 1967 the number of tax expenditure items in the budget was 50. By 1982 the number of tax expenditure items had grown from 50 to 104, and the revenue loss estimates had increased from $36.6 billion in 1967 to $253.5 billion in 1982 (CBO, 1981; Joint Committee on Taxation, 1982). Overall tax expenditures have grown from 4.4% of the gross national product and 20.5% of the federal budget in 1967 to 8.0% of the GNP and 34.6% of the federal budget in 1981 (Rivlin, 1982). Tax spending has increased at a faster rate than direct spending over the last ten years; direct spending has increased from $232 billion in 1972 to $709 billion in 1982, an increase of 206%, whereas tax expenditures during that same period increased 345% (Kennedy, 1982). The tax expenditure budget is kept by both function and items within a functional area. Tax expenditures are also kept according to whether or not they benefit corporations or individuals. For example under the functional category heading of Training, Employment, and Social Services, one item concerns those tax expenditures made to induce charitable contributions on the part of both individuals and corporations. In 1982 the estimated tax expenditure or subsidy given to induce corporations to make charitable contributions amounted to $690 million. The estimated 1982 tax expenditure for individuals making charitable contributions was approximately $8.5 billion (Joint Committee on Taxation, 1982). These expenditures represent revenues lost to the
In 1982 the tax expenditure budget for individuals amounted to an estimated $198.4 billion. A majority of these expenditures are by functional area, such as deductions for mortgage insurance. A smaller, yet very significant, portion is targeted to specific populations, such as tax exclusions for a number of veteran benefits and services, credit for child and dependent care, and tax expenditures for the elderly. By far the most heavily targeted individual tax expenditure population is the elderly. Some 22% of all individual tax expenditures in 1982, $43,665 billion, were designed specifically to benefit the elderly (Table 1). For purposes of our discussion and analysis, tax expenditures benefiting the elderly are categorized as benefits for individuals who are currently elderly and tax subsidies for private pensions. The distinction between benefits for individuals who are clearly currently elderly and tax subsidies for private pensions is important. Although both categories of expenditures are designed to benefit individuals in old age, subsidies or tax expenditures made in support of private pension plans benefit both current workers saving for old age and elderly individuals who are retired and receiving private pensions. Tax expenditures for current elderly include the following: a) exclusion of Social Security benefits for retired workers and their survivors and dependents, b) exclusion of railroad retirement system benefits, c) exclusion of veteran's pensions, d) the additional exemption for the elderly, e) the tax credit for the elderly, and f) the exclusion of capital gains on home sales for the elderly. Social Security disability benefits are not included as they are not explicitly for the elderly. The tax expenditure for disability benefits in 1982 was $915 million. Tax expenditures for the current elderly have risen from $2.3 billion in 1967 to $15.36 billion in 1982, an increase of 568% in 15 years. In fact, with the exception of the exclusion of Social Security from taxes, the other five tax expenditure items for the present elderly did not come into existence until 1974. Tax expenditures designed to benefit the elderly are also made in support of private pension plans. These tax
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Table 1. Estimated Tax Expenditures Directly Affecting the Elderly in Fiscal Years 1967,1974 and 1982 (in Millions of Dollars) Function and Item Fiscal Year Commerce and housing credit Mortgage credit and thrift insurance —Exclusion of capital gainson home sales for pensions age 55 and over Income security General retirement and disability insurance —Exclusion of Social Security OASI benefits for retired workers —Exclusion of Social Security benefits for dependents and survivors —Exclusion of railroad retirement system benefits —Net exclusion of pension contributions and earnings Employer plans Plans for self-employed 1967 Individuals 1974 1982
Who Benefits from Tax Expenditures?
