I Hate Flexible Spending Accounts

by on December 6, 2017 at 7:38 am in Economics | Permalink

I hate “flexible” spending accounts, i.e. those accounts where you put say $1000 in tax-free but you then must submit a bunch of health or education receipts to claim the money–and the “benefits manager” tells you half of the receipts you submitted are no good so you have to trawl through your files to find more–or lose the money. The whole process is demeaning. My hatred of this process, however, pales in comparison to that of Scott Sumner who gives a correct analogy:

Imagine a government that took 10% of each person’s income, and put in in a wooden box. The box was placed at the end of a 10-mile gravel road. Each citizen was given a knife, and told they could crawl on their hands and knees down the road, and then use the knife to cut a hole in the box, and retrieve their money.

Scott’s point is twofold. First, there is a lot of waste in crawling down the road. Second, taken in isolation, it looks like the plan at least offers people an option and so, in isolation, flex accounts and their ilk appear to benefit taxpayers. In the big picture, however, the total amount taken in taxes is somewhat fixed by politics and economics so if we got rid of the spending accounts, taxes would probably fall in other ways that are difficult to predict but nonetheless real.

Some want to crawl down the gravel road, fearing that if they abolish the program the government will not reduce their tax rates, instead the money in the box will be diverted to welfare for the poor, or higher salaries for teachers. I can’t deny that this might occur, but if we don’t even TRY to build a good country, how can we possibly succeed? Isn’t it better to try and fail, rather than not even try?

I agree with Scott. If I am going to be forced to pay taxes I’d like to hand over my cash standing like a man and not be given the option of crawling to recoup some bills the tax collector magnanimously throws on the floor.

1 A Truth Seeker December 6, 2017 at 7:50 am

“If I am going to be forced to pay taxes I’d like to hand over my cash in a clean transaction and not be given the option of crawling to recoup some bills the tax collector magnanimously throws on the floor.”

So that is what Americans have become: ungrateful.

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2 GoneWithTheWind December 6, 2017 at 9:59 am

The author actually believes “but if we don’t even TRY to build a good country, how can we possibly succeed?” is what higher taxes is all about. Seriously, could he be that stupid?

The welfare in question here is nothing more than politicians paying off the low information voters to keep them voting Democrat. The cost of this fraud increases every year as does the cadre of useless unproductive people on welfare. Sooner or later this unfortunate and misguided program will destroy our culture. Already our federal government has borrowed in excess of $20 trillion to fund the free stuff give away programs and no one believes we will ever be able to pay it back. It is a time bomb sitting there waiting until the inevitable inflation causes it to blow up plunging us into another great depression. Welfare should be ended not mended.

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3 Moo cow December 6, 2017 at 11:48 am

The welfare here is typically used by high income/highly educated people who have high marginal tax rates and (in many cases) unhealthy children or spouses.

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4 JonFraz December 6, 2017 at 12:50 pm

Yes, FSAs are no more a form of welfare than an IRA is.

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5 efcdons December 6, 2017 at 2:27 pm

So they’re welfare then. Like all government provided benefits. The right and the post-Bill Clinton Democratic party have done a good job protecting the feelings of the non-poor by allowing them to collect welfare without disrupting the self-esteem they get from pretending to not be dependent on government. Unlike “those people”. But we should probably make government benefits more obvious instead of hiding them in the tax code. Then maybe people would be less willing to vote against government benefits for other people. Just like how conservatives think making the taxes people pay more obvious and “painful” would make them more likely to support tax cuts for “those people” (i.e. for the rich).

6 Thomas December 6, 2017 at 3:58 pm

efcdons demonstrates that ever salient point, that the left cannot distinguish action from inaction. The government taking your money is an action. The government not taking your money is an inaction. Your account with the government being net positive is welfare, your account with the government being net negative is not. Reducing the size of the negative balance is not welfare.

On a related note, it is difficult to decrease the taxes of those that pay zero in taxes. NPR is reporting this as the equivalent of the government stealing from the poor. Again, action and inaction are very difficult concepts for the left.

7 Moo cow December 6, 2017 at 4:32 pm

GWTW was the one who called it welfare.

But really…you get $2500 more than me because you have medical expenses? What is that? If not welfare.

8 GoneWithTheWind December 6, 2017 at 6:11 pm

I did not call the FSAs welfare. Let me more clear. Scott professed a love of taxes and felt that taxes allow us to “build a good country” But much of our federal tax money is wasted on foolish things and in many cases harmful things (like welfare). I do not have a problem with a taxpayer being allowed to deduct his or his families out of pocket medical expenses from his taxable income. It seems fair and it is most certainly neither “welfare” nor “benefits”. It is merely allowing a taxpayer to keep more of what was theirs to begin with..

9 JonFraz December 7, 2017 at 1:24 pm

Apparently there are Russian trolls on Tyler’s site who are arguing nonsense just to provoke discord.
The money in an FSA (or an IRA) comes from the depositor’s own income. IT IS NOT PUBLIC MONEY. If that’s not dispositive then I will leave these tovarishchi to argue with each other.

10 Don McArthur December 6, 2017 at 10:54 am

I love the state employee with the lifetime guarantee of employment, headed for a cushy, government tax-funded retirement, pretending to be a Libertarian and taking a swat at being “forced to pay taxes”.

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11 tim December 6, 2017 at 12:08 pm

So he bites the hand that feeds him — better than the alternative.

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12 A Truth Seeker December 6, 2017 at 1:05 pm

The hand biting him?!

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13 The Centrist December 6, 2017 at 1:43 pm

“When a man bites a hand, that is not news. But if a hand bites a man, that is news.”

14 JWatts December 7, 2017 at 8:59 am

When a Brazilian bites a man, that’s a jaguar.

15 Joël December 6, 2017 at 2:26 pm

To “a Truth Seeker”, please stop posting these standardized messages. There was a time your contributions were bringing a different and interesting point of view. Now they are mostly just noise.

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16 Sam the Sham December 7, 2017 at 9:04 am

So that is what America has become – a place where Truth Seekers and standardized messages are not welcome. 😉

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17 Evan December 6, 2017 at 7:58 am

“If I am going to be forced to pay taxes I’d like to hand over my cash in a clean transaction…”

Obviously then… you are on the far distant fringe of American attitudes. Otherwise we would not now have the incredibly intricate U.S. tax codes & procedures crafted by our stalwart representatives in Federal/state/local government. Democracy has clearly rebuked your oddball tax viewpoint.

