Free Markets, Free People

flat tax


Mortgages, “tax expenditures” and jujutsu

I disagree with one point in Michael’s otherwise fine post about the mortgage interest deduction.  It’s something I hear frequently from fiscal conservatives, and it’s a nice sentiment, but we need a better argument.

Michael writes,

…we cannot accept the equivalence drawn between wealth transfers like Medicare, Social Security and Medicaid, and tax breaks like the mortgage interest deduction (MID). In one case, the government is taking money from someone else (despite how it has been characterized) and giving it to another, while in the other situation the government is simply deciding how much of one’s hide it will charge for its oh-so-wonderful services (a.k.a. taxes). It’s the difference between transferring money from one to another, and refraining from taking the money in the first place.

But targeted tax breaks aren’t really different, in practice, from subsidies.  The numbers would work out the same if the feds cut checks each year to people who hold mortgages, but we think of the tax break as allowing people to preserve their status quo, while we think of the subsidy as an intervention.

Somebody always has to pay for government spending.  A targeted tax break just means the government is going to force other taxpayers to pay for the spending, and when we’re running a deficit, that means future taxpayers.

I anticipate the counter-argument that if we send Congress more money to cover deficits, they’ll just ramp up their spending until they have equally large deficits again, so we won’t “save” future taxpayers a dime.  I have two responses:

  1. That sounds like a fine argument for requiring balanced budgets.
  2. It appears that nothing short of catastrophic deficits motivates politicians to cut back on spending, and even that is an iffy proposition, so if fiscal conservatives are serious about governing, we  need a better strategy than holding the Alamo on taxes.

What’s important for small-government tax policy is that taxes should (1) make people sensitive to increases in government spending (requiring balanced budgets helps), and (2) be simple and broad-based, not a tool for tinkering with social policy.

On the latter point, maybe I should give credit to Democrats for trying to undermine some of the biggest obstacles to the flat tax: the employer health benefits exemption and mortgage interest deduction.  I see potential for some political jujutsu: Republicans can let the Democrats take the heat for killing the deduction, and just push for other flat-tax provisions that tend to compensate the losers.  Lose the battle, win the war.