Tax Expenditures and Social Policy

With debate raging over the Obama administration’s budget and policy plans, last Friday the New America Foundation gathered experts from government, academia, and the business community to discuss the merits of using the tax code to dispense more than $700bn of social spending annually. The morning-long discussion, co-hosted by the Schwartz Center for Economic Policy Analysis, was titled

“Tax Expenditures and Social Policy: Are We Getting Our Money’s Worth?” and focused on three of the largest tax expenditures: the health care premium exclusion, the home mortgage interest deduction, and the retirement plan exclusion.

Cornell University Professor and New York Times columnist Robert Frank delivered the keynote address, which focused on the economic fundamentals of taxation as well as the revenue and externality implications of tax expenditures. Comparing the minimum wage and the Earned Income Tax Credit, Frank argued that policymakers must consider trade-offs and efficiency questions when addressing social policy issues. He also called for tax expenditures that fund productive investments in the American economy, and the implementation of a progressive consumption tax to reduce private sector waste.

Urban Institute Senior Fellow Eric Toder then presented on the distributional effects of tax expenditures. He demonstrated the effects on income levels by quintile of eliminating the three major expenditures in question and concluded that while tax expenditures are regressive in general, distributional outcomes ultimately depend on what happens with the increased revenue produced by their elimination.

Following these opening presentations, a diverse panel of discussants considered the specific value of the tax expenditures for health insurance, homeownership, and retirement savings. Roy Ramthun, Visiting Fellow at the Council for Affordable Health Insurance and former Senior Health Policy Advisor to President George W. Bush, claimed that the health care premium exclusion has positive effects on insurance coverage in America and contributes to our global leadership in healthcare, although he cautioned against over-consumption of insurance. By contrast, Doug Holtz-Eakin, director of domestic and economic policy for John McCain’s 2008 presidential campaign and former Director of the Congressional Budget Office, argued that the insurance exclusion was an unintended consequence of World War II-era price controls, contributes to “job lock,” and crowds out the individual insurance market.

Next, Paul C. Bishop, Managing Director of Real Estate Research for the National Association of Realtors, and Danilo Pelletiere, Research Director for the National Low Income Housing Coalition, squared off over the home mortgage interest deduction. Bishop championed the deduction, identifying numerous positive externalities associated with homeownership and cautioning against further disruption in the housing market. Pelletiere, conversely, maintained that the mortgage interest deduction is very costly, has little demonstrable effect, and is effectively a large, unfunded entitlement. According to Pelletiere, while low-income people are tarred with the “subsidized housing” label, it is rich people who in reality receive the largest housing subsidies.

Finally, David Wray, President of the Profit Sharing/401k Council of America, and Teresa Ghilarducci, Irene and Bernard L. Schwartz Professor of Economic Policy Analysis at the New School for Social Research, discussed tax subsidies for retirement savings. Wray distinguished between these and other tax expenditures, noting that retirees will eventually pay taxes on their savings withdrawals. He also argued that subsidized retirement savings work well as an employee benefit and a complementary program to Social Security. Ghilarducci disagreed, claiming that the 401(k) system’s failures have left a generation of retirees worse off than their parents and grandparents, and that generous tax subsidies have increased coverage by “not one iota.” She proposed a national system of Guaranteed Retirement Accounts as a mandatory savings supplement to Social Security.

Hon. Jim Nussle, former Director of the Office of Management and Budget and former Chairman of the U.S. House Budget Committee, moderated the question-and-answer session that followed. Questions touched upon the perceived need for comprehensive tax reform, the value of putting tax expenditures on-budget, and whether the administration will modify the insurance premium exclusion to finance a healthcare overhaul.

Participants