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18 dan1111 December 6, 2017 at 8:09 am

Complexity rarely arises because people want it.

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19 Evan December 6, 2017 at 8:32 am

…so tax complexity imposed by government arises against the will of the citizenry ??

Interesting. Obviously you don’t believe in American democracy or representative government.

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20 Not Eliezer Yudkowsky December 6, 2017 at 9:36 am

It’s an Inadequate Equilibruim!

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21 Hazel Meade December 6, 2017 at 9:38 am

Only racist plutocrats think democracy is imperfect!

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22 John Thacker December 6, 2017 at 8:53 am

People do want it. Complexity arises because most people are far more concerned with keeping their own private specific break (or “loophole” for people who like that term) than with opposing other people’s specific breaks.

Even when a bill abolishes a large number of complex tax breaks and corporate welfare in exchange for broad lower rates, it’s easier to rally people and public opinion against it for the same reason. Everyone can see the one specific break that they’re losing, and it looms larger in their minds.

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23 Pshrnk December 6, 2017 at 9:49 am

It is, in fact, a Tragedy of The Commons.

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24 ʕ•ᴥ•ʔ December 6, 2017 at 9:39 am

I agree with Alex.

And it seems pretty clear who the lobby for specially managed accounts would be.

The managers of special accounts.

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25 Beliavsky December 6, 2017 at 8:00 am

Flex spending accounts are fine if you can roll them over to the next year. Your family almost certainly will have medical expenses, eventually. If everyone had a flex spending account with $10,000 in it, they could pay directly for their own medical care in almost every years. Health insurance would exist to cover only huge bills, not routine visits to doctors and dentists.

Unlike Alex Tabarrok, I have not had much trouble getting reimbursed through a flex spending account.

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26 Clyde Schechter December 6, 2017 at 8:31 am

But FSA’s don’t roll over. (This is one of the major differences between an FSA and a Health Savings Account.) Use it or lose it. So FSA’s contribute to unnecessary spending on “health care.” Any health care provider will tell you that there’s a big rush to spend down the accounts on eligible junk items/services right before the deadline.
To be honest, I’ve never heard anybody complain about the process before–I guess GMU has an unusually onerous process for managing them. But from a health policy perspective, FSA’s are a terrible idea, another contribution to the egregious waste in our health care system.

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27 John Thacker December 6, 2017 at 8:56 am

I have heard a lot of people in a variety of jobs complain about the process (Josh Barro did just the other day on Twitter, for example.) The “process” got somewhat tougher after the PPACA because of (understandable) concern about the waste you mention. It resulted in some extra layers of verification and limiting the use on OTC without extra documentation.

I agree that FSAs are a terrible idea and ought to be shifted to HSAs, dependent tax credits and deductions, or other less complicated mechanisms. The current tax bill (at least the House version) made some moves towards getting rid of FSAs (starting with the dependent care one) as well as some other now obsolete accounts (like Archer MSAs, which are strictly inferior to HSAs and no one should have anymore.)

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28 Mulp December 6, 2017 at 11:55 am

FSAs were invented by conservatives who argue people chose the level of sickness and chronic illness and thus know in advance all their spending costs. After all, individuals can predict costs much better than insurance companies who merely predict pooled costs and then wastefully split that cost equally.

Basically, conservatives reject the foundations of capitalism. Remember, it was founded on pooling the risks of loss on trading voyages. Real conservatives invested only on the ships that would never fail to return with the planned cargo, and rejected the socialism of pooling risk and reward with others, admitting uncertainty.

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29 kevin December 6, 2017 at 12:42 pm

I actually think this isn’t that far off. Debate the use of the word “sickness” but people generally do plan healthcare expenditures like vision correction, dental, allergy buildups, etc. with a large degree of certainty. And these types of healthcare are not usually covered by insurance

30 efcdons December 6, 2017 at 2:37 pm

I think the FSAs and HSAs are mostly designed to reduce the degree to which people cross subsidize other people’s health care costs via mass participation in large insurance pools providing comprehensive coverage. The consequencialist justification of tax advantaged spending accounts as a tool for reducing health care costs because people will shop around, or whatever they give as the explanation du jour, is just a cover for the real “moral” explanation for why the government shouldn’t “force” me to help people sicker than I. Since “I don’t care about sick and/or poor people” has proved to be politically unpopular for the most part.

31 Mulp December 7, 2017 at 10:25 am

“people generally do plan healthcare expenditures like vision correction, dental, allergy buildups, etc. with a large degree of certainty.”

Giving tax deductions creates incentives to be born with bad genes leading to poor vision, bad teeth and oral biome, faulty immune system.

But FSAs are better than zero deductible low copay universal coverage like in the UK which promotes people like Hawking choosing to be born with ALS genes.

That is the conservative argument against a rational health care system. High deductible plans were supposed to cut disease, but to make them possible, workers had to be sold on the free lunch of high deductible by letting them put the portion of the promised lower premium in a tax free account, the FSA.

32 JonFraz December 6, 2017 at 12:53 pm

Starting this year an FSA can be rolled over to an extent (1K I think)
Also the other side of this is that the entire pledged amount of the FSA is available for us on day one, and if you leave a job before the end of the year and have drawn your FSA beyond its contributions you cannot be required to pay the amount in deficit (the employer eats the short fall just as he gains a windfall if you leave with the account in surplus.

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33 Pshrnk December 6, 2017 at 9:51 am

Even the Soviets could make five year plans; and we do things on one, two, and four year cycles. Good Grief!

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34 Thomas December 6, 2017 at 4:01 pm

“If everyone had a flex spending account with $10,000 in it,” an aspiring and not-too-clever Ivy student would do a study demonstrating that the holders of said accounts were disproportionately wealthy and the Democrat party would attempt to tax the accounts.

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35 Jeff December 6, 2017 at 8:02 am

Mason must not have a very good FSP if you have to spend time filling out forms and such. Mine just gives me a debit card, which I hand to my healthcare provider at the time of transaction. I assume they have some sort of validation behind the scenes going on but I never see it.

