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Federal Tax Law, State Income Taxation, The Combination Of Federal And State Income Tax Burdens

Elderly persons are treated very well by the U.S. federal tax system and by the tax systems of many states and localities. They get an extra federal standard deduction, Social Security benefits are taxed lightly or not at all, pensions get special relief, and state and local property tax burdens are often offset by income tax relief. It is not, however, easy to provide a simple, widely accepted philosophical justification for taxing an elderly person at a lower rate than a younger person with the same income.

These tax concessions may simply reflect the political power of elderly voters. People sixty-five and over constituted 16.5 percent of the voting age population in the 1996 election, but provided over 20 percent of the votes. Their political importance will grow considerably when an increasing number of baby boomers reach age sixty-five in the years following 2010.

Despite the political power of older voters, it is hard to believe that significant tax breaks would be possible without the tacit support of the younger population. Older people are popular. Many are peoples’ grandparents, and young people certainly hope to survive to an age at which they too can enjoy the tax concessions granted older adults.

However, it must be noted that the benefits conveyed to older Americans have a considerable cost—a cost that will rise as the population ages. The related revenue loss must be added to the much larger benefits appearing on the spending side of the budget. Social Security is now the largest single federal program and Medicare spending will soon exceed defense spending. Those over sixty-five absorb about 50 percent of the civilian, noninterest expenditures of the federal government. Although the tax preferences given to older Americans are quite small relative to the benefits received on the spending side of the budget, they do add up. They also imply that younger workers are forced to pay higher taxes than they would otherwise. Given American hostility to higher taxes, it is probable that the benefits conveyed to older adults on both the spending and tax side of federal, state, and local budgets tend to crowd out other government activities in areas such as defense, child welfare, and highways.

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