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Six Policies Economists Love (And Politicians Hate) Commentary

July 19, 2012

This post is in reference to this article on NPR:

“One: Eliminate the mortgage tax deduction, which lets homeowners deduct the interest they pay on their mortgages.”

A lot of people in America own their own homes, so this deduction is popular, but let’s think about what it does to prices. When you pay for a house, part of your payment goes to interest, to the bank, and another part builds equity. Renting is a pure interest payment. It’s equivalent to owning your home, but building no equity forever. So, the government spends a obscene amount of money subsidizing the interest part of homeownership, but not the equity part, and, oh, by the way, people who are poor and can’t afford to own houses don’t get anything. The good part of home ownership, the whole “ownership” part is taxed, but the bad part, the interest, is subsidized. It’s regressive and it encourages people to take on more housing debt than they can really afford.

“Two: End the tax deduction companies get for providing health-care to employees. Neither employees nor employers pay taxes on workplace health insurance benefits.”

Health care in America is bad. Everyone recognizes that, but allowing employers to deduct health insurance payments is one of the worst parts of the system. It ties health care to employment, and not just any employment, employment with a large corporation or the government itself, which can afford the fixed regulatory costs of “playing the game”. So let’s say you lose your job. Boom, you just lost your health insurance too. In what twisted world does that make an ounce of sense? Why make individuals pay 30% more for health insurance than corporations as a matter of law? Lefties like to fret over the power of corporations vis a vis individuals, and health policy is a major source of that power. Libertarians fret about the increasing nexus between big corporations and the government, both in regulation and in subsidies. And, believe it or not, by and large, economists are not conservatives. Primarily, they are liberals, secondarily they are libertarians. There are maybe half a dozen truly conservative economists out there. If you want to subsidize health (I would say “care”, not “insurance” and yes, they are different), subsidize it for everyone, not just corporations.

“Three: Eliminate the corporate income tax.”

Since corporations aren’t people, taxing them doesn’t hurt anyone “real”. Wrong. Tax corporations and you tax three groups:
1. Their workers through lower wages.
2. Their customers through higher prices.
3. Their shareholders through lower stock returns.

Groups 1 and 2 are clearly not just the 1%, etc. Group #3 is less the 1% than most people think. Why tax a large group just to hurt a few of its members? There are a lot of people who invest, even if it’s indirectly through pension plans. Which of the three pays the most depends on tax incidence, which is often quite hard to measure.

“Four: Eliminate all income and payroll taxes… Instead, impose a consumption tax, designed to be progressive to protect lower-income households.”

When you tax something, you get less of it, because you raise its relative price. If you tax everything, relative prices stay mostly the same, leading to lower distortion. Any tax raises the price of earning money compared to leisure, and so it will still have some effect. One of the major problems in taxation theory is that some types of income are taxed several different times at different rates leading to some people paying vastly different rates (the “Buffett problem”). A progressive consumption tax fixes all this. No matter how you make your money, at the end of the day, you pay a rate based on how much you consume. Rich people who consume a lot, pay a lot. Poor people who consume a little, pay a little. No more deductions based on political power, no more loopholes giving the rich a free ride. Consumption taxes are highly efficient. That’s why the high tax European countries rely on them so much. In order to collect so much taxes, they need to be efficient.

“Five: Tax carbon emissions.”

If you want less carbon, you have to make it more expensive to consume. Supply and demand. It’s as simple as that. Here’s a good test to see if an environmental policy is effective: Does it make polluting more expensive? If yes, then it’s effective, and vice versa. If you want people to use less gas, gas needs to have a higher price. People don’t like this idea. People want to live in magical fun world where everything is free and we still get a pristine environment. The world doesn’t work like that.

“Six: Legalize marijuana.”

So much ink has been spilled on this topic, some of it mine. Suffice it to say that I agree wholeheartedly.

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