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36 Edward Pierce December 6, 2017 at 8:17 am

I have a debit card as well. Physician visits outside of the ER or Family Care usually require uploaded documentation. Almost all other purchases do — pharmacy spend, anything else listed on the politically-generated list of items considered eligible for FSA spending.

I often find myself wondering if the tax savings is worth the hassle. I calculate I’ve probably spent a grand total of an hour or two this year tracking, uploading, or otherwise thinking about receipts and say to myself “yeah, it’s worth it.” That doesn’t mean it doesn’t suck.

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37 JonFraz December 6, 2017 at 12:58 pm

I’ve used my FSA debit card at the pharmacy many times. I suspect they are coded behind the scenes, as food stamp cards are, to only allow certain types of charges and return a balance owed on anything you buy that doesn’t fit the allowed list. I’ve also written in the card number and expiration date when paying a medical bill by mail. The only time I ever had a trouble was with an HSA where I found out that the account could not be used at a dental office so I had to submit the paperwork with the dental bill (the card was linked to my health insurance and only worked in conjumction with claims that were going through that insurance, not my dental insurance)

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38 XVO December 6, 2017 at 8:46 am

You’ve never had to provide proof that you’re spending it on valid medical expenses before? Seems like every time I use the damn thing I get a letter asking for documentation.

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39 JonFraz December 6, 2017 at 12:59 pm

Weird. I’ve never had that happen. I’m surprised they don’t just check their records. They should be able to see where the money is going and what’s it’s for.

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40 alz9794 December 6, 2017 at 9:06 am

Agreed. I knew I was going to have a dental procedure this year, so it’s the first time I used an FSA. I have a debit card, and for some things (prescriptions for the procedure) it was a very simple swipe of the card. For the main procedure (implant), I had to email/fax a copy of the receipt to the provider. Within one day I had a confirmation email that it was accepted. It was pretty painless, but I had read up on what qualified and what didn’t, so perhaps that helped me avoid issues.

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41 Pshrnk December 6, 2017 at 9:53 am

“I assume they have some sort of validation behind the scenes going on but I never see it.”

They do. And remember TANSTAAFL !

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42 NPW December 6, 2017 at 8:06 am

The problem with flex spending accounts is their incompatibility with insurance. I’ve yet to have the option to have both. I don’t know how much is legal and how much is the options that my employers have offered.

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43 other derek December 6, 2017 at 8:59 am

100% legal. You can’t have an FSA with a high-deductible plan. But! High deductible plans are eligible for HSAs, which are vastly superior to FSAs.

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44 Jeff December 6, 2017 at 9:53 am

>>You can’t have an FSA with a high-deductible plan.

Don’t tell my employer that, because I do have both.

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45 Jeff December 6, 2017 at 9:57 am

I should add that it’s legal because the FSA is limited to vision and dental. That is in fact what I use it for.

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46 NPW December 6, 2017 at 10:06 am

I use the company PPO. None of the of the other plans make sense that have been offered at the two employers I’ve had post-Obamacare. The (savings accounts+plans) have all had horrendous rule sets. The previous company I was at had corporate HR come out to explain the rules. Within five minutes it was obvious that they were too complex even for the ‘expert’ to keep up with.

The core problem was that the savings account type (HSA, maybe?) that everyone wanted was unavailable with insurance that actually covered anything. When I ran the numbers for what I would get in the event that I actually used the coverage the PPO won. I wrote up a fairly detailed spreadsheet in excel that several people used. Even single/childless/never-go-to-the-doctor-types saw a car accident type event as reasonable justification for the PPO.

The HR monkey was rather bombastic with the line that if we were responsible little minions (company was self-insured) we would shop around for the best prices. After preaching the company dogma, she got eviscerated. Was the company going to let us shop around during working hours? How were we going to be more effective with negotiating with providers than professionals? How were we going to get accurate pricing the in the first place? What market position were we going to use to get better prices individually than we do collectively (Company used BlueCross/BlueShield). Since when was non-routine health care firm- fixed price?

Then our local HR asked about a medical emergency. How was one to shop around when they were unconscious at work and an ambulance was called? “Well, in this hypothetical..”,responded the corporate HR. “Not hypothetical, it happened to me last week.” the local HR said. Corporate HR said they’d look into it.

Corporate HR was pushing hard the notion that people would be responsible if it was ‘their’ money in a way they weren’t if it was the company dollar. I was working for an international engineering firm with average IQ and conscientiousness likely above average of population. General consensus was not going to happen for the types of events that drive the need for health insurance.

Maybe it was just crappy options, but so far the only savings account that’s worked for me is the one for dependents.

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47 Mulp December 6, 2017 at 12:01 pm

Sounds like your corporate HR monkey was trained by the same conservative idiots advising the GOP on health care policy, all based on every illness and every accident, and every aspect of genetics at birth, being individual choices that the individual must be forced to take individual responsibility for.

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48 cthulhu December 6, 2017 at 12:06 pm

I use the FSA, and it almost-but-not-quite covers my company PPO’s annual deductible for my employee+spouse+family plan. Ever since ObaminableCare cut the FSA max down from $5k to $2.5k, I typically spend down the entire thing before tax day on essential medical services (not including Rx). So I pay for dental and vision care with fully-after-tax dollars. This is all part of the shift over the last 30+ years where the government immediately shares in the private citizen’s good fortune (income tax) but refuses to share in the same citizen’s bad fortune (expensive medical bills) until they become absolutely horrendously expensive, if then.

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49 kevin December 6, 2017 at 12:44 pm

You can have a specific type of FSA. I believe it is called a vision and dental FSA. Works exactly the same as a normal FSA, but limited to those 2 types of expenses

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50 JonFraz December 6, 2017 at 1:02 pm

It isn’t a slam dunk that an HSA is superior to an FSA. The advantage a FSA has is that the entire pledged amount of the account is available on day one of the plan, funded or not. An HSA is available only to the extent it has been funded, so you need to plan your major medical expenses for the end of the year, which is not exactly easy to do. (An employer-funded HSA may be fully funded at the beginning of the year courtesy of the employer)

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51 anon December 6, 2017 at 6:35 pm

This is not much of a downside unless you are spending the maximum contribution every year and have no funds remaining from your prior years’ contributions. You can also reimburse yourself for previously incurred medical expenses down the road–from my understanding there is no time limit to this reimbursement so long as you have everything properly documented. If you really want the HSA funds immediately, you can front-load your contribution if your payroll/HR people are accommodating.

