The Case Against Tax Breaks
By Arnold Kling
Most tax expenditures are really spending programs designed to look like tax cuts. Picture them as vouchers for healthcare, mortgage payments, daycare, transportation — name the tax break. Dressing these programs up as tax cuts makes them a much easier sell for politicians who fear the “big spender” label. But call them what you will, they drain the money from the Treasury and extend the scope of government. All told, this portion of the budget represents $800 billion in lost government revenues annually.
Not only do these tax breaks mask the true size of the government, they are a terrible way to make policy. They regularly pay people and businesses to do what they would do anyway, making them both poorly targeted and unnecessarily expensive. They are also extremely regressive. A particular tax exemption might be worth 35 cents on the dollar to a wealthy individual and only 10 cents to someone on the other end of the income scale who faces a lower tax rate. It would be hard to justify a housing policy that does more to subsidize the rich than the poor, yet that is exactly what the $80 billion a year home mortgage interest deduction does.
We really should get rid of tax deductions. Any social policy that you want to do can be done with subsidies. Even the charitable deduction could be re-cast as a matching grant from the government.
That is why I am not a cheerleader for Health Savings Accounts (HSA’s). They encourage two things that I like: savings; and catastrophic health coverage. But as a tax break, the HSA arbitrarily benefits those with high incomes more than those with low incomes. I think that HSA’s are better than nothing, but getting rid of all tax breaks associated with health insurance would be better. Then you can figure whether and how to subsidize catastrophic health insurance and savings for medical needs in old age.