—
10
510
2,300
2,530
9,980
— —
410 160
1,915 380
3,000
4,790
25,765
& others
—Additional exemption for the elderly —Tax credit for the elderly Veterans' benefits and services Income security for veterans —Exclusion of veteran's pensions Totals
60
— —
230
1,150 100
2,560
2,335 135
Tax expenditures imply that special relief is to be given to certain individuals and, in this regard, are analogous to direct government expenditures. The conceptual support behind the tax expenditure and direct expenditure analogy is twofold. First, it is assumed that without the special revision an additional tax payment would have been made to the government. Second, the presence of the provision results in a payment to the individual for whom the expenditure was designed (Federal Council on Aging, 1975). A third point might be added in support of the direct government expenditure analogy, namely that, with a tax expenditure for one segment of society, one foregoes alternative uses for that revenue. In its study The Impact of the Tax Structure on the Elderly, the Federal Council on Aging made the following statement concerning the intent of these tax preferences: "Presumably, the major intent in granting these tax preferences was to alter the income distribution between the aged in a manner favorable to lowerincome aged" (Federal Council on Aging, 1975, p. 47). In fact, as that study indicated and this article finds, although tax expenditures alter income distribution between the elderly and the non-elderly, tax expenditures for the elderly are heavily weighted toward benefiting a small high-income elite of elderly individuals and not elderly individuals who are in "need." Current elderly. — In the category of tax expenditures for individuals who are clearly currently elderly, the exclusion of Social Security income from taxation for retired workers and their survivors and dependents is the largest item, amounting to $11,895 billion in 1982. In a previous analysis of the distribution of 1974 fiscal year tax expenditure benefits for the exclusion of Social Security income by income class, it was found that 52% of the subsidy went to elderly individuals with annual incomes of less than $7,000 and 17% to individuals with incomes greater than $15,000. However, an analysis of the per capita expenditures for elderly individuals reveals a different distribution pattern. For elderly individuals in the 0 to $3,000 income class, the per capita expenditure was $239.06 compared to $769.23 for those with incomes over $100,000. Here one sees how the distribution of the benefit is skewed toward higherincome individuals (Federal Council on Aging, 1975). This is due to the fact that the actual numbers of taxpayers in each class diverges greatly between lower and higher income classes. There are many more elderly individuals in the lower income classes, making the per capita return smaller. The second largest tax expenditure for the current elderly is the additional income tax exemption. Taxpayers are allowed another $1,000 exemption if they are aged 65 or over. In applying the double personal exemption, tax exempt income such as Social Security and railroad retirement benefits are not included as income for tax purposes. In 1982, with the new reduction in marginal tax rates, the amount of tax relief per exemption ranges from $120 to $500 as the marginal tax rate increases from 12 to 50%. No assistance is offered to elderly individuals with no tax liability (Committee on
—
25
85
$5,360
$9,405
$43,665
Source: Joint Committee on Taxation, U.S. Congress, Estimates of federal tax expenditures 1982-1987, (U.S. Government Printing Office, Washington, DC, March 8, 1982).
subsidies of private pension plans include net exclusions of pension contributions and earnings for employer plans and plans for the self-employed. In terms of both absolute growth and rate of growth, tax subsidies for private pension plans have experienced the greatest increase. Tax subsidies for employer private pension plans have increased from $3.0 billion in 1967 to $25,765 billion in 1982, a growth rate of 759% in 15 years. Private pension plans, such as Keogh and Individual Retirement Accounts, have grown from a tax subsidy of $30 million in 1967 to $2,560 billion in 1982. This represents a 753% increase in 15 years. Combined tax expenditures for all "private" pensions amounted to $28,325 billion in 1982. It should be remembered that the elderly also benefit from other non-age specific expenditures, most notably perhaps for deductions for medical care expenses and property tax. Because these benefits are impossible to assign by age category with current data, however, this article concerns itself only with tax expenditures clearly designed to benefit the elderly by enhancing their income in old age. It should also be remembered that tax expenditures are made at the state and local levels of government as well. These expenditures no doubt amount to additional billions of dollars and probably possess many of the same distributional characteristics as federal tax expenditures. Vol.23, No. 5, 1983
