Episode 162 – “Tax and Return” Scheme – Tom Wheelwright & Judge Glock

Speaker 1: 

This is the WealthAbility Show with Tom Wheelwright. Way more money, way less taxes. 

Tom Wheelwright: 

So, one of the things they teach you in Sunday school is the Lord giveth and the Lord giveth away. These days it’s more the government giveth and the government taketh away. And today we’re actually going to talk about robbing Peter to pay Peter. And that’s the topic of several Wall Street Journal articles that our guest today, Judge Glock, has contributed to talk about this idea of tax disincentives, not just the incentives, which we talk about all the time, of course on this show, but the tax disincentives and how does tax actually disincentivize people from working and from other productive laborers. And so, we’re just very grateful to have Judge Glock from the Manhattan Institute on our show today. Judge, welcome to the WealthAbility Show. 

Judge Glock: 

Thanks so much for having me. 

Tom Wheelwright: 

And Judge, if you would just give us a little of your background, and particularly why this topic and why now? 

Judge Glock: 

Yeah, so my background is I was a former economic professor. I focused on economic history. I dealt a lot with things like housing, housing finance, urban policy, all of which were issues where tax borrowing and lending and government transfers or benefits loom large. My dad also happens to do a lot of tax law. So, I grew up around the table hearing about that and couldn’t avoid it, despite my best efforts as a kid and eventually became interested in it. So yeah, this particular issue that just came out of the recognition that in today’s large tax and welfare state, a lot of families that receive benefits to the government are also going to be paying taxes. And how big is that? I wanted to investigate how substantial that is in our whole tax and transfer system. 

Tom Wheelwright: 

Yeah, so let’s talk about some of those disincentives. Now in full disclosure, recently I turned 66 and a half this year, which means that technically I can take Social Security. The challenge is, is that I have a big disincentive to take Social Security right now because 85% of that Social Security is going to be taxed. That’s one of these disincentives you’re talking about, right? Judge, where okay, you’re getting the benefit, but then we’re taking back some of that benefit. If you would, just from a general policy perspective, what’s your thoughts on the policy of pulling back some of those benefits? And the idea is, well, it’s more affordable to these people. It’s really pulling it back because they’re still working. But the reality is that if I weren’t working, I’d get the benefit. And if I am working, I get two thirds of the benefit. So, there is definitely a disincentive there to work. 

Judge Glock: 

Exactly. And that’s one of the biggest problems with that, with the taxing Social Security benefits. And originally Social Security benefits were not taxed at all. It was a tax deal back in 1983 that first began the taxation of them. And for many people’s perspective, this was kind of a non-issue. Taxing people on their Social Security “was equivalent” to just giving them less of in the first place. But as you already noted, there are significant disincentive effects to taxing Social Security like other income. That’s increasing your overall marginal tax rate, the amount of taxes you pay on what you saved, your pension withdrawals, other things like that. Having that higher tax rate on Social Security can bump you into a different tax bracket. All of that discourages people from saving for retirement. 

If part of your Social Security is actually not just going to be taxed away, but it’s going to be counted as part of your income, then you’re going to face the danger of, well, it makes maybe more sense for me not to earn a little extra money if I just going to get taxed away or save a little extra money. And since I’ve published that Wall Street Journal article, I’ve already heard from people who describe just the rigmarole they have to do to try to avoid the Social Security taxes and keep their income down, which is just a waste of human life. The policy puts these incentives in place and then we all have to kind of run around and deal with them. 

Tom Wheelwright: 

So, some of these disincentives, let’s talk about taxes as a disincentive to begin with. I mean, the term tax is simply a drag, right? To tax something is to put a weight against it and to slow it down. What is the policy behind taxing? Is it just saying, “Well, look, if you have the means, then we’re going to tax some of this back from you.” Is that the policy behind it or even is there a consistent policy behind it? 

Judge Glock: 

There’s a few different policies, none of which I’ve described as exactly consistent, but all of them have some suspect logic behind it. So yes, the basic idea of taxation and kind, a lot of what our government does taking from A to give to B is that A, supposedly has enough resources, money and they should be taxed in order to give to B, who is in need. Now, how we define need is variable. For Social Security, it could just mean someone who’s older and therefore supposedly more in need. For unemployment, it could be someone who’s just lost their job. But for other things such as food stamps or housing subsidies, it could just be people who have less income on the whole. So, the goal of all those taxes just kind of take from the better off, give to the worse off in some fashion. Other taxes such as the Social Security tax itself, the idea there is we’re in some sense contributing to our own Social Security savings. But in reality, those usually have a very loose connection to what you’re actually going to receive in Social Security. 

