Two more notes on tax reform

Steve skewers extending the mortgage income tax deduction down the income scale and applying it to payroll taxes in his recent post, and admires a package with a 25% income tax only on income above $100,000 per family.

I wish first to take another poke at the first idea. Why do we subsidize housing at all? There’s a romantic view that homeownership confers all sorts of moral standing and responsibility; in my view this is a lot of nonsense. Renting doesn’t seem to have made Mark craven and dissolute (while he rides out the LA housing bubble); he was a house guest a few weeks ago and we still have all the sterling. And there’s plenty of evidence, especially now, that there’s a lot wrong with inducing people to put almost their entire portfolio into one kind of asset at one address on one street.

Housing as a consumption good seems to me to have only negative externalities; the bigger your house and lot are, on the average, the bigger your carbon footprint on my planet, and the harder you make it for me to have efficient transit and a pedestrian community. The mortgage interest deduction is pushing in exactly the wrong direction; we need fewer people living in houses with three-car garages and five bedrooms for three people, not more. Basics apply: housing (and gasoline) are too cheap, not too expensive.

The Graetz proposal has a hole below the waterline Steve doesn’t mention: it throws a bomb into the system of charitable non-profit enterprise that, with all its defects, is a virtue of how Americans have organized our society. It removes the implicit subsidy (deduction of gifts from income) for giving to charities, churches, education, and the arts from everyone below the $100K cutoff, and reduces it for everyone else from the current top rate of about 40% (including state deductions) to 25%. In other words, the price of a gift of $1000 from middle-class people will go from (say) $800 to $1000, and for rich people it will rise 25%, from $600 to $750. The overall result will be a severe contraction of charitable giving and hence of the services provided by nonprofits, so if we want those services, they will have to be provided the way Europeans do, by government. Without some assurance that this will happen – and the politics of such an expansion of the public sector are quite daunting – and a lot of assurance that we will really be happy if a large fraction of, for example, higher education and the arts are nationalized and become provided by a bureaucracy, a scheme like Graetz’s, despite its appeal on some grounds, needs to be dealt with very gingerly.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.