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the Budget, 1982). In 1982 an estimated 7,804,000 individuals will have applied for the additional age exemption and received $2,133 billion in tax expenditures. Table 2 presents the distribution of the tax expenditure benefit by income class for both the total expenditure and the average expenditure per return in that income class (Table 2). The distribution of the tax expenditures by income class shows that 2%, or $40 million of the entire expenditure of $2,133 billion, went to individuals with incomes less than $5,000. Some 50% of the expenditures went to individuals with incomes over $20,000. The average return for elderly individuals with incomes less than $5,000 was $98 compared to $704 for those with incomes between $100,000 and $200,000 and $697 for those making more than $200,000. It should be remembered that in 1979 only 20% of older families and 2% of older individuals had incomes above $20,000. Some 5.9 million elderly individuals (25% of the total) lived at or below 125% of the poverty line in 1979. The 125% poverty line figure amounted to $5,455 for a couple and $4,340 for an individual in 1979 (Special Committee on Aging, 1981). The eligibility criteria for the elderly tax credit expenditure are more complex. The elderly tax credit revised the earlier enacted retirement income tax credit. It was intended to remove the inequities between individuals receiving tax exempt retirement income, such as Social Security, and those receiving taxed retirement income. Eligibility for the elderly credit is conditioned on the individual's being 65 years of age or older. The credit is equal to 15% of up to $2,500 of taxable income for a single person and up to $3,750 for a joint return where both individuals are aged 65 or more. "The limits of $2,500 and $3,750 are reduced (1) by tax exempt retirement income such as Social Security benefits, and (2) by one-half of the taxpayer's adjusted gross income over $7,500 for single individuals and over $10,000 for a married couple filing a joint return" (Committee on the Budget, 1982, p. 281). The maximum elderly credit in
1982 was $375 for an individual and $552.50 for a couple. The primary beneficiaries are federal and state local retirees who do not have Social Security. An examination of the distribution of the tax credit for the elderly shows that, although more progressive, it is still weighted toward the higher-income elderly. In 1982 an estimated 585,000 individuals will apply for the credit and receive $129 million. Those elderly individuals with incomes below $5,000 will receive no benefit from the credit. Individuals with incomes between $5,000 and $10,000 will receive 16% of the total expenditure, and individuals with incomes greater than $20,000 will receive 29% of the benefit. The average return rate is $167 for individuals with incomes between $5,000 and $10,000 and $375 for individuals with incomes between $50,000 and $100,000 (Joint Committee on Taxation, 1982). The exclusion of capital gains taxes on home sales for persons age 55 and over was designed to shield older taxpayers from large tax burdens when they decided to sell their home and rent or move to a less costly residence. This exclusion was originally introduced in 1964, at which time the qualifying age was 65 and the sale price of the home could not exceed $20,000; only a portion of the gain could be excluded for expensive homes. The Revenue Act of 1976 increased the home sale price to $35,000. The 1978 Revenue Act increased the amount of capital gains exclusion to $100,000 and permitted it for all individuals 55 or older. The Economic Recovery Tax Act of 1981 increased the capital gains exclusion to $125,000 (Committee on the Budget, 1982). In 1982 the tax expenditure for the exclusion of capital gains taxes on homes amounted to $510 million. Available figures on the distribution of tax expenditures on the capital gains exclusion for the elderly are less current and complete, but those figures that were available for fiscal year 1977, when the exclusion was restricted to $35,000 for individuals aged 65 and over, showed that 83% of the entire expenditure went to elderly individuals with incomes greater than $20,000 a year. Some 50% of the benefit went to individuals with
Table 2. Distribution of Age Exemption Tax Expenditures, 1982 Age Exemption Expanded Income Classa (thousands) Below $5 $5 to $10 $10to$15 $15 to $20 $20 to $30 $30 to $50 $50 to $100 $100 to$200 $200 and over Total Returns (thousands) 407 2,292 1,787 955 1,094 765 362 108 33 7,804 Amount (millions) $ 40 368 407 260 360 374 225 76 23 Distribution of Expenditure (percentages) 2 17 19 12 17 18 10 4 1 100 Return Rate (in dollars per return) $ 98 161 228 272 329 489 622 704 697 $273
$2,133
Note: Estimated for the tax law enacted as of December 31, 1981, and at 1981 income levels. Source: Joint Committee on Taxation, U.S. Congress, Estimates of federal tax expenditures for fiscal years 1982-1987 (U.S. Government Printing Office, Washington, DC, March 8, 1982). a "Expanded income class is a broader concept than the 'adjusted gross income' concept that appears on tax returns. In addition to 'adjusted gross income,' it includes the untaxed part of capital gains, percentage depletion in excess of cost depletion, and other tax preferences subject to the minimum tax. However, it excludes the deduction of investment interest up to the amount of investment income. It therefore comes closer to real economic income than does adjusted gross income" (Committee on the Budget, 1978, p. 6).