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52 JonFraz December 7, 2017 at 1:27 pm

Most people I know try very carefully to only fund these accounts to the extent they will use the money. Why lock up money that you could use for other purposes, including investments (these accounts are not interest-bearing– you earn nothing on them) ?

53 Stephen L. Carter December 6, 2017 at 8:06 am

Perhaps the middle ground is deregulation of flexible spending accounts, preserving the option to put tax-free dollars aside, but dispensing with the extensive paperwork to make withdrawals. Let employees draw down their funds on their honor rather than on the basis of proof of expenditures. This would be consistent with how we handle any number of tax deductions, where receipts are needed only in the (highly unlikely) event that a deduction is challenged. Yes, there would doubtless be some employees who would cheat, but there are surely taxpayers who cheat too. On this model, the challenge to the drawdown would come only ex post, and would be done only by government auditors — never by the employer’s own human resources department.

True, this proposal reflects my prejudice in favor of a government that actually trusts people — but perhaps there are worse prejudices to hold.

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54 dan1111 December 6, 2017 at 8:11 am

The problem with systems based on trust is that they often reward untrustworthy people at the expense of trustworthy people.

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55 kevin December 6, 2017 at 12:47 pm

Sure thats a problem. What we deal with it for real estate deductions, charity deductions, etc. Why have we determined the benefit outweighs the negative/problem in those scenarios, but not here.

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56 Hazel Meade December 6, 2017 at 9:40 am

just abolish them and let everyone have HSAs.

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57 cthulhu December 6, 2017 at 12:07 pm

At last you make a comment worthy of your namesake! I was beginning to think you didn’t have it in you anymore…

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58 Hazel Meade December 6, 2017 at 10:45 pm

Why anyone thinks a Heinlein fan would support Donald Trump is beyond me. Heinlein was a nudist who supported polyamorous marriage and free love. His books are full of multi-cultural and multi-racial casts. The lead characters of The Moon is a Harsh Mistress are a trans-racial black woman, a disabled black hispanic man, and a transgendered AI. It celebrates an imagined lunar culture that is a diverse mixture of Russian, Chinese, and American. Heinlein would have loathed everything about Trump’s economic nationalism and cultural nativism.

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59 JWatts December 7, 2017 at 9:06 am

“Heinlein would have loathed everything about Trump’s economic nationalism and cultural nativism.”

Heinlein would have understood that the Democrat driven media demonizing someone as innocuous as Mitt Romney is what gets you Donald Trump. And frankly, “Trump’s economic nationalism and cultural nativism” is overstated. Trump has a big mouth but has done little. He certainly hasn’t done anything as bad as either the Iraq War or Obamacare.

60 Hazel Meade December 7, 2017 at 10:15 am

I’m no supporter of the Democrat dominated media, although it’s overstating the case to argue there was some sort of media conspiracy to “demonize” him. The right wing paranoia about the evil media conspiring against them makes themselves look like lunatics. (See Roy Moore – it’s all a plot!) Same with the left’s paranoiac belief that all free market economics is a plot to foist capitalism on deluded masses, false consciousness included. (Also, every time a socialist government fails, it’s because of secretive capitalist efforts to sabotage them).

As for Trump, give him time. He’s been deliberatly sabotaging NAFTA negotiations so he can have a pretext to withdraw from it. And if that happens, it will be just as bad as Obamacare or the Iraq War. Maybe worse.

61 JonFraz December 6, 2017 at 1:05 pm

There’s no need for it to be “on their honor”. The cards should be coded in much the same manner as food stamp cards where only certain sorts of purchases are approved at point of sale.: A prescription at the pharmacy but not a bag of potato chips (some do work this way already). All that is required is for the pharmacy to code their system so that Rx drugs are categorized with their own code, and I would surprised if this was not already standard practice.

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62 Bill December 6, 2017 at 8:13 am

How many people will be purchasing glasses this holiday season, even though they don’t need them, because of their flexible spending account.

Or, What if you are poor and don’t have savings to put into the account.

FSA as a rich persons problem.

Let’s be sure to cut Medicaid

So we can preserve FSAs!

Burp.

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63 John Thacker December 6, 2017 at 8:58 am

The House bill eliminated dependent FSAs, which was a good trade. (If that provision had made it into law would you suddenly switch to be an ardent defender of FSAs? I hope not.)

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64 kevin December 6, 2017 at 12:50 pm

What do you truly need? You can get by/live without glasses at all. I’m inclined to think someone upgrading their prescription/glasses a little bit earlier then their insurance would have let them as a problem wayy down on our list of priorities.

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65 JonFraz December 6, 2017 at 1:07 pm

The money in an FSA is the taxpayer’s own money, deducted from his pay check. it is NOT public money! There it should matter what he does with it, as long as it is within the rules of the account.

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66 Bill December 6, 2017 at 3:09 pm

John, The meme that its the taxpayers own money, when it would otherwise be taxed, is just a meme: if everyone agrees through there elected representatives to purchase goods, then there is a bill for that, which we call taxes. The better question to ask is whether FSA’s, which are an exclusion from income, cause unnecessary medical expenditures.

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67 Anon7 December 7, 2017 at 1:31 am

“Let’s be sure to cut Medicaid.”

Yes. That requires far too much money from taxpayers.

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68 Benny Lava December 6, 2017 at 8:17 am

Do you and Scott want a little cheese with your whine?

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69 Bill December 6, 2017 at 8:31 am

Go to the Wall Street Journal today and run the comparison of how much your taxes will increase. Good calculator which includes many of the deductions one would ordinarily make.

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70 Evan December 6, 2017 at 8:40 am

Taxes are supposed to increase. Where have you been since 1913 ?

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71 Bill December 6, 2017 at 3:10 pm

Taxes and debt increased, what an accomplishment from a tax bill.

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72 Anon7 December 7, 2017 at 1:40 am

It’s the upper middle class who benefit most from deductions. You lefties should be thanking the Republicans for doing your dirty work because it will be that much easier for you to sock it to the evil rich 1% when you get the chance without losing any tax money from the upper middle class, which will enable you to provide even more handouts to the poor.

