Deductions are the Cheez Doodles of tax policy: Everyone likes them; everyone who studies the matter knows they are not good for us; and nonetheless, most people will get very indignant if you attempt to replace them with something more wholesome.
This is why deductions rarely go away, no matter how stupid and detrimental to the fiscal and economic health of the republic. For example, virtually every wonk in Washington, from radical libertarian to fervent socialist, can agree upon at least one thing: the tax deductibility of employer-sponsored health insurance is a terrible idea. On the one hand, it costs the government a packet of money every year, money that has to be raised by higher taxes on someone else. On the other hand, it encourages employers to load as much compensation as possible into the health benefit package, which distorts our economy and contributes to ballooning costs. There is nothing nice to be said about this particular tax deduction, except that it undoubtedly seemed like a good idea during World War II.
And yet, when it comes time to, say, pass a major health-care reform, or reform the tax code, do our nation’s legislators start with the obvious, and get rid of this egregiously stupid deduction? I regret that there is no way to convey my hollow, despairing laugh in pixel form. Of course they don’t touch it. The very egregiousness of its immense costs, the massive distortions it has induced in American consumption patterns, mean that getting rid of it would be far too disruptive.
Megan McArdle, “Republicans Turned the Tax Code Into a Weapon”, Bloomberg View, 2017-11-03.
December 27, 2019
QotD: The perils of tax reform
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