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annual incomes over $50,000 in 1977 (Committee on the Budget, 1978). Certainly with the upward revision of the capital gains exclusion in 1978 and 1981 and the dropping of the age criterion to 55, the distribution of the benefit will, if anything, be more slanted to the wealthy elderly. The exclusion of veterans' pensions from taxes is the smallest tax expenditure item for present elderly beneficiaries. In 1982 it amounted to an estimated $85 million. All benefits overseen by the Veterans' Administration are presently excluded from income tax. The rationale for the exclusion of veterans' benefits from the income tax is, according to government reports on tax expenditures, unclear (Committee on the Budget, 1982). Data on the distribution of the exclusion of veterans' pensions from taxation for 1977 indicated that 86% of the benefit went to individuals with annual incomes of less than $10,000. Private pension subsidies. — Tax expenditures designed to benefit the elderly are also made in the form of government subsidies for private pension plans. In 1982 estimated tax expenditures for employer plans amounted to $25,765 billion. Tax expenditures were also made in the amount of $1.005 billion for plans for the self-employed and $1,555 for individual retirement plans. Employer contributions to qualified employer plans established for the exclusive benefit of employees and their beneficiaries are not taxable to the employee at the time they are made; the employee is not taxed on the benefits from the plan until they are actually distributed. The taxing of the benefit is generally adjusted according to how much the employee has contributed. The tax expenditure benefit is comprised of two elements: "(1) the average employee's marginal tax rate will be lower during his retirement years than during his working life because of lower income and other special tax provisions for the aged; and (2) current aggregate pension contributions and investment income which are not taxed exceed aggregate amounts paid out as taxable benefits" (Committee on the Budget, 1982, p. 261). Accordingly, current workers receive a non-taxable benefit during their working years and retired workers receive a benefit by paying taxes at a lower marginal tax rate on private retirement income received in their old age. This basic treatment of private pension plans was originated in 1921 and expanded in 1924 and 1974. These tax subsidies were purposively established to foster the growth of "private" retirement plans. Data on the distribution of tax expenditures were available for 1977. Some 66% of the tax expenditures for employer plans were made to individuals with annual incomes greater than $20,000 and 17% to individuals with incomes greater than $50,000. Only 5% of these tax expenditures were made for individuals with incomes less than $10,000. Retirement plans for the self-employed are referred to as "H.R. 10 plans" or "Keogh plans." Annual deductible contributions to such plans are generally limited to the lesser of $15,000 or 15% of net earnings from selfemployment. Tax expenditures for self-employed plans were first established in 1962 and liberalized in 1974 and 1981. The intent was to provide tax treatment simiVol. 23, No. 5, 1983
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lar to that afforded to employees under "private" pension plans. Individual retirement accounts (IRAs) were established in 1974, the rationale for their creation being to ensure coverage of employees not covered by other pension plans. Under the aegis of the Economic Recovery Tax Act of 1981, the deduction limits on all IRAs were increased to the lesser of $2,000 or 100% of compensation ($2,250) for spousal IRAs. At the same time, the allowable deduction for employer contributions was increased to the lesser of $15,000 or 15% of compensation. Distributions made before the age of 59.5 years are subject to an additional tax, but exceptions are made in situations involving death or disability (Committee on the Budget, 1982). Distribution of the tax expenditure benefits for self-employed individuals in 1977 identified 84% of the beneficiaries as individuals having incomes greater than $20,000. Some 40% had incomes greater than $50,000, and only 2% had incomes less than $10,000 (Committee on the Budget, 1978). In the case of employer plans, self-employed plans, and IRAs, data that would distinguish between benefits for individuals who are currently working and those who are retired are not available. For our purposes subsidies for private pensions are classified as tax expenditures for the elderly in that the tax expenditure is made specifically in support of providing additional retirement income in old age. This is in contrast to other forms of saving in which individuals may engage for either their old age or other purposes. A consequence of this is that private pension subsidies made in support of increasing retirement income in old age means that one forgoes alternative uses of these resources for the elderly or other beneficiaries of public interventions.