And part of what my report looks at is if you look at all of these taxing systems, especially the kind of idea of taxing A to give to B, it doesn’t make much sense when a lot of B today, the people who receive the government benefits are also being taxed. Exactly, not just Social Security, but a lot of people receiving food stamps, housing subsidies, veterans benefits, all sorts of things are paying substantial amounts of taxes. But if you think about that in total, both the taxes and benefits together, you have this strange circular system where you’re paying a lot of money to the government and then they’re giving it back to you after the middleman and the bureaucracy in DC takes their cut off the top, which seems like a big waste. 

Tom Wheelwright: 

So, clearly a very inefficient way to do it. But do you think a lot of how this has expanded over the years is because more and more people are getting benefits than they used to get? I mean, a lot more people can get food stamps now than could ever get food stamps before. A lot more people now we’ve got a bill right now to increase the child tax credit. I had during the pandemic, one of my employees who I would’ve considered a fairly well-paid employee, he was a manager. His tax credits, now he had eight kids, his tax credits were in the $40,000 range. 

Judge Glock: 

It’s not nothing. 

Tom Wheelwright: 

It’s not nothing. And of course I’m not going to complain because I got PPE loans, right? So, you can’t complain about it. But there is a question here, is the issue in the taxing it or is the issue in the delivering those benefits to the middle income people in the first place? 

Judge Glock: 

I would say mainly the latter, but both are an issue. So yes, in recent years we’ve seen a continual expansion of what you can call the welfare state are just transfers from the government to individuals and families. And a lot of that has moved transfers further and further up the income ladder. This is not just welfare for people who don’t have jobs and so forth. This is people, exactly who are working, who often raising families who as I also pointed, are paying substantial amount of taxes. And like you say, to my mind, there’s a lot of confusion about this because like you say, you can’t complain because hey, we also get PPE loans, people also get tax credits. But to my mind, too many people view that as just a free benefit from the government when actually I imagine for people like you, that’s mainly just returning a lot of the taxes that you’ve already paid for the government that year. 

And part of the point of this report was to both answer those people that say, hey, as Romney maybe called them back in the day, the 47% that aren’t paying taxes are getting the benefits. A lot of them actually are paying taxes too to answer that. But two, to answer those who are kind of looking for more expansive welfare state to say, “Hey, maybe this isn’t so beneficial if you have to tax the people more and more to give them back some benefit.” Getting a giant child tax credit or a stimulus payment when you’re paying more than that in taxes and in the end we all have to pay this in taxes sooner or later, probably isn’t a great benefit. And in fact is a waste, partially because the administrative costs and partially because the disincentive effects you mentioned. 

Tom Wheelwright: 

Interesting. So, there are a number of things I want to get into here. I want to go back to something you were talking about as far as a disincentive to save for retirement. The 401(k), as we know this is the primary retirement vehicle now for most Americans is taxed when you pull it out. So, it’s deducted when you put it in, so you aren’t being taxed on the money that you earn to put into that, but when it comes out, you’re being taxed on the money coming out. And the reality is that the more you save, the higher your rate. So, it’s not just that, okay, you have disproportionately less money, the more money you save, and is that what you’re talking about? And would you change that to make all 401(k)s deductible going in and non-taxable coming out? 

Judge Glock: 

Well, I mean that would make them a little closer, obviously, to the Roth IRA, which allows you to take the tax-free withdrawals out of that. And I wouldn’t say what’s the best method to deal with this problem? But the simplest thing would be to kind of limit the taxes that are on the retirees that are receiving these benefits writ large. Because if we do have this massive system that’s providing Social Security and other systems and providing the tax deduction originally for 401(k), but we’re adding the taxes incredibly on the backend, all of this is a disincentive to save for retirement. As you say, it’s not just that you lose some of the taxes on the other side when you retire, it’s that your rate is up and the rate going up, taking more and more every time that rate goes up, is it proportionately less worthwhile for an individual to save? 

