Jared Bernstein Gets Efficiency Wrong
By David Henderson
Jared Bernstein, formerly chief economist for Vice-President Joe Biden, argues for a measure that I agree with him on, but ends up arguing, on one criterion, against the measure. He doesn’t know that this argument goes the other way, which is why I titled this post as I did.
The measure: getting rid of the home interest deduction. You can see his argument here. He gives three arguments for it: revenue foregone, efficiency, and fairness. We pretty much agree that the revenue foregone is substantial. Where we would disagree is that I would want the measure to be combined with a cut in the top marginal rates to make getting rid of the home interest deduction more fair. Based on one past discussion with him and on having read many of his posts, I’m guessing that he and I will never agree on fairness.
We also agree that the tax break is inefficient. But even though he titles his post, “Here’s What an Inefficient Tax Break Looks Like” and claims that the tax break is inefficient, his own actual argument is that it’s efficient. He writes, “The MID [mortgage interest deduction] is widely believed to subsidize home purchases that would mostly have been made anyway, so it scores high on the inefficiency criterion.” If the deduction subsidizes “home purchases that would mostly have been made anyway,” that means that the deduction does not distort much. Which would mean that it scores high on the efficiency criterion and low on the inefficiency criterion. What makes a tax or a tax break highly inefficient is that it does alter behavior. If I bought Jared’s argument that it doesn’t much affect purchases of houses, I would be less opposed to the mortgage interest deduction than I am.
Ht to Mark Thoma.