The Aging Policy Context and Tax Expenditures
The analysis of tax expenditures made on behalf of the elderly reveals that a majority of the benefits are directed to a small elite of individuals who are currently elderly or who will be elderly in the future. In fact, in terms of individuals who are presently elderly, it was estimated that in 1982 only 9.2 million out of 25 million elderly would benefit from provisions of the 1981 tax cuts. The rest of the elderly had insufficient incomes to benefit from the special tax provisions (Select Committee on Aging, 1981). Where do tax expenditures fit in the overall context of public policy for the elderly? In another article the author argued that public policy for the elderly targets benefits to three classes of elderly: a) the poor or marginal elderly; b) the downwardly mobile, middle-, and lower-middle-class elderly; and c) the middle- and upper-middle-class integrated elderly (Nelson, 1982). It was argued that the public assumption of risks incurred by the elderly is conditioned in great part by status patterns established prior to old age. The rights to publicly supported benefits in old age are seen as stemming primarily from one's pre-retirement socioeconomic status rather than an objective assessment of need. Titmuss (1965) illustrated the connection between socioeconomic status and access to public policy benefits. He conjectured that public entitlements were marked by
a sense of approved and disapproved public dependency. Public policy measures for the elderly, like measures to the non-elderly, embody different classes of approved and disapproved public dependency. The elderly who receive approved public dependency measures do so on the basis of possessing certain achievement, status, and need characteristics. These elderly expect and receive their entitlements as a matter of right in the form of what Titmuss called occupational and fiscal welfare. Occupational welfare benefits result from one's occupational status, that is, rights to health insurance, contributory Social Security, and private pension benefits. Fiscal welfare measures, in contrast, are primarily tax expenditure items, such as the double income tax exemption for the elderly, tax subsidized retirement plans, property tax relief, and so on. These measures occur at both the federal and state levels of government. Disapproved policy benefits or, as they are usually termed, "welfare benefits," are based strictly on objective criteria of need. Benefits here are directed to the poor elderly and they are given as a measure of paternalism versus a matter of "rightful" entitlement. Public policy for the elderly is marked by a three-tier benefit approach. The first tier of benefits consists of, but is not limited to, means-tested welfare benfits such as Supplemental Security Income (SSI), Medicaid, and Title XX services for the marginal or poor elderly. The marginal elderly are seen as individuals who were likely to be poor or near poor prior to old age and continue to be poor in old age. The second tier involves compulsory earnings-related Social Security benefits, the Medicare health insurance program, and the universal entitlement Older Americans Act social service program. The second tier is targeted primarily, but not exclusively, to the largest segment of the elderly population, the downwardly mobile elderly. These are individuals who are seen as experiencing a decline in their standard of living as they try to hold onto their pre-retirement lifestyles through a combination of public and private resources. They are individuals who were primarily middle and lower-middle class prior to retirement. The third tier involves public support for what are referred to as the high-income integrated elderly. The public benefits for this group include straightforward public measures such as Social Security and Medicare and publicly supported, tax subsidized provisions such as "private pensions" and various tax exclusions and credits for the elderly. By combining their private resources with these public tax expenditure items, Social Security and Medicare, the integrated elderly are able to deal with most, if not all, economic hardships associated with old age (Nelson, 1982). In 1982 tax expenditure items benefiting primarily present and future high-income elderly amounted to $43,665 billion. The three tiers of public policy measures for the elderly are based on ". . . highly political and subjective standards of entitlement: a) a standard for the poor; b) a standard for the middle- and lower-middle-class elderly; and c) a standard for the high-income elderly" (Nelson, 1982, p. 103). Each tier is based on different standards of minimums of public support. The standard for the poor is based on subsistence; the standard for previously middle- and lower-middle-income elderly, on a 476
