Arnold Kling  

Tax Reform

Envy, Happiness, and Social Po... New Interview with Milton Frie...

Sebastian Mallaby writes,

The same argument holds for tax incentives to buy health insurance. Just over a quarter of this subsidy is swallowed by households in the $100,000-plus bracket; far from promoting the wider dissemination of health insurance, it may even reduce it. Affluent Americans use the subsidy to buy all-inclusive health plans, which in turn causes them to throw money at health services; health inflation goes up, making insurance too expensive for poor families. The Treasury estimates that the ranks of the uninsured could be reduced by at least 1 million if the tax deduction for health insurance were capped at a reasonable level.

Read the whole thing. He makes the reasonable point that the labor-left agenda--trade protection, increased unionization, and raising the minimum wage--probably would do little to achieve the supposed goal of helping the poor at the expense of the rich.

On the other hand, if we stop using the tax system as the vehicle to subsidize housing, saving, and health insurance, that would promote equality. Hence, the argument for tax reform.

People on the left pose the friend of the poor. But they won't get on board for means-testing of entitlements or tax reform. Instead, they heave insults at the Sebastian Mallabys of the world.

See also posts from Greg Mankiw on Mallaby, The Earned Income Tax Credit, measuring poverty, and Brad DeLong.

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COMMENTS (8 to date)
reasonable writes:

Most progressive economists are in favor of increasing targeted social spending (i.e. do better at identifying the poor and refocus available social funds to make this spending more effective). This requires means-testing or the use of other indicators of income and need to achieve the same purpose. So Arnold Kling's statement is not correct or entirely fair .
He is right however that in the political debate many on the left oppose means testing due to the political economy 'paradox of targeting.' There is a nice paper by Gelbach and Pritchett from a few years ago that provides lots of examples of conservative politicians calling for finer targeting as a strategy to cut and eliminate programs, and conversely of politicians on the left who want to expand programs to the poor who call for costly 'universal' programs that also cover those not in need. The reason is that both sides clearly recognize that if you target too finely you undercut political support for programs. That's because in this country at least the poor vote less then the middle class and rich. Stated more crudely if the median voter is benefited by the program they'll support it, otherwise they won't. This makes for inefficient social spending.
Both the right and the left understand this perfectly well, as does Arnold Kling. The problem for people like him is that he declares himself in favor of more efficient mechanisms while 'caring for the poor' but people see an obvious 'bait and switch' because of the above problem.

To convince anyone you have to talk about how you are going to commit yourself and Congress to maintaining that stated concern for the poor, otherwise nobody will believe you.

WJ writes:

Paying less taxes than you would without tax incentives is NOT a subsidy. The mortgage interest deduction is only a subsidy if your mindset is that the govt has ownership of all of our income. A subsidy would be the earned income tax credits.

reasonable writes:

WJ misses the point completely. What matters for efficiency is whether you distort relative prices. In this case it is achieved by giving a tax break to home buyers, but you'd achieve the same result at the end of the day if you instead raised taxes on rentals. Either way, since the rich own much more expensive property than the poor, by definition the change in prices heavily subsidizes the consumption of fancy houses.
You could remove the interest rate deduction and use the money to give an across the board reduction in other less distorting taxes to both the rich and the poor, so the issue is not over how much the government collects in taxes overall but rather over how it collects those taxes.

Same goes for the EITC. Traditional welfare end up imposing extremely high marginal tax rates on the poor (far higher than the rich in the highest income brackets pay), because they lose benefits when they earn more. Replacing existing welfare programs with a program more like EITC lowers the tax rate on the poor and improves labor supply and economic efficiency.

Victorian arguments to the contrary about how the EITC is a 'subsidy' because the policy gives money to the poor are quaint in their appeal to 'natural law' and partial-equilibrium views but they don't make much sense from an economic standpoint that tries to understand the role of incentives and relative prices. Milton Friedman is the best person to read to understand the principle.

Barkley Rosser writes:

There seem to be at least two things going on this post. One is a defense of Mallaby's call for tax simplification as an anti-poverty program. The other is a defense of Mallaby against charges by Brad DeLong that he is a "hack journalist" because of his mocking of Minnesota allowing insurance coverage for wigs for cancer victims. These strike me as two very different things.

I do not know for sure what DeLong's position on tax simplification is, but I imagine that he would support some version of it. In one of his recent posts he even distinguished himself from Krugman by saying that he was less inclined to believe that more unionization and trade protectionism were effective anti-poverty programs, if not necessarily all the things on Mallaby's list of reputedly ineffective policies. In any case, it is far from clear that he disagrees with Mallaby all that much on those points.

I personally do not know exactly what Mallaby said at Cato (presumably you do, Arnold), nor exactly what the program in Minnesota is or if it is either worthy of the ridicule that DeLong says Mallaby heaped on it or not. It was this latter point that seemed to bring out the most negative remarks by DeLong about Mallaby.

I can understand that you, Arnold, may be unhappy that DeLong does not agree with you regarding consumer rationality in health care decisions. However, I do not see him being vituperative or name-calling towards you or your proposals. I applaud you for making a serious proposal. I do not know if it would solve things or not. I see DeLong raising serious questions, but in a reasonably civil manner.

Dr. T writes:

As a member of the over $100,000 income class who takes advantage of "tax incentives" to buy health insurance, I disagree with his conclusions. I carry health insurance to cover the low risk of catastrophic costs and therefore choose the highest deductible policy available. I would like to use a catastrophic hospitalization-only policy, but two things prevent this: they are not available and the perverse pricing* of routine health care for persons without medical insurance. But, I and people like me are not buying premium benefit policies that allow MRI scans for stubbed toes and drive up the overall costs of health care. All I am doing is preventing the government from applying a 30% tax on the part of my salary I spend on health insurance.

*Perverse pricing incentives: Doctors, pharmacies, labs, etc. charge much more to persons willing to pay cash at the time service is rendered. If one does not have an insurance policy, one gets screwed on pricing. For example, a physician charges a cash-paying patient $100 for an office visit. For an insured patient, the physician may accept a $70 payment ($60 from the insurer and a $10 copay). Billing expenses are about $7 per bill, so the doctor actually gets only $63. The situation is worse for prescription drugs, which is one reason why I have medical insurance. In a logical world, doctors and pharmacies would offer discounts for immediate cash payments, but that violates Medicare laws and most doctor-insurer contracts.

Dean writes:

I agree that raising minimum rage, trade protection, etc would do little to help the poor. If the minimum wage was raised then store owners would raise the prices because people have more money. I also think that unionization would keep wages for employees low. Wal Mart which is not a union pays employees more then Kroger and Harris Teether.

Shawn Mallison writes:

For those in the upper income tiers I like the idea of gradually reducing subsidies. I just don't believe that the buying habits of those earning in excess of 100,000 will change dramatically. These are smart people. The benefit of investing in real estate or retirement accounts remains largely unchanged. The subsidy is often gravy. I think the more challenging question is how do you allocate the savings without creating an even deeper entitlement mentality than we already have in this country?

TGGP writes:

"If the minimum wage was raised then store owners would raise the prices because people have more money."

Dean, are you one of those people that believes that Henry Ford got rich by paying his employees enough to buy his car?

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