Tax Analysts Blog

Tax Credits Are Easy – And a Loser’s Game for Liberals

Posted on Nov 24, 2015

Hilary Clinton’s presidential campaign is still churning out tax proposals at a furious pace. Over the weekend, she proposed a new credit for caretakers—intended, according to her campaign, to “provide support for the millions of families paying for, coordinating, or providing care for aging or disabled family members.”

That sounds great – just like every other tax break Clinton has suggested in the past several months. After all, caring for family members can be hard, and it’s often expensive. Caretakers could definitely use a hand.

But is the tax system the best way to provide it? Probably not.

Clinton has a thing for tax incentives. Faced with any sort of social problem or neglected priority, she reflexively turns to the tax system. As Richard Rubin and Laura Meckler observed for The Wall Street Journal:

      It offers a way to reward behavior she wants to see more of, punish actions that she sees as harmful, and directly aid families with particular challenges.

This taxation fixation is a family thing. As president, Clinton’s husband was a fan of targeted tax incentives, too. But then, as now, those tax breaks were more about optics than actual solutions.

Almost always, tax incentives are a complicated, roundabout way of achieving social goals. Generally targeted at a narrow problem and a specific set of taxpayers, they often miss the mark on both counts.

The proliferation of higher education tax incentives is a case in point. Over the years, they’ve done little to make college more affordable for those struggling to pay. But they have shaved the tax bills for students (and their families) already planning to go.

Broadly speaking, targeted tax credits of any sort are well intentioned but inefficient. Faced with a choice between a narrow tax break and a cost-equivalent spending program, we’d be better off with the latter.

That’s why the Treasury Department used to consistently oppose targeted tax incentives. As Assistant Secretary Stanley Surrey argued back in the day:
      The Treasury is constantly presented with proposals to accomplish all sorts of desirable social objectives through the tax system. In general, these objectives can be accomplished more effectively and economically by other means.

In recent decades, Treasury has caved on this fight. That’s partly because the cause is lost, I suspect. But it’s also because Treasury is now in the business of drafting such proposals, prodded by presidents who love backdoor spending.

Fans of targeted tax credits often acknowledge that direct spending would be preferable, at least in theory. But given the realities of modern politics, tax credits are often the only solution.

That’s a compelling argument, if you look only at the short term (and don’t demand much in the way of efficacy even then). But over a longer time horizon, the dependence on tax credits is a losing game for liberals.

Using tax incentives as a form of hidden spending merely serves to further erode support for more direct forms of government action. Small-bore tax breaks breed more small-bore tax breaks. But they don’t foster any serious rethinking of the role of government.

Nor do they produce meaningful results, even for the narrow problems they target.

If liberals have any hope of changing the conversation in Washington, it begins with honest talk (in a Bernie Sanders sort of way) about the value of government.

And if they can’t win that argument on the merits, it’s time to throw in the towel.

Read Comments (2)

edmund dantesDec 1, 2015

Tax credits are a losing game for the country. They only benefit tax
preparers, who can up their fees when they "find" and claim the credits that
ordinary taxpayers could never understand.

Have you ever tried to rationalize all the education tax credits? Impossible.

MIKE55Dec 8, 2015

Out of curiosity, what's the logic behind your statement that "[f]aced with a
choice between a narrow tax break and a cost-equivalent spending program, we’d
be better off with the latter"? That's not intuitive to me, at least for the
type of small-bore policies that are the subject of this article. I wonder if
these narrow forms of government intervention have a tendency to just be
inherently bad policy,* making the delivery vehicle (refundable tax credit vs.
direct spending) more or less irrelevant.
*This is not to say all small-bore government policy is bad but rather that, at
least federally at the moment, the small-bore stuff seems to consist almost
exclusively "bumper sticker" plans.

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