notion of social adequacy; and the standard for the highincome elderly, based on the objective of maintaining continuity between a high income pre-retirement lifestyle and post-retirement lifestyle. Tax expenditures, as outlined by this article, are a principal mechanism for helping to maintain a segment of the elderly population at a relatively high-income lifestyle. Such a standard raises questions as to whether it is appropriate to use billions of tax dollars to maintain high-income lifestyles of an elite of American elderly when millions of other elderly are either in poverty or near poverty. Comparing Elderly Tax and Direct Expenditures Clearly the federal government spends large sums of money on the elderly. If one were simply to count the resources from the major federal elderly funding sources of Social Security, Medicare, the Older Americans Act, Medicaid, Title XX of the Social Security Act, and food stamps, the figure for fiscal year 1980 would amount to approximately $146.4 billion (U.S. Government Budget, 1982). Using the "senior dollar distribution" figures developed by the Office of Management and Budget (Select Committee on Aging, 1980), these programs could be safely said to comprise perhaps 98% of all federal resources for the elderly. To this figure one must then add the federal tax expenditures explicitly identified for the elderly. In fiscal year 1980 tax expenditures for the elderly amounted to $25.94 billion. If we were to combine federal tax expenditures with federal direct expenditures for the elderly — in effect develop a reconstituted elderly service dollar — the total expenditure for 1980 would be $172.38 billion. Tax expenditures would account for 17.7% of this reconstituted federal elderly social welfare dollar. It was argued earlier that federal public policy for the elderly is marked by a three-tier benefit approach. Although some overlap is obviously present in these tiers and their associated programs, the primary constituencies are generally distinct from each other. For purposes of sharpening the distinction between these different tiers of support, we can compare the extremes of "welfare" benefits for the poor elderly with tax expenditures which benefit primarily the high income elderly. Table 3 compares the welfare benefits for the poor elderly from the major programs of Medicaid, SSI, Title XX, and food stamps with tax expenditures for the high-income elderly (Table 3).
Table 3. Direct and Tax Expenditures for the Elderly, FY 1980 (in Millions of Dollars) Welfare Benefits for the Elderly Medicaid SSI Title XX Food stamps Total $8,686 2,734 365 915 $12,700 Total $25,940 Private Pension Subsidies 15,050 Tax Expenditures for the Elderly Current elderly $10,890 (exclusions & credit)
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Tax expenditures are grouped as to current elderly benefits and private pension subsidies which benefit both future and present elderly. Again the tax expenditure categories for the current elderly include the following: a) exclusion of Social Security, railroad retirement, and veteran's pensions from taxation; b) the extra exemption accorded the elderly; c) the elderly tax credit; and d) the exclusion of capital gains taxes on the sale of homes. Tax expenditures in support of private pensions include tax subsidies to employers and self-employed private pension plans. In comparing federal expenditures for the poor elderly with tax expenditures for the highincome elderly, we find that nearly twice as much is spent to enhance the retirement income of current and future high-income elderly individuals. In 1980 $12.7 billion was expended on welfare programs for the elderly poor compared to $25.94 billion on tax expenditures primarily for current and future high-income elderly individuals. A few specific comparisons between direct expenditures for the poor elderly and tax expenditures for the wealthy elderly are worth considering. In 1980 $1.97 billion in federal dollars were expended for the additional elderly income tax exemption. In our analysis we found that 98% of this tax expenditure item (in 1982) was made for non-poor, primarily wealthly elderly individuals. This single tax expenditure figure of $1.97 billion compares to direct 1980 funding figures for the Older Americans Act of $652 million, estimated elderly food stamp expenditures of $915 million, and Title XX social service expenditures for the poor SSI elderly of $365 million. Here we find that more money was spent on this single tax subsidy measure than for the combined outlays of these three programs, $1.97 billion compared to $1.93 billion. In looking at the overall distribution of the $172.38 billion total for federal elderly social welfare, we found that 17.7% was accounted for in tax expenditures and 7 percent by direct welfare expenditures for the elderly poor.
