The Real Reason Tax Reform Is Hard

A blog about business and economics.
Aug. 10 2012 12:06 PM

Tax Reform Is Hard and It's Not Just Politics

Ezra Klein says big picture tax reform is really hard, and I agree. Indeed, if anything, he's underselling the challenge here:

The second problem is that it can be politically difficult to cut tax breaks. If you listen to Democrats, you would think these benefits mainly accrued to corporate jet owners and oil companies. But if you are going to seriously lower rates—not to mention raise any revenue—you’re talking about cutting or eliminating the deduction for home-mortgage interest, charitable contributions, state and local taxes and employer-provided health insurance. These are, by and large, regressive, but they are also widely used by the middle class, and exceedingly popular.

I've said this before, but I do think it's worth dwelling on the fact that the problems with eliminating these deductions aren't just about politics and public opinion. The employer-provided health insurance tax break and the charitable deductions tax break are real policy levers that meet real policy objectives. This is how we deliver health insurance to most prime age adults in the United States, and it's one of the main levers by which we finance higher education and academic research. They aren't necessarily great ways of doing these things. In fact on the health care front it's certainly not a good way. But you can't just kick these pillars of American social policy away, shrug your shoulders, and move on to debating Social Security. America does much less direct government funding of the arts and higher education than most countries, and we rely instead on the charitable deduction to provide a decentralized subsidy method. We use the health insurance deductibility to make it financially worthwhile for large employers to turn their workforce into risk-sharing pools. These are important policy goals and you'd need to try to meet them some other way.

That's hardly impossible to do—though given path dependency I'm genuinely skeptical we could do without the charitable deduction—but it would need to be done and it's a problem of substance over and above the fact that changing these things is unpopular.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.


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