The Magazine

Declining Deficits

Economic growth is the imperative, not budget cuts.

May 27, 2013, Vol. 18, No. 35 • By IRWIN M. STELZER
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The president made clear in his address to the graduates of Ohio State University that he has little use for the institutions of civil society, that he believes that government can provide all of the services that Americans might require, including some they don’t yet know they need. Which is one reason that he and what are now called “progressives” would “reform” down the charitable deduction. Never mind that the charitable deduction increases the willingness and ability of Americans to support some of the greatest universities and art institutions in the world, to donate to their churches and synagogues, to the fight against disease, and to a host of other good causes. Limits to deductibility of charitable contributions are, in essence, a tax on civil society. 

Charitable institutions provide alternatives to government institutions: Some provide direct relief from want, others enrich the culture, still others provide alternatives to government and government-friendly sources of information and scholarship. It is unsurprising that Obama and some of his constituent groups see these institutions and organizations as threats—charter schools frighten the trade union-government monopoly hold on education; think tanks produce critiques of government policies, some valid; churches provide alternatives to official morality on issues such as abortion and an alternative to the government welfare bureaucracy.

Then there is the mortgage-interest deduction. Tax reformers have the deduction of mortgage payments of less than the current limit of $1.1 million in their sights. Whether that limit is too generous is an open question, as is whether it should be restricted to only one home rather than being a limit on the total deductions for two. But what is not an open question is that reducing mortgage deductibility will make home ownership less attractive.

Yes, such a move would increase labor-force mobility as workers, who would be renters, find it easier to move to where the jobs are, and an artificial inducement to excessive investment in housing would be removed. But conservatives can nevertheless feel comfortable opposing the removal or even a reduction in the mortgage deduction since the deduction supports two conservative goals: It gives more people a stake in a stable society, and an incentive to maintain the housing stock in good order. As Larry Summers reminded us, no one washes a rented car.

Moreover, studies suggest that home ownership is associated (with varying degrees of statistical robustness) with lower crime rates, more active parent participation in community organizations, cleaner streets and parks, lower rates of school dropout and teenage pregnancy, and a host of other social advantages that are not fully reflected in the price of homes. They are, in economists’ jargon, externalities, justifying subsidies to encourage home ownership. Conversely, there are social costs to reducing the incentive to own a home: Is society better or worse off if a poor family receives a subsidy—which is what the mortgage deduction is—that enables it to get its kids out of some horrible neighborhood and into better surroundings?

Lesson Four: A presumption in favor of lower taxes should be just that—a presumption to be tested against the specific tax proposal being made. So before joining the chorus of those singing the praises of a cut in the corporate tax rate from 35 percent to, perhaps, 25 percent, it might be well to consider two things. First, very few companies actually pay the 35 percent rate. GE paid federal, state, local and foreign taxes equal to about 17.9 percent of its earnings over the past five years, FedEx 20.1 percent, Amazon 6.6 percent, and Ford 4.2 percent, according to S&P Capital IQ. This rather dilutes the force of the argument that this particular cut would increase the competitiveness of U.S. companies.

Second, these tax cuts would have to be paid for by some increases in order to be revenue neutral, even given dynamic scoring. And poised in the wings to argue for the offsetting increases are Democrats with redistributionist urges. Yes, reducing corporate tax rates might stimulate growth, but the nexus between the cuts and that growth should be clearer before establishing the need to find offsetting increases.

Enough of warnings. On to the main chore: finding policies that stimulate growth, and growth that will affect the lives of more than the much-derided 1 percent. Several such leap to mind, but that is for another day, after we hear from those who are relieved of the necessity of devoting their time to tackling a budget deficit that is shrinking, and entitlement spending that might, some day, perhaps need tackling.

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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