Arnold Kling  

Tax Breaks vs. Subsidies

PRINT
Housing Bubble?... Politics and Academia...

Edward Lotterman writes,


When or why should government use direct payments versus tax breaks? The answers are more political than economic. One skeptic has argued, "Politicians and economists have a love-hate relationship with tax breaks. Politicians love them and economists hate them."

For example, follow some of the links in Tyler Cowen's post about the peculiar impacts of using tax deductions to subsidize health insurance.

UPDATE: Jonathan Gruber writes concerning policies for expanding health insurance coverage


every tax policy is much less efficient than public insurance expansions: while public insurance costs the government only between $1.17 and $1.33 per dollar of insurance value provided, tax policies cost the government between $2.36 and $12.98 per dollar of insurance value provided.

For Discussion. Are there any really compelling economic arguments for using the tax system rather than vouchers or other direct subsidies?


Comments and Sharing





COMMENTS (6 to date)
Bruce Bartlett writes:

One problem with using tax breaks is that tax distribution tables only take account of taxes. Thus, if we were to replace a tax deduction with a direct spending program that was even more generous to the exact same people, it would show a tax increase on those people and nothing more. The spending would be ignored. This sort of thing creates massive problems with improving the tax code. No matter what you do, it always appears to hurt the poor and enrich the wealthy.

Lawrance George Lux writes:

Yes, reduction of infrastructure costs in enforcing the program. The trouble--tax breaks always allow for external inclusion beyond the targeted Beneficeries. A badly written Tax break can allow inclusion costs far in excess of the infrastructure costs of direct subsidies. lgl

Chuck writes:

I'm at work on a statewide grassroots campaign to enact a school choice measure. As you probably know, there's a huge fight among pro-market education reformers over whether a tax credit or voucher is the better vehicle. Part of the fight is political, e.g., much turns around the word "voucher" as a frightening or unintelligible term.

Is there an economic side to the argument? I think so. Adding a tax credit increases the complexity of the tax code, at the margin. It might also be open to creative interpretation, again at the margin. But the drawback of vouchers is greater. Vouchers might change the incentive structure and, ultimately, the operating protocol of private schools. In other words, private schools may change their behavior for the worse in order to placate the government, since they give out vouchers.

Theoretically, the same problem could exist for tax credits. But if the transaction remains private (between a parent and a school), then the producer-customer relationship remains in tact. Hopefully, this will allow the maximum gains from trade.

Is this an economic argument or a political one? I don't know.

(And yes, I'm working on behalf of a campaign for tax credits.)

Deb Frisch writes:

For Discussion. Are there any really compelling economic arguments for using the tax system rather than vouchers or other direct subsidies?

The interesting question is whether and whom the government should subsidize when it comes to health care, housing and education. Now, for example, the gov't subsidizes health care for people who happen to work for large institutions. It subsidizes housing for people who happen to own homes. It subsidizes the wealthiest universities (Harvard, Stanford, etc. take the lion's share of grant money from NSF, NIH, etc.)

A graduate of econ 101 might ask whether the status quo in these three domains is rational, since it takes from the relatively poor and gives to the relatively rich.

Yet instead of focusing on the interesting question of whether the gov't should subsidize X and if so, WHO should be subsized, you want to quibble about HOW.

Yikes.

Boonton writes:
Is there an economic side to the argument? I think so. Adding a tax credit increases the complexity of the tax code, at the margin. It might also be open to creative interpretation, again at the margin. But the drawback of vouchers is greater. Vouchers might change the incentive structure and, ultimately, the operating protocol of private schools. In other words, private schools may change their behavior for the worse in order to placate the government, since they give out vouchers.

Using tax breaks, however, limits the impact of the program on those who do not pay taxes. You can use credits so the person will get cash back for his private school expenditure but you still run into the problem of financing... If you have a low income person they may have to wait a year to get back their $5000 voucher in the form of a tax refund while the school wants the money now.

I think your arguments against vouchers are actually arguments for them. Vouchers preserve the image, at least, of who is really paying for them...the tax payers. They make it easier to track abuse and measure results. Food stamps are a type of voucher and I haven't heard any food companies altering their production strategies to accomodate food stamps.

Dewey Munson writes:

Health does not fit the market system of trading. Trading requires the option of either party to "walk away" a situation which does not truly exist in health matters.

Like it or not, we must tackle the bureaucratic beast which will arise with
the necessary national health system which Marvin points out.

Who knows? Maybe the experience will help contain those other bureaucratic beasts.

Comments for this entry have been closed
Return to top