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Thursday, October 13, 2005

The END is near I agree with John Podhoretz

There are not many matters of tax policy about which you will find unanimity of opinion across the political spectrum, but a Bush-appointed commission's gambit to raise federal revenue to offset the elimination of the alternative minimum tax by raising taxes on middle-class home-owners and small businesses is one. The home-mortgage interest and health-insurance deductions, which the panel has now proposed eliminating, are not called "popular" for nothing. John Podhoretz at the National Review's The Corner writes: "This may be the dumbest major independent-commission proposal in all of human history."

I had to cut him off at one sentence. He went on to write "t would be one thing to trade the home-mortgage deduction for a serious flat tax, because that would, in the end, even everything out." which leads me to suspect that he has a very very weak grasp both of arithmetic and of the distribution of income and wealth in the USA. Also note that an independent commission of just J Pod would have come up with a worse proposal.

Still I do agree with his very strong claim. I" trying to think of a dummer independent commission proposal .......... OK I don't know enough history. I'll have to ask Brad DeLong.

To me the unbelievably incredibly unspeakably dumb idea is to tax employer provided health insurance. This is crazy. The USA has a huge problem with employers not providing health insurance and hence free riding on employers who do. Their unfortunate employees pay out of pocket and forego some health care but mostly they get care (expensive because delayed) and employers who do provide health insurance pick up the tab. The idea of increasing incentives to free ride is insane. Also the companies who would be hammered are large well known and at risk of bankruptcy (ever heard of GM?) They are high wage firms paying their workers much more than they could get anywhere. This means that anything which causes them to contract (or collapse) imposes huge negative externalities on their employees. This is both true (ask Larry Katz) and a huge major obsession of populist hacks (ask Gephart). Only fools challenge the combined might of the facts and the hacks.

I heard of hints of this possible proposal a while ago. I thought it must be some kind of joke.

Now in normal times, I would actually support eliminating the mortgage interest deduction. Basically I think the world would be a better place if more of US capital was plant and equipment and less consisted of absurdly huge houses. However these are not normal times. The US economy is flying on a wing a prayer and a housing bubble. Bursting the bubble is bad policy so long as there is any hope of a soft landing. It is also political suicide. All in all I guess I hope Bush follows the advice of the manchurian commission (congress will protect themselves and therefore the USA).

Finally, the commission is doing all of this partly to eliminate the alternative minimum tax. That's right eliminate not index to inflation. That is for even more tax cuts for rich people.

Beyond belief

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