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Do the right thing, by Scott Sumner

Indi Lens 2017-11-14 12:35:18

My daughter is now taking her first college economics class. Occasionally I like to provide her with examples from everyday life.

For instance, my wife spends a lot of time on the phone with insurance companies, mostly dealing with complex and confusing rules and regulations. One day after a particularly frustrating set of calls trying to get coverage for the purchase of my daughter’s contact lens, we discussed the root cause of all this distress. I pointed out that in a normal country you’d just go to the store and buy contacts, instead of working through a so-called “insurance” company. (I use scare quotes as this has nothing to do with “insurance” as an economic concept–it doesn’t reduce risk.)

Our government uses the tax and regulatory system to push people towards buying more expensive contacts via employer insurance. (And let’s not even talk about “prescriptions”.) Without these provisions, my company would have no reason at all to provide contact lens insurance for my daughter. I’d buy catastrophic health insurance (which I’d probably go through my entire life never using), and then pay for health care out of pocket. Even if health care were a bit more expensive, my wife would be much happier. And in fact I’d probably spend far less on health care.

Recently I’ve been disturbed by some of the comments that I read about tax reform. One argument is that it’s a mistake to repeal certain deductions, because that will allow the government to collect more revenue—in other words, the closing of loopholes will not be offset by tax cuts elsewhere. I see lots of problems with this argument:

1. The GOP clearly plans to offset the loophole closing with tax cuts elsewhere.

2. One counterargument is that the Democrats would later raise the tax rates back up again. Maybe so, but if the Democrats are determined to raise taxes, they will do so regardless of whether the GOP cuts out some loopholes or not.

But let’s say I’m wrong in these claims. I’d still argue that we should close tax loopholes, regardless of the impact on later decisions regarding how much to tax. To see why, let’s divide public policy questions up into what we know and what we don’t know:

1. There is wide bipartisan agreement among experts on both the left and the right that tax complexity is harmful. Fixing the tax system is like picking up $100 bills lying on the sidewalk. It’s a no-brainer.

2. There is no agreement among experts about the proper size of government. Some prefer a government that spends about 18% of GDP, like Singapore or Hong Kong. Some want to spend about 35% of GDP, like Switzerland or Australia. And some want to spend about 57% of GDP, like France or Denmark.

If we are to be a successful society then we need to come together on issues where there is broad agreement, and then agree to disagree on other issues, which will be fought out in the political arena. Given American culture and politics, the near-term outcome of that fight will probably be pretty similar to what we have now; we aren’t going to suddenly drop government spending down below 20% of GDP, or raise it up above 55%. The votes aren’t there.

If we become so tribal that we squash win-win reforms because it might, and I emphasize might, help the “other tribe” at some future date on some future issue, then we will almost all end up worse off. That’s the mentality you see in failed tribal societies in the third world, say Afghanistan or Libya.

Similarly, a person’s views on tax reform should not depend on how it affects their pocketbook. I favor eliminating state and local tax deductions even though I live in California and pay a lot of taxes. If you always support sensible reforms, then the net effect of all of these reforms will eventually benefit you as well. It’s not a zero sum game!

If you support a bad policy in the hope that down the road it might lead to good policies elsewhere, then you are likely to be disappointed. It’s like a four cushion shot in billiards, theoretically possible but difficult to pull off. We simply don’t know enough about our highly complex world to make those sorts of calculations. Better to support sensible policy reforms as they come up and then let the chips fall where they may on other issues. And what makes you think that your opinion on the highly contentious issues is even correct?


The focus of public policy should be on doing things that we know will make society better off.

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