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73 Dann Ryan December 6, 2017 at 8:32 am

Conversely, Health Spending Accounts are fantastic. Sure there is the requirement of being in a high deductible plan, but that is becoming exceedingly common these days. There is no forfeiture of the account value at year end and you can submit reimbursements for medical expenses at any time. You just keep accurate records and let the account grow tax-deferred. It essentially becomes another retirement vehicle, like an IRA, that you can tap into at any time for tax-free withdrawals up to the total amount of medical expenses you’ve incurred.

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74 Hazel Meade December 6, 2017 at 9:44 am

They should just merge them with 401(k)s and IRAs. Just have one generic tax-deferred savings account than can be used for retirement or medical or any other tax deductible expenses.

(Then gradually eliminate all the itemized deductions … muahahaha).

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75 ʕ•ᴥ•ʔ December 6, 2017 at 9:48 am

There should not even be IRAs or 401k.

You only need a healthy investment income exemption for the working class.

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76 Hazel Meade December 6, 2017 at 11:02 am

It would all work out to be equivalent in the end – you get $X a year you can deduct from income tax free, as long as it goes into savings or XYZ qualified expenses (such as medical). Whether the account is officially an IRA or not would be irrelevant.

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77 ʕ•ᴥ•ʔ December 6, 2017 at 11:11 am

Not equivalent, because there would be no account management fees.

Simply make the first $40k of investment income tax free, and a lot of people will start investing. The power of free.

It can be made revenue neutral pretty easily, both because special accounts currently shield the same sort of return, and because you can be aggressively progressive above $40k.

78 Hazel Meade December 6, 2017 at 11:33 am

Whether it has the rules of a 401(k) or a traditional IRA or whatever is open to negotiation. I’m imagining that an open investment account would not be politically feasible because many Democrats want that money to be saved for retirement not withdrawn at some later date, and/or will argue that people will put their money into risky investments and lose it.

The idea of keeping some of the rules of an IRA or 401(k) is to satisfy those objections.

79 ʕ•ᴥ•ʔ December 6, 2017 at 11:57 am

If you ask me, it was a failed experiment.

20 percent of 401k’s have loans outstanding.

The median account balance in the U.S. is only around $72,000 for 55-64 year olds.

80 Hazel Meade December 6, 2017 at 1:45 pm

I’m just saying you’re not likely to convince a majority of Congress to kill all IRA/401(k) requirements in favor of no-strings-attached tax free investments. If the median 401(k) plan only has $72K in it now, how much will it have when there are zero restrictions on withdrawals? A lot of people are going to argue that some people will save even less if they can spend the money whenever they want – and those people will end up destitute at retirement. Unless you can convince them that that’s OK, you aren’t going to be able to pass your plan.

81 Stormy Dragon December 6, 2017 at 9:49 am

Yeah, we need to keep raising taxes on the middle class so we can afford more tax cuts for billionaires.

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82 Hazel Meade December 6, 2017 at 11:00 am

Because only billionaires use 401(k)s or IRAs ?????
WTF are you talking about? I’m suggesting just have one generic tax-deferred savings account for all tax deductible expenses. At the moment those have annual tax free contribution limits, which you could keep, so the benefits to billionares would be miniscule. A billionare is not going to give a shit about an account he can only put $10K a year into tax free.

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83 Peter December 6, 2017 at 11:11 am

@Hazel – The only reason to keep them segregated now, is that HSA money can be withdrawn and spent the moment it is earned. Whereas 401(k) and IRA money has age restrictions on withdrawals. Merging them together would create an accounting nightmare for most people. Also, 401(k) funds that you may not need for 30+ years are going to be invested very differently than your HSA funds you may need in 12-24 months.

84 Hazel Meade December 6, 2017 at 11:28 am

Why do you need separate accounts to put some money in a long term investment and hold some other money in cash? That’s pretty much how my Ameritrade account works right now. Maybe have some sort of minimum cash balance ?

I think the age restrictions would be irrelevant, since HSAs are tax deductible regardless. You would basically be allowed to withdraw money from your 401(k)/IRA to spend on medical without paying taxes or penalties. The age limit would still apply to non-eligible expenses – you could withdraw the funds but will pay taxes on them for the year the money is withdrawn, and when you hit retirement age you can withdraw whatever you want. I don’t think this is an accounting nightmare – you still would only deduct everything put into the account for the fiscal year from income. It would simplify things by having only ONE account instead of different accounts for different purposes. It’s one line on your 1040 instead of three or more.

85 Peter December 6, 2017 at 4:25 pm

If you contribute 401(k) money and HSA money to the same account, it would be an accounting nightmare to keep track of how much of the contributions and earnings are HSA and eligible for immediate withdrawal with no tax due and how much is 401(k) with its associated age restrictions and tax deferred liabilities.

If you want to change the tax laws to create a single pool of untaxed/tax deferred money, well now you’re talking about a whole different story.

86 Viking December 6, 2017 at 12:31 pm

That’s what Singapore is doing, my recollection is that the account can be used for house purchase, health care, and retirement.

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87 Hazel Meade December 6, 2017 at 12:40 pm

Right, just expand it into a totally generic bucket for everything tax deductible. Then it’s just one line on your 1040 – you can spend it on whatever you want that’s tax deductible, or save it for retirement. Itemized deductions disappear into the eligibility criterion for account withdrawals, and everyone gets $X a year they can spend on deductible expenses, including retirement savings, but they have more flexibility about which of those things they want to prioritize. I.e. you can spend your tax free $X/year on retirement or health care or house down payment or whatever. Your choice. Everyone gets the same maximum deduction.

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88 kevin December 6, 2017 at 12:53 pm

I agree, but literally all of Tyler’s reasons against FSAs except one equally apply.

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89 rayward December 6, 2017 at 8:32 am

Tabarrok and Sumner have spent most of their adult lives working for large, highly bureaucratic organizations, so it’s not surprising their version of flexible spending accounts isn’t, well, flexible; indeed, I think it explains much of their animosity towards large organizations, including especially government. I work mostly with small to medium sized professional partnerships, and I can assure Tabarrok and Sumner that their flexible spending accounts are very flexible. That’s not to say there aren’t advantages to working for the types of organizations Tabarrok and Sumner work for. Sometimes I have the impression that economists believe their experiences and just like everyone else’s. The universe is actually a flexible place.

