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Jerome Lyle Rappaport

Jerome Lyle Rappaport
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Edward Glaeser

Edward Glaeser
Professor of Economics at Harvard University
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Greg Massing
Executive Director for the Rappaport Center for Law and Public Service
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Professor of Law and Public Policy at Suffolk University Law School
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Monika Bandyopadhyay
Suffolk University Law Student

David Barron
Harvard Law School and former Deputy Counsel for the Office of Legal Counsel in the US Department of Justice

Linda Bilmes
Senior lecturer in public policy at the Harvard Kennedy School. Assistant Secretary of Commerce during the Clinton Administration.

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Boston Green Blog, Dukakis Center for Urban & Regional Policy

Matthew Todaro
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Alexander von Hoffman
Senior Researcher, Joint Center for Housing Studies

Brett Walker
Student, Boston College Law School

Margarita Warren
Student at Suffolk University Law School

Tax Breaks Shouldn't Be Sacrosanct

Friday, August 26th, 2011
By Edward Glaeser

Originally published in The Boston Globe

All six Republicans on the debt-reduction super committee have signed a no-new-taxes pledge, and that means the panel can only dig up extra revenues if some of those six decide that eliminating some tax breaks doesn’t count as raising taxes.

But getting rid of ethanol subsidies, the low-income housing tax credit, and many other tax breaks ought to be an easy decision. Some tax breaks are really just government expenditures in disguise, and should be subject to the same scrutiny as any other spending program. Other tax breaks do let people keep more of the money they’ve earned, as antitax activists might prefer, but create a plethora of other problems.

Either way, getting rid of many of these credits could save at least a few billion dollars a year - and potentially much more.

Different tax credits behave in different ways, but even the most well-meaning ones can be difficult to justify as an economic matter. Consider the low-income housing tax credit, which compensates builders of low-income housing with a tax credit that is transferable. Because many of these builders are nonprofits, they can’t use the credits themselves. So they sell the credits on the open market to third parties eager to pay less to the government. But the bottom line is that the government gets less revenue and owes more money.

This isn’t tax relief for the builder; it’s a payment for providing a service - that is, for the hard work of producing affordable housing. What would be materially different if the government instead used the foregone taxes to pay for the housing? Not much. The builder would still be paid for services rendered - this time directly - but Congress and the administration would weigh that spending against other items in the normal budget process.

The tax credit for ethanol blenders has a similar structure - and is also just a form of spending in disguise. Energy producers who blend ethanol with their oil receive a tax credit. The tax credit isn’t free money for the company, which has to pay for the ethanol. The impact on the producer and the Treasury would be essentially identical - and more transparent - if the government borrowed money and cut the producers checks for undertaking this service.

Some tax breaks do provide real tax relief, in the sense of cutting people’s taxes without requiring them to do something they wouldn’t otherwise do. For all those parents who would have had a child without receiving the children’s tax credit, that credit is a pure tax reduction. For them, eliminating the credit is undoubtedly a tax increase. If your family size is set, then you are not going to cut back on parenting if the tax credit for children is reduced, and you’d just be out cash. But whether offering this tax credit makes sense as a matter of policy is another question entirely.

All of this leads to the biggest tax break of them all - the home mortgage interest deduction. If we’re going to see really significant increases in revenues from reforming the tax code, this is the sacred cow to gore. Most Americans who buy a home and take out a mortgage would have done so with or without the deduction.

Yet those home buyers who bought in 2005 and 2006, and leveraged themselves to the hilt to do so, suffered a great deal in exchange for the tax credit. For any new home buyers, taking on the risks of huge debt is the price of a larger government tax cut. By lowering the upper limit on the deduction from a $1 million mortgage to a $500,000 one, the government could keep lower taxes for most Americans, while reducing the tax code’s tendency to encourage excessive borrowing and all the costly risks that entails.

A realistic budget discussion has to start somewhere. The nation’s antitax activists talk as if all tax breaks are somehow sacrosanct, but they’re the lowest-hanging fruit in the budget debate.


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