And right now, the disincentives for saving retirement are surprisingly large because of the amount of taxes retirees are paying right now. And the reduction in benefits they get, not just on their Social Security, but the more they would have to pay for Medicare, the more they have to pay for other programs, the less benefits they get elsewhere. Some of retirees, you could lose Medicaid, which some people get in retirement or get later into life as well if you save too much. All of that is the government constantly telling people, save less for retirement, think less about your future, which is not a good thing we want. It’s still worthwhile in America to save, but the government’s just making much harder than it should be. 

Tom Wheelwright: 

Yeah. Why do you think that is? 

Judge Glock: 

I think it’s just people have looked mainly at the expansion of the welfare state as a sort of unalloyed benefit to the people you’re providing those transfers to. Social Security, Medicaid, Medicare, et cetera, and not thought about the taxes side of it, that every dollar of that sooner or later has to be paid back with a tax. And so, you’ll expand the benefits and then often a few years down the road you realize, well, we have to raise taxes on that. And there’s only so many very, very wealthy people you can raise taxes on. So, what that means is the sort of broad middle class they have to get those increased taxes over the long run. 

And part of what I was trying to describe here is that you really need to think of both sides of the equation, even for the beneficiaries of these benefit payments when you’re creating them. It’s not just the beneficiaries of these payments, whether they’re increased health insurance subsidies or Medicare or whatever. It’s not just they get those benefits and those can sometimes have disincentive effects. It’s that they’re often going to be taxed to pay for them. And you have to kind of net that out if you’re considering the effects of these new programs. And as they keep going bigger and bigger, you have more and more people being taxed to pay for the very programs they receive. 

Tom Wheelwright: 

It’s interesting because it does put a heavy cost in time and effort that you’re spending to avoid the disincentive. We hear of the single mother in South Chicago, for example, who fourth generation welfare, and they literally know the system so well that they can maximize their benefits. Okay, well they’ve got a whole lifetime of training. But when you think about it, everybody has to look at this, right? It’s not just the person on welfare, but anybody who’s like you mentioned Medicare. So, my Medicare is I is actually not that much less than if I got private health insurance, but if I weren’t working, it would be free. 

So, there is this function we have to consider in our planning. We don’t just have to plan for how do we reduce our taxes overall. But we actually have to look at, okay, when do we take Social Security? I mean, there’s a whole industry that is cropped up of how to maximize your social security based on how long you’re going to live, what your family is like. Maybe AI will give us some simple tools for this, Judge. I mean, I hope so because it’s a lot of work. 

Judge Glock: 

Yeah, it’s what some economists refer to as the shoe leather costs that we all have to kind of run around a lot more to meet the requirements of these programs, to look at our income, to see how they compare to the requirements of these different programs. Again, to see how these programs can affect your tax bracket and your overall taxation. All of those things are real cost in terms of human life. And as you say at this point, it’s definitely not just the single mother on welfare and public housing. This is all of us. We all have to think about this. 

Many of these programs have asset requirements, and so if you save too much for retirement and well, maybe it would make more sense for me not to save anything because then I could get these benefits from Medicare and Medicaid that I wouldn’t get otherwise. And that’s a huge thing for people to think about. I know a lot of people approaching the possibility of a nursing home, it would be devastating for them to pay for a nursing home out of pocket, but if they can get Medicaid support, they can do that, but they’d have to run down all their assets pretty much to do it. 

Tom Wheelwright: 

It’s actually one of the reasons that from an estate planning standpoint, you see a lot of trusts, and these are special needs. There’s a term, Special Needs Trust. Well, the idea is to prevent, whether it’s a child or parent, whoever, to prevent that person from not meeting the asset test or having too much income. You put the assets into trust and now, okay, now they get these other government benefits, but it just seems like such a waste of time and effort to be having to spend this time gaming the system. And people complain all the time about, well, the rich don’t pay tax. They’re gaming the system and going, well, if you’re not, I mean, everybody’s in the game. You don’t have a choice whether you’re in the game or not. The question is, are you going to win the game or you’re going to lose the game? How well are you going to do in the game? 

Judge Glock: 

And I forget who said it back in the day, that in regards to people receiving welfare, that it would be illogical for us to think that people are any less likely are able at exploiting the welfare system than the rich are at exploiting the tax system. But as you say, it’s not so much a question of exploiting, it’s a question of the vary incentives the system puts in place. And as you’ve discussed already, this is not two totally separate categories anymore. This is not the individual on welfare and then the rich person paying taxes. These are all mixed up together. And as you said, there’s just a huge cost to all of us in time and effort and thought and worry, frankly about how to meet all these strange benefits and asset, asset and income requirements. I would add that there’s not great estimates on how much this really does cost us sort of in time and money. 