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90 other derek December 6, 2017 at 8:57 am

Here is some real advice: The online receipt uploading tools for those FSA programs are really bad, and the standards for receipts seem to be impossibly/obnoxiously high. The trick is to ignore those tools. You need to download the paper forms that you get your care provider to sign, and just mail/fax those in. If you use the online tool, the process is a nightmare. If you download and print the PDF, it’s easy.

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91 JonFraz December 6, 2017 at 1:11 pm

Even back in the day when I had to submit receipts I never had a problem. I would submit (by mail) pharmacy receipts, or insurance EOBs showing what insurance paid vs. what I still owed (generally with a break down of what the medical expense was all about, a date, and the person they were for). I’ve had FSAs for twenty five years, and I am surprised to hear of people having these problems which are unknown to me.

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92 Ted Craig December 6, 2017 at 9:03 am

Our FSA offers debit card option.

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93 Trevor H December 6, 2017 at 9:29 am

Echoing many other comments, having a debit card makes all the difference. Occasionally they will send me a letter asking for receipts. I have ignored those letters 100% of the time without consequence.

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94 Dan December 6, 2017 at 9:33 am

My FSA sponsor has long provided a debit card, which works fine for many purchases and med office visits. And, in one of the extraordinarily rare developments I approve of from the Obama years, a change was made for FSA plan sponsors to allow EITHER a rollover of $500 from one year to the next — not much, but better than no rollover whatsoever — or a 2.5 month grace period to spend down the FSA funds from the prior year. My employer opted for the rollover.

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95 Hazel Meade December 6, 2017 at 9:34 am

I agree, FSA’s suck. They have no real advantages over HSAs.
The main problem is that the money comes out of your pay, but it’s “use it or lose it”. You can’t roll it over to the next year if you don’t spend it (or only a small amount), so you have to know in advance how much you are going to spend, or blow it on stuff you don’t really need at the end of the term. This seems rather pointless. If the goal is to stop people from putting unlimited amounts in a tax deferred savings account, there are better ways to prevent that like have a maximum account limit after which the money goes back into your pay. Or make it work the same as a 401(k), where you can’t withdraw money without paying a penalty, except the approved expenses. The whole practice of taking the money in the account if it’s not spent is wrong.

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96 Ted Craig December 6, 2017 at 10:34 am

“after which the money goes back into your pay. ”

That sounds like an accounting nightmare.

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97 Hazel Meade December 6, 2017 at 10:57 am

We have computers for these sorts of things these days.

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98 Ted Craig December 6, 2017 at 11:00 am

Yeah, right.

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99 Hazel Meade December 6, 2017 at 11:17 am

It shouldn’t be that difficult to keep track of the amount in the account, the amount added in the fiscal year, and then calculate the taxable pay. Come on. It’s probably already an accounting nightmare to keep track of what expenses are FSA eligible. Adjusting the amount deducted from pay based on a maximum account limit should be trivial by comparison.

100 Ted Craig December 6, 2017 at 11:29 am

You’re “not that difficult” task already includes three factors. And that’s without any reporting requirements to the government.

101 Ted Craig December 6, 2017 at 11:35 am

Just to be clear, I’ not against HSAs for all. I am against the idea that any solution involving a bureaucratic entity would be simple. It should be, but it wouldn’t be.

102 Boonton December 7, 2017 at 8:42 am

so you have to know in advance how much you are going to spend, or blow it on stuff you don’t really need at the end of the term.

You probably could estimate 80% of your next year medical expenses with a very, very, slim possibility of not going over. For example, if you have monthly prescription expenses of $100 and quarterly doctor visits of $40 each that’s $1360. If you put that in the account you won’t have to worry about losing anything. Yes if you have a surprise dental visit needed there won’t be enough money in the account to cover it so you’ll pay for it the old fashioned way. Not the end of the world.

Even if you lose some of the money it still isn’t the end of the world. If you’re in the 25% bracket putting $1200 in an FSA will save you about $400. If, at the end of the day you lose $25 left over in the account you have still saved $375.

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103 ʕ•ᴥ•ʔ December 6, 2017 at 9:46 am

By the way, am I right that some of you who don’t like the nudges of behavioural economics actually do like the handcuffs of special savings accounts?

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104 TMC December 6, 2017 at 10:27 am

You saw some support for FHAs above? HSAa get some support because they don’t suck so bad (and tax benefits).

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105 Pshrnk December 6, 2017 at 9:47 am

I have never availed myself of a flexible spending account. Not worth the trouble. Money is better spent keeping life simple.

” if we don’t even TRY to build a good country, how can we possibly succeed? Isn’t it better to try and fail, rather than not even try?” Hear, Hear

As future Nobel prize winner Toby Keith said :
We might go down cryin’
But at least our love will die
Tryin’ to matter, tryin’ to matter

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106 Hazel Meade December 6, 2017 at 11:14 am

Money is better spent keeping life simple.

Also worth noting that money spent on whatever is tax deductible is still money spent. Never spend money on something just so you can get the tax deduction.

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107 albigensian December 6, 2017 at 10:04 am

In the private sector, this is the retail rebate. And, like the retail rebate, it’s an instance of price discrimination, a means to offer a bargain to those willing to crawl over gravel while charging full price to the less motivated.

Just as many shoppers never redeem the rebate, many taxpayers either don’t create flexible spending accounts, or lose some of their funds at the end of the year.

So, perhaps “taxes would probably fall in other ways that are difficult to predict but nonetheless real,” but, they’d fall by less than you could save in taxes with a flexible spending account IF you do the full gravel-road-crawl. For the same reason that a merchant can afford to offer a larger rebate than the merchant could afford to offer as a simple price reduction.

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108 Boonton December 6, 2017 at 10:50 pm

It’s not about figuring out who will ‘crawl over glass’. It’s about tax avoidance. Maxing out on flexible spending accounts, HSAs, 401ks etc. is a great way for very highly paid people to avoid some (not all) income tax. It does provide some middle and lower class people a way to save a much smaller portion of tax on some of their necessary purchases.

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109 WD40 December 6, 2017 at 10:41 am

Here is a simple solution to Alex’s and Scott’s problem. If their institutions provide them debit cards, then only use them where they will work without further documentation (in my experience, doctor visits and pharmacies) and then base the amount put aside on these easily reimbursed expenses. And if they are afraid that they will over-estimate the medical costs, then just underestimate sufficiently.