Policy Implications
A number of policy issues must be considered when reviewing tax expenditures for the elderly. Two central policy issues include the following: 1) a need for restoration of equity in public policy for the elderly and 2) the establishment of a unitary jurisdiction and control of related direct and tax expenditures for the elderly. An analysis of tax expenditures for the elderly reveals a serious social equity problem. This problem is twofold. Its first component is the distribution of tax expenditure benefits relative to those most in need, the elderly poor and near poor. A majority of the tax expenditures go to elderly individuals with annual incomes greater than $20,000. The distribution of the tax expenditure benefit relative to the elderly poor reveals that in 1980 twice as much was spent on the wealthiest segment of the elderly population as on the poorest segment. By 1982 this situation was further exacerbated as direct expenditure programs were either capped or cut and tax expenditures in general, and for the elderly in particular, expanded dramatically. The continued growth in tax expenditures for the elderly points to the second factor in the equity problem. While tax expenditures for the wealthiest elderly are Vol. 23, No. 5, 1983
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being expanded, direct benefits for the poorest elderly are being cut drastically. For instance, eligibility guidelines are to be made more stringent for SSI recipients under the Reagan Administration. SSI benefits are to be calculated for new recipients on a retrospective rather than prospective basis, thereby delaying benefits and saving money. In addition . . . "the President's (Reagan) budget indicates that the Internal Revenue Service will be used to identify the existence of outside income of SSI recipients, e.g., bank accounts" (Select Committee on Aging, 1981, p. 40). This is being proposed to save alleged overpayments to SSI recipients, in 1979 estimated to be between $67 million and $122 million. This is in comparison to the estimated $2.1 billion in expenditures to the elderly in 1982 made under the single tax expenditure item of the additional income tax exemption. Through the additional exemption provision, some $324 million in expenditures were made to elderly individuals with incomes greater than $50,000 per year, 2% of all elderly families. It is also interesting to note that, while tax expenditures made to enhance the income of the "elderly" in 1982 amounted to $43.7 billion, the 1.8 million elderly on SSI were "taxed" for receiving outside countable income. "For example, all but $20 of any Social Security benefits an individual receives are subtracted from the maximum SSI benefits they may receive" (Select Committee on Aging, 1981, p. 40). In effect, while SSI provides an income floor to the poorest elderly, it taxes income beyond that floor, such as Social Security, at nearly 100% (Burkhauser & Smeeding, 1981). While the wealthiest are given billions in tax benefits to save for retirement, the poor elderly under SSI are taxed for whatever "excess" savings and income they may have. In addition to cuts in SSI in 1982, other welfare programs for the poor elderly have also been cut. An estimated 125,000 elderly individuals will lose their food stamp benefits; the proposed cap in Medicaid expenditures will result in sharp reductions on health benefits for the 5 million elderly who depend on Medicaid; and the 25% reduction in Title XX social services, particularly homemaker and chore services, will mean reduced benefits to tens of thousands of poor elderly (Select Committee on Aging, 1981). In contrast to current (1982) and pending cuts in direct expenditure programs for the poor elderly, tax expenditures for the high-income elderly have and will continue to increase dramatically. Tax expenditures made in behalf of the elderly increased from $25.9 billion in 1980 to $43.7 billion in 1982 (Committee on the Budget, 1982). Tax expenditures in support of the elderly will, under Reagan's Economic Recovery Tax Act (1981), increase from $43.7 billion in 1982 to $66.9 billion in 1986. This represents an annual increase of $23.2 billion by 1986. The vast majority of the increase is in the form of expanded subsidies to employer and self-employed "private" pensions. What policy alternatives are suggested by an examination of tax expenditures for the elderly? To restore equity in public policy for the elderly, one alternative would call for a real location of a portion of the tax expenditures currently allotted to the affluent elderly to the poor elderly. With this measure, poverty among all elderly could be eliminated in this country. Other op-
