Are our programs working? Do we even want them to?

In light of all the talk about limiting and eliminating certain tax deductions I wanted to address them in a bit more general way than I did in my post about the mortgage interest tax deduction. Once a tax expenditure like the MITD is in place we tend to go to great lengths to study its effects and to ensure that it's achieving its goal(s), but rarely do we revisit whether that goal is actually worth pursuing. It's now taken for granted, for example, that the MITD has the effect of increasing homeownership rates to some degree; only recently, however, have we begun to question whether pushing those rates up at the margins is actually an economically or socially beneficial outcome. In the case of the commuter tax benefit, we're still not seeing much discussion outside of transit advocacy blogs and organizations about why we're giving car drivers a more valuable benefit than transit users (currently, $240 vs. $125). It's a policy that's completely contrary to the economic and environmental goals of our country, giving cars an arbitrary financial advantage over transit, and yet it persists.

Employer-based health insurance is probably the most significant example of this. (At $131 billion per year, it's certainly the biggest.) Logically, getting your insurance through your employer makes very little sense. It cedes the decision of what insurance company you use to the business owners and/or HR staff, as well as which programs they'll offer within that insurance company's suite of coverage options. Even more importantly, most businesses are fairly small so their bargaining power is extremely limited--even in the case of a massive corporation like Boeing or Microsoft, their leverage is insignificant compared to that of an entire state, or the federal government. This means higher costs for smaller businesses, and even for the bigger businesses costs can never compare to those of national programs like Medicaid and Medicare. We've enshrined the value of employer-based health insurance despite these and other faults, not because it's superior but because it's simply the way things have always been. We look at the system and see that it generally works okay, but by what standard? Relative to any other country's system of health care provision it fails on nearly every metric.

Nationally we're at record lows in terms of government revenue, and this has many causes. Partly it's been a giveaway over the last decade to the most well-off among us. Everyone though, not just the rich, has had their tax burden reduced, so there's more to it. Businesses are also contributing a smaller and smaller share of GDP to government revenues. I strongly feel that we need policy changes that result in increased revenue, but I'm willing to resist that impulse for some sensible revenue-neutral reform. We spend about $250 billion a year on employer health insurance, mortgage interest, and property tax deductions, and there are many other smaller deductions that make just as little sense from a social engineering perspective (and make no mistake, all tax expenditures are social engineering--and that's okay). We need to do something about them.

I'd like to see these programs reduced and revised in a way that redirects more money toward useful government programs or reduces the deficit, but completely offsetting these deductions with tax rate reductions would be a step forward, at least, and probably more politically palatable. Without raising any new revenue we'd be simplifying the tax system and removing distortions, encouraging people to use their money in rational ways, not just those that are preferred by their government. Some people would pay more, of course, but it would level the playing field such that everyone received some benefit, rather than just those who chose to accept the government's soft coercion. (Or, as is often the case, those who needed no encouragement and are essentially being handed free money in exchange for doing what they were going to do anyway.) This streamlining would also almost certainly increase productivity and encourage economic growth that actually did increase revenues faster than baseline. 

If any of that's ever going to happen, though, we need to stop worshiping at the altar of the familiar and traditional. Until we do we'll continue to be beholden to these wasteful programs whose goals are no longer aligned with our values, and probably never were. There are plenty of worthwhile tax expenditures, we just need the courage to evaluate them on their merits and not their history or constituency. In each case, need to decide whether targeting deductions at special groups (health insurance consumers, homeowners, car drivers) is superior to lowering costs for everyone. Where the answer is no, we need to shed these burdensome expenditures and move on to a more simple, sensible system.

*Note: I changed the title because no one got the reference to the Bushism "Is our children learning?"