Do they complain about searching for coupons in newspapers that provide special deals on store purchases? This is the private sector analogy to the extra time spent on these savings accounts. I suspect that they do not even bother looking for such coupons. And do they complain about paying for magazine subscriptions, when they read fewer articles than anticipated because they are either uninteresting or they are too busy doing other things? Again this is a private sector analogy to some of their complaints.

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110 Peter December 6, 2017 at 11:05 am

Like others have said, you and/or Scott must have a pretty crappy plan. When I had an FSA I had absolutely ZERO problems using it or getting reimbursed (this was back before they used debit cards). We now have an HSA with a debit card and again have had ZERO problems using it.

If you don’t like these accounts on principle, or have an economic argument about why they aren’t the optimal use of resources, just say so. These overly melodramatic analogies just make you sound like a general complainer who may not understand how they really work. And besides, no one is forcing you to contribute to or use these accounts. If you think it’s too much hassle don’t do it.

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111 Luis Pedro Coelho December 6, 2017 at 11:21 am

FSAs and tax benefits are government coupons.

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112 Flexible Spending Account December 6, 2017 at 12:13 pm

I’m not the biggest fan of you, either, but I don’t go around making blog posts nitpicking at your imperfections.

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113 JonFraz December 6, 2017 at 12:49 pm

Re: I hate “flexible” spending accounts, i.e. those accounts where you put say $1000 in tax-free but you then must submit a bunch of health or education receipts to claim the money

There may be some that still operate that way, but the FSA’s I’ve had for the last few years all came with a debit card that could be used at a doctor’s office, dentist office or pharmacy, or else its numbers written in on a medical bill like any other credit.debit card.
You are very much well behind the times on this one

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114 Boonton December 6, 2017 at 12:49 pm

Not really an issue for me. My Flexible spend account is tied in with my health and drug insurance. Whenever I fill a script or pay a doctors’ copay the money from the account is wired to me a few weeks later once the claims hit insurance.

Yes there is an option to submit paper receipts but if you plan your flexible spending account to be about enough to handle your copays it really isn’t necessary.

On a larger scale, though, I’m not sure we are accomplishing anything with these accounts other than giving high income people a vehicle to avoid taxes. I would propose instead:

Rolling Savings Account

Require 2.5% of everyone’s paycheck to go into a savings account, sort of like an IRA or 401K. The account would be ‘rolling’, though. 25% 1 year, 50% 5 years and 50% 10 years. That means if you put $100 in year 1, you can take out $25 in year 2, $50 in year 5 and $50 in year 10.

You can pair this with a rollback of unemployment benefits. Instead let anyone who has a job build a reserve fund. Once established it can be tapped for any emergency….not just ‘approved’ ones like retirement, medical expenses, but offbeat ones like having to move quickly to take advantage of a job opportunity or get your unexpected transmission repair done. Since many people will get used to leaving the money aside, most won’t take it all out as soon as it becomes available so you will beef up people’s under-utilization of retirement accounts while at the same time providing some needed financial security for the lower working class without establishing a complicated program to evaluate claims.

Libertarian ninnies may complain about this smacking of the ‘nanny state’ but I think it would actually be an improvement. For those who already save, they could scale back their savings to offset their ‘loss of freedom’ due to this forced saving. For those who don’t it’s true that it is an imposition but unlike a tax it ultimately comes back to them.

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115 Scott Sumner December 6, 2017 at 12:51 pm

Gonewiththewind, You asked:

“The author actually believes “but if we don’t even TRY to build a good country, how can we possibly succeed?” is what higher taxes is all about.”

No, that’s not what I believe. It would be more accurate to say that I’m not so naive as to think all these deductions actually result in us paying lower taxes.

Edward, Our family spends at least 40 hours a year on this nonsense. Yes, I know, we should just not do the FSA. But that doesn’t make me feel any better about the program. I’m the boss, but my wife is the decision-maker.

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116 Boonton December 6, 2017 at 1:52 pm

40 hours per year? Errr no.

FSA? About 15 minutes. Figure out how much to contribute and that’s it. It’s hooked to my insurance so whenever I make a copay it automatically submits to the FSA so as long as my FSA contribution is about what I’ll spend in copay I don’t have to worry about receipts and submissions.

Taxes? About two hours each year. We itemize our deductions and have a rental property on top of our primary residence. The 2nd hour is mostly figuring our total medical expenses (including miles for travel) which isn’t really of benefit on the Federal tax return but is helpful on the state. Turbotax does the taxes and it takes, generously, an hour to fill in the blanks which are the same from last year.

Might I spend a lot of hours on taxes some year? Sure if I did something I never did before that opened up a whole area of taxes that I’ve never had to deal with…say if I brought an oil well…I’m sure it would. But my ‘normal’ taxes which is not a big amount of planning or doing.

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117 efcdons December 6, 2017 at 2:45 pm

As Corey Robin points out in his piece “Socialism: Converting Hysterical Misery into Ordinary Unhappiness for a Hundred Years”, making you spend so much time figuring these kind of things out for your health care, retirement, education, etc. is a feature of the “accounts” model and not a bug.

“One more account to keep track of, one more bell to answer. Why would anyone want to live like that? I sure as hell don’t know, but I think that’s the goal of the neoliberals: not just so that we’re more responsible with our money, but also so that we’re more consumed by it: so that we don’t have time for anything else. Especially anything, like politics, that would upset the social order as it is.”

“That’s what the neoliberal view reduces us to: men and women so confronted by the hassle of everyday life that we’re either forced to master it, like the wunderkinder of the blogosphere, or become its slaves. We’re either athletes of the market or the support staff who tend to the race.”

http://coreyrobin.com/2013/12/10/socialism-converting-hysterical-misery-into-ordinary-unhappiness-for-a-hundred-years/

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118 Ted Craig December 6, 2017 at 3:51 pm

If you’re maxing out at $2,600 and spending 40 hours a year, you’re spending an hour to make a $65 claim, on average. Dude, you’re doing something wrong.

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119 Kevin Postlewaite December 6, 2017 at 3:11 pm

I always figured that going through the FSA hurdles was a separating mechanism to separate conscientious people who reliably vote from those who don’t, and thought of it as a targeted tax cut to those peole.