tions would call for a partial real location of current tax expenditure benefits to more targeted and pressing needs among the elderly. For instance, more money is presently to be expended under the double income tax exemption in 1982 on elderly individuals with incomes greater than $20,000 ($1,058 billion) than was expended on all home care services to the elderly under Medicaid or Medicare in 1980. The money currently allotted under the exemption provision could be retargeted as a tax credit for elderly individuals in need of home care services. The point is not to list all the alternative expenditures but to emphasize that tax expenditures are equivalent to direct expenditures for the elderly and as such represent choices as to beneficiaries and purposes for which the monies are expended. Expenditures for one segment of the elderly population may mean foregone expenditures for another segment. How do we address this equity dilemma in public policy for the elderly? First and foremost a means must be found to incorporate tax expenditures into the general discussion of policy matters affecting the elderly. By combining tax expenditures for the elderly with direct expenditures, we obtain a more complete picture of overall government policy as it affects the elderly. We are also better able to examine equity issues and coordinate overlapping direct and tax expenditure programs for the elderly. This matter is made more urgent by the present economic crisis facing government. As Senator Kennedy aptly put it in testimony on a bill calling for the control of tax expenditures, ". . . when austerity in federal spending is being pressed to the point of cruelty, it is wrong to demand budget cuts only in direct spending programs, while ignoring all the spending programs in the tax laws" (Kennedy, 1982, p. 11). Senator Kassenbaum proposed S. 193 in 1981 to amend the Congressional Budget Act of 1974 for the purpose of establishing a ceiling on revenue losses from tax expenditures and to require authorization of any new tax expenditures (Kassenbaum, 1982). Although the legislation was not passed, it did set the stage for discussion of the need for Congressional review of tax expenditures and increased coordination between tax and direct expenditure programs. If Congress were to regularly review and authorize tax expenditure programs, it might eliminate outmoded and inefficient tax spending in much the same way as it would eliminate unnecessary direct expenditure programs. As Alice Rivlin, Director of the Congressional Office of the Budget, put it, many low visibility tax expenditure activities may not have sufficient support to stand the light of day as direct expenditure programs. For Rivlin the issue is not so much the need to eliminate or control expenditure totals but rather". . .to
consider seriously the trade-offs between tax expenditures and spending programs on a case-by-case basis" (Rivlin, 1982, p. 28). Tax expenditures for the elderly need to be examined on a case-by-case basis with direct expenditures. Tax expenditure policies for the elderly should be approved by both Congressional tax committees and by committees with authority over analogous social welfare programs for the elderly. Rather than being treated simply as another tax cut they should be viewed as alternatives to direct spending programs. This change would be similar to the current joint allocation of governmental spending to appropriations and authorizing committees and would be one way of emphasizing the relationship between direct and tax spending programs for the elderly. Here the trade-offs between direct and tax expenditures for the elderly could be examined. The objective should be a coordinated policy approach for the elderly designed to ensure an adequate and equitable standard of well-being for those in need.
References
Burkhauser, R. V., & Smeeding, T. M. The net impact of the Social Security system on the poor. Public Policy, 1981, 29, 159-177. Committee on the Budget, U.S. Senate. Tax expenditures: Relationships to spending programs and background material on individual provisions. U.S. Government Printing Office, Washington, DC, September 1978. Committee on the Budget, U.S. Senate. Tax expenditures: Relationships to spending programs and background material on individual provisions. U.S. Government Printing Office, Washington, DC, March 17, 1982. Congressional Budget Office, U.S. Congress. Tax expenditures: Current issues and five-year budget projections for fiscal years 1982-1986. U.S. Government Printing Office, Washington, DC, September 1981. Federal Council on Aging. The impact of the tax structure on the elderly. U.S. Government Printing Office, Washington, DC, 1975. Joint Committee on Taxation, U.S. Congress. Estimates of federal tax expenditures for fiscal years 1982-1987. U.S. Government Printing Office, Washington, DC, March 8, 1982. Kassenbaum, N. L. S. 193. In Hearing before the Committee on the Budget, U.S. Senate. U.S. Government Printing Office, Washington, DC, 1982. Kennedy, E. M. Prepared statement. In Hearing before the Committee on the Budget, U.S. Senate, Tax Expenditure Limitation and Control Act of 1981 (S. 193). U.S. Government Printing Office, Washington, DC, 1982. Nelson, G. Social class and public policy for the elderly. Social Service Review, 1982,56,85-107. Rivlin, A. M. Prepared statement. In Hearing before the Committee on the Budget, U.S. Senate, Tax Expenditure Limitation and Control Act of 1981 (S. 193). U.S. Government Printing Office, Washington, DC, 1982. Select Committee on Aging, U.S. House of Representatives. Analysis of the impact of the proposed fiscal 1982 budget cuts on the elderly. U.S. Government Printing Office, Washington, DC, 1981. Select Committee on Aging, U.S. House of Representatives. Future directions for aging policy: A human service model. U.S. Government Printing Office, Washington, DC, 1980. Special Committee on Aging, U.S. Senate. Part I: Developments on aging 1980: A report of the Special Committee on Aging. U.S. Government Printing Office, Washington, DC, 1981. Titmuss, R. The role of redistribution in social policy. Social Security Bulletin, 1965,28,14-20. U.S. Government budget for fiscal year 1982. Office of Management and Budget, Washington, DC, 1981.
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