There’s a little better estimates for what it costs the government. So, obviously it costs the government money to receive applications for food stamps and process that checks and send them out. Some estimates for some of these programs say cost about 15 cents for every dollar distributed just on the government side. So, that’s a big waste just on its own. And then if you look at the personal waste again to apply to this, getting the tax attorneys, getting these, paying for these businesses that try to maximize your Social Security return, that’s a waste too. The disincentive effects in terms of well, you’re not saving as much as you’d like because you’d have to meet these other requirements, that’s a waste too. All of this is costing a lot of money and time and effort for people that are trying to save. 

Tom Wheelwright: 

Yeah, it’s so interesting. So, I think you’re focusing mostly on income tax, correct? And the income tax people pay, but the reality is that everybody, poor, middle class, rich, everybody pays sales tax, everybody pays excise taxes, anybody who owns property pays property tax. So, there are other taxes you’re talking about, not just income tax, right? 

Judge Glock: 

Oh, exactly. In my report where I estimated that about 20% of all benefits received from the government are returned in taxes, that was just looking at state and Federal income taxes and your FICA taxes, your payroll, Social Security, Medicaid, your 15.3% you pay when you’re earning your income. But as you point out, and as I try to point out in the report, that is just a portion and roundabout, depending on how you look at it, half or so of all of the government income they get, the government gets from people. Now, yes, sales taxes are huge. We all pay some of the excise taxes, we pay the tariffs, we pay the corporate taxes as either shareholders or as employees, and those impact us. Yeah, we pay property taxes. So, my argument in the paper is that 20% of all benefits that I estimated were returned as taxes would be much, much larger. Especially if you looked at things like sales taxes. 

That is a lot of people that receiving these benefits are paying substantial amount in sales taxes, depending on which state you’re in, anywhere six to eight plus percent. That is a big tax, and a lot of those are going to pay for those same programs that they’re receiving. Medicaid is a joint federal and state program, and a lot of those Medicaid dollars are coming from the sales tax, which means a lot of the people receiving Medicaid are putting that money in the sales tax hopper, sending it up to the state capital in Austin or Albany, and then getting a portion of it back down, which again, it’s just a strange waste. 

Tom Wheelwright: 

So, if you were actually making the policy, how would you change things? 

Judge Glock: 

Well, the best way to do it would be just to limit the transfers to those actually in need. Now, some people would claim this is a way to punish the middle class or takeaway benefits the middle class is received. But when you look at it in the framework of both taxes and benefits, if you cut both the taxes and benefits to the middle class, broadly speaking at the same time, you don’t cost anybody a dime, but you save everybody a lot of time and effort. The administrative effort from the government, the administrative effort on behalf of families and individuals, that’s a huge savings. In fact, you can shrink the government significantly by doing that, cutting both tax and benefits at the same time without costing any of these households a dime, which is exactly what I advocate doing. And at the same time, focus benefits on those truly in need. Cut the taxes and benefits simultaneously to those who are paying substantial taxes, and benefits should really only go to those people who aren’t paying much in taxes because they don’t have any income at all. 

Tom Wheelwright: 

They should be consistent. In other words, you’re just saying, “Let’s make the tax system and the benefit system consistent.” And the challenge, of course, what I always say is Congress giveth and the IRS take it away, right? So, Congress has all these great incentives and they have all these great programs, and yet then the IRS comes and say, “No, no, no, no, no, we’re not going to let you do it that way. We’re going to actually restrict it,” which is actually what the Chevron case, right? That the Supreme Court is looking at. Chevron case is actually looking at because does the IRS get to make law like that? And so, you do have a lot of the administrative agencies. Do you find that a lot of the administrative agencies are reducing the benefits that the government intended? 

Judge Glock: 

They face pressure from both sides. Obviously some places like the IRS are a little more skin flint and they’re often concerned about limiting the amount of deductions. And they face a lot of very intelligent lawyers on the other side of the table who are very creative at finding ways to maximize those. You have other places, maybe like the US Department of Agriculture, which distributes food stamps in the local and state offices that work on applications that try to maximize those benefits. It certainly depends on the sort of agency, but as you point out just part of the danger here is the raw amount of discretion this gives to those agencies. Beyond that kind of 15 cents on the dollar cost of administration that I talked about earlier for US benefits programs, you have just the issue of the more benefits you give through these complicated systems, the more discretion you give to someone in an office in DC to decide who gets what. And that’s always a little dangerous. 