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120 responsible D December 6, 2017 at 3:33 pm

The problem with FSA is you have to guess during the fourth quarter of a given year what your medical expenditures will be for the following year, and once that number is set it can’t be changed. Guess too low and you end up using after-tax money to pay some expense. Guess too high and you have an unused lump of money at the end of the year that you need to try to spend or else lose it (I believe that actually your plan sponsor i.e. typically your employer, gets to keep whatever you didn’t use).

I never had an issue with reimbursement because the FSA administrator was always connect to my health insurance provider. So any amount I owed was automatically deducted from the FSA account. Once a year at the end of the year I’d submit one reimbursement request for anything that hadn’t been automatically deducted. There was never a problem with quibbles over receipts. Maybe it helped that it was always done through a plan sponsored by my employer which was a large organization.

So sure it could be better but the reimbursement mechanism isn’t really the problem.

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121 Boonton December 6, 2017 at 4:12 pm

If you’re trying to predict down to the penny it is a ‘problem’ but why do you have too? I typically do $1200 per year, $100 per month. We always exceed that with at least one visit ($40) per month, at least $100 in drugs and $20-$50 in blood work. If it looks like you’re coming in under you can always do dental work or eyeglasses to top you off.

I suppose if you put a huge amount in, like $5,000, thinking you were going to do an operation or something and then that gets nixed it would become a hot potato.

If you make a fetish out of trying to get every medical expense paid pre-tax by guessing down the penny….well keep in mind diminishing marginal returns. Does it make sense to drive an extra 15 minutes out of your way to find the gas station that is selling for a nickle per gallon less? Assuming a 25% tax bracket, paying $100 of medical cost outside an FSA will cost you $133.33 or so. If putting an extra hour at work increases your chance for a raise or promotion, that’s much more important financially than trying to land your FSA on the penny.

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122 Bill December 6, 2017 at 7:20 pm

I bet

The reason Alex is having difficulties getting approval for his FSA claims

Is that

He is requesting reimbursement for

Non-FDA approved drugs.

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123 Normal December 6, 2017 at 10:04 pm

There’s a simple solution to this problem. Make the first dollar of medical spending deductible.

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124 Boonton December 6, 2017 at 10:47 pm

Scott’s point is twofold. First, there is a lot of waste in crawling down the road. Second, taken in isolation, it looks like the plan at least offers people an option and so, in isolation, flex accounts and their ilk appear to benefit taxpayers. In the big picture, however, the total amount taken in taxes is somewhat fixed by politics and economics so if we got rid of the spending accounts, taxes would probably fall in other ways that are difficult to predict but nonetheless real.

1. The flex account is something of a gimmick but it does offer two benefits:
a. People set aside some money for health expenses.
b. Many people don’t itemize deductions and even if you do medical expenses can’t be deducted on Federal returns unless they are very large. With the flexible account you can deduct medical expenses without breaking open your taxes and going to full itemization.

2. Question….why bother having taxes? The purpose of taxes on a macro level is not really to pay for gov’t spending but to check consumption so the economy doesn’t overheat. What if instead we simply had no taxes but a requirement to contribute to a personal savings account (a 401K but one where the money isn’t locked up until you’re old but is locked away for a few years)?

If we tried that we would see the gov’t financed entirely by borrowing. But on the flip side many gov’t spending programs would decline (people would immediately see 20%+ jumps in their pay). All inefficiencies caused by the tax system would vanish providing yet another economic boost.

But perhaps most importantly we would break the illusion the gov’t is about a giant ‘household’ that has to ‘pay its bills’. In reality on the macro scale the gov’t is about altering the allocation decisions of the market. From this POV spending $25B to make a new aircraft carrier is about deciding the economy will produce fewer Facebook games and instead make a new carrier. Pretending the carrier is ‘paid for’ if it is financed with a $25B tax versus $25B in borrowing distorts the reality. Either a $25B distortion in the economy is significant or it isn’t. If it is the evidence will be rising interest rates and inflation. If it isn’t it could be financed by issuing bonds that people will buy with their savings either directly (retirement accounts) or indirectly (going to the store, paying for a pile of shit, and the store owner puts the money in his bank which buys bonds).

It would make policy questions like this much more simple. What are we trying to accomplish with Flexible spending accounts? Are we giving a benefit to established, stable, upper middle income people or are we trying to increase the provision of healthcare? If we had a no tax system, I doubt a replacement program that issued checks to the types of people who previously would have maxed out on flexible spending accounts would look like anything other than a handout. Instead a program that simply issued payments to people short on healthcare coverage would be easier to see as both less expensive and more effective in terms of actually increasing those with coverage.

The same could be said for the ultimate ‘flexible spending account’…the 401K.

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125 buddyglass December 7, 2017 at 8:45 am

I hate them as well. Don’t even participate in mine anymore because of the irritation of managing receipts. The only times I’ve participated is when I knew I’d be making a major health expenditure that would allow me to max out the Flex spending with a single purchase.

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126 Donald Freeman December 7, 2017 at 9:54 am

Sounds depressingly familiar to my experiences with employer provided health insurance. They take my premiums and the employer’s contribution and lock them in a wooden box, place it ten miles down a gravel road…

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127 Ted Craig December 7, 2017 at 10:35 am

I finally figured out the issue. College professors must be among the last citizens of the land of small co-pays. It’s a pain for them to put together dozens of $5 pharmacy receipts.

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128 Mark F December 7, 2017 at 4:41 pm

One of the disadvantages to participating in a Flexible spending account is that the money you contribute to an FSA must be used by December 31 of the contribution year, unless your employer offers either a grace period (in which case you must use all funds by March 15 of the following year) otherwise, the unused funds are forfeited to your employer. This means you must be fairly accurate at guessing what your healthcare expenses will be in the future, which isn’t always so easy. And you can only change how much you contribute to your FSA during open enrollment, or after a life change (such as a marriage or birth of a baby) or change in employment.

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129 dsp December 8, 2017 at 9:12 am

Sumner’s analogy might have been true 10 years ago, but technology has shortened the 10 mile road to 1 block, paved it, and replaced the knife with a key. Although far from perfect, smartphone apps, like that of Benefit Strategies, makes the process of submitting receipts and monitoring balances very simple.

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