Tom Wheelwright: 

So, when you think about somebody go a little granular here, and you think about the average person. So, everybody is going to get some government benefit, presumably at some point in their life, and we all experience massive government benefits during the pandemic. But ignore pandemics for a minute, and let’s just talk about normal daily life. You have the middle class benefits like child tax credits, right? Dependent care credits, adoption credits, things like that, that are or earned income credits, right? That are available based on income, but not too much income, right? A little bit of income. You mentioned the $2,500, right? Yeah, you have to earn some, you have earn $2,500 to get this new child tax credit, but $2,500 is not a whole lot of work we’re talking about here. Even at minimum wage, that’s not a whole lot of time working during the year. So, what does a person do to manage all this? Because it is actually, we do have to manage it. 

Judge Glock: 

Yeah, I mean, I wouldn’t have any great advice. Probably no better advice than you have who deals more with the personal financial side with this, except to say that these are very complicated questions that precisely require a lot of the attention people like yourself give to it. Because the government has set up these very complicated programs in place. The best I can say is that ideally all of these would be simplified a lot. And ideally too, people would stop referring to a lot of the people who receive government benefits, but simultaneously pay a lot of taxes as beneficiaries of the sort of welfare state. If you’re still paying more in taxes than you’re paying over in benefits, that’s a net loss to you still. The fact that someone got a big stimulus payment is not a reason to start singing to the high heavens about the benefits of the government if you paid twice that or three times that in income taxes that year. That’s just to assert giving your own money back to you in some sense. So again, just simplifying all then the government side would make everyone’s life a lot easier. 

Tom Wheelwright: 

Yeah, it’s really a different perspective. It’s like I say in my book, Behind Me Tax Free Wealth and say, “Rule number one is it’s your money.” And if you look at it, I think there are people in government though that look at it as it’s the government’s money, and that anything they give back to you is a gift from the government. And to me, I can’t go there because especially since in our constitution, I mean the foundation of the American government is personal property rights and personal property rights means that we’re one of the few countries that individuals own energy rights, right? Individuals own the minerals in the ground, individuals own the land. That’s not really necessarily common in every country. And so, if you start with that premise though, that we are a country based on property rights, then you have to go to the next step, which is, look what you’re saying. The government’s really giving you back something that was yours in the first place. 

And so, maybe what the government ought be doing is doing, I actually find a lot of the tax incentives, they can be very efficient, okay? There are some efficiencies in doing things tax wise. There’s a reason why the pandemic payments were made through the IRS. It’s a more efficient way to do it than some other way of making those payments. And so, maybe it’s a matter of just really focusing some of that policy on the tax law, which none of us in the tax field would be opposed to because it’s such a complex area. But at the same time, it’s something that we can deal with it. I think that technology will help us deal with it better. And I’m hopeful that you can continue your voice in encouraging a better policy from this standpoint. I think we need to encourage our politicians certainly to create better policy. And I certainly think that we need to take control of our own lives and say, “Okay, if this is the game and we’re in this game, are we going to be winners or losers in this game?” 

Judge Glock: 

I agree, and exactly. It’s important to start from the perspective. If you earned it is your money, and we should always start there and set the perspective that the government is distributing large S. They only got that because they took it from somebody and often that somebody was you, the person who paid it in the first place. 

Tom Wheelwright: 

I love it. The reason that these discussions are so important. Yes, it’s important to understand policy, but really understanding policy is understanding what’s going on in the world that’s going to affect your personal life here, the life of your parents, the life of your kids, in my case, life of my grandkids. And so, even if I don’t see big changes in the near future, but wouldn’t it be great if my 6-year-old, my 8-year-old grandchildren were able to have some policy benefits? I would love that. In the meantime, as we learn more about policy, as we really understand how these disincentives work along with the tax incentives, we’re always going to make way more money and pay way less tax. We’ll see you all next time. 

Speaker 1: 

You’ve been listening to The WealthAbility Show with Tom Wheelwright. Way more money, way less taxes. To learn more, go to wealthability.com.