CDZ The Real Issue Behind Tax Deductions

[jwoodie]

Whether it be mortgage interest deductions or ethanol subsidies, the real problem with our current tax policy is that it creates inefficiency in our economic system by distorting the real value of goods and services. As a result, individuals and businesses make decisions based on tax effects rather than on sound financial analysis.

The free market components of demand and supply, unfettered by governmental manipulation, are the best determinants of economic efficiency. Artificial price supports and tax credits/rebates merely add a false value to selected goods and services which otherwise represent less efficient allocation of resources.

For example, most solar panel applications are terribly inefficient compared with other means of producing electricity. However, tax credits, subsidies and "buy back" schemes have reduced their apparent cost to a fraction of their real cost, which must be borne by the public at large. If they really saved money, why wouldn't they sell on their own merits? These price distortions end up rewarding inefficient behavior and retarding real economic growth.

Politically, we can't end all of these subsidies overnight. But we should recognize their negative economic impact and begin to phase them out as part of a plan to restore our economy.

 

[gipper]

Agreed.

I think the only tax deduction allowed should be for dependent children, but never going to happen.

 

[320 Years of History]

Whether it be mortgage interest deductions or ethanol subsidies, the real problem with our current tax policy is that it creates inefficiency in our economic system by distorting the real value of goods and services. As a result, individuals and businesses make decisions based on tax effects rather than on sound financial analysis.

The free market components of demand and supply, unfettered by governmental manipulation, are the best determinants of economic efficiency. Artificial price supports and tax credits/rebates merely add a false value to selected goods and services which otherwise represent less efficient allocation of resources.

For example, most solar panel applications are terribly inefficient compared with other means of producing electricity. However, tax credits, subsidies and "buy back" schemes have reduced their apparent cost to a fraction of their real cost, which must be borne by the public at large. If they really saved money, why wouldn't they sell on their own merits? These price distortions end up rewarding inefficient behavior and retarding real economic growth.

Politically, we can't end all of these subsidies overnight. But we should recognize their negative economic impact and begin to phase them out as part of a plan to restore our economy.

On this I must agree with you. I think anyone who has taken the barest bit of economics would as well. The problem with the overwhelming majority of U.S. citizens is that they have no formal, collegiate level training in economics. Lacking that knowledge, oh, so many folks quite simply don't "recognize [the] negative economic impact" of their tax subsidies like the mortgage interest deduction. They only see the positive impact it has on their own financial situation.

Off Topic:
Regarding the history of the mortgage interest deduction, the following are two great reads:

• The full story: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=1561&context=lcp
• Abridged version: The History of the Mortgage Interest Deduction

 

[Dont Taz Me Bro]

Tax deduction are simply ways of buying votes. A flat tax with no deductions is the way to go

 

[Fishlore]

I agree with jwoodle that "the free market components of demand and supply, unfettered by governmental manipulation, are the best determinants of economic efficiency." It is important to remember, however, that the economy serves the Constitution, not the other way around. Economic efficiency is indeed an heuristic but it is not the goal.

What is the goal? That's easy, "to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity" are the purposes of the government which regulates the economy. More broadly, there is the goal of protecting and enhancing those unalienable rights of life, liberty, and the pursuit of happiness. Economic efficiency is often of great help in achieving these goals, but is not itself a goal.

And, the human condition being what it is, preservation of our values as a society and supporting the unalienable rights of individual citizens is not always compatible with the highest economic efficiency. The enormous burden of supporting the old, the poor, the sick and those who cannot support themselves would be more economically accomplished by transporting them to the gas chambers and killing them.

There a number of self-styled "libertarians" who, while they would never go to such a murderous extreme, nonetheless place the economic efficiency of the so-called "free market" above individual needs. Can't afford the doctor? Die in the gutter. Kids can't afford college? Flip burgers. etc. Whatever economic efficiency such an approach may demonstrate, it isn't what the United States is about.

 

[oldsoul]

I agree with jwoodle that "the free market components of demand and supply, unfettered by governmental manipulation, are the best determinants of economic efficiency." It is important to remember, however, that the economy serves the Constitution, not the other way around. Economic efficiency is indeed an heuristic but it is not the goal.

What is the goal? That's easy, "to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity" are the purposes of the government which regulates the economy. More broadly, there is the goal of protecting and enhancing those unalienable rights of life, liberty, and the pursuit of happiness. Economic efficiency is often of great help in achieving these goals, but is not itself a goal.

And, the human condition being what it is, preservation of our values as a society and supporting the unalienable rights of individual citizens is not always compatible with the highest economic efficiency. The enormous burden of supporting the old, the poor, the sick and those who cannot support themselves would be more economically accomplished by transporting them to the gas chambers and killing them.

There a number of self-styled "libertarians" who, while they would never go to such a murderous extreme, nonetheless place the economic efficiency of the so-called "free market" above individual needs. Can't afford the doctor? Die in the gutter. Kids can't afford college? Flip burgers. etc. Whatever economic efficiency such an approach may demonstrate, it isn't what the United States is about.

As much as it pains me to say this, I must argree, in priciple at least. How we go about this, we will debate until the end of time. Or aliens arrive and kill us all for being such idiots...

 

[Dont Taz Me Bro]

There a number of self-styled "libertarians" who, while they would never go to such a murderous extreme, nonetheless place the economic efficiency of the so-called "free market" above individual needs. Can't afford the doctor? Die in the gutter. Kids can't afford college? Flip burgers. etc. Whatever economic efficiency such an approach may demonstrate, it isn't what the United States is about.

I love how people who aren't libertarians tell libertarians what it is they supposedly believe.

 

[Fishlore]

There a number of self-styled "libertarians" who, while they would never go to such a murderous extreme, nonetheless place the economic efficiency of the so-called "free market" above individual needs. Can't afford the doctor? Die in the gutter. Kids can't afford college? Flip burgers. etc. Whatever economic efficiency such an approach may demonstrate, it isn't what the United States is about.

I love how people who aren't libertarians tell libertarians what it is they supposedly believe.

And I love how misguided people who are in fact reactionary anarchists, think they are libertarians or even think they know what the term "libertarian" means. It's a lot of laughs at the zoo these days. Thank you for your condescending sarcasm. I'll feed it to my parrot.

 

[auditor0007]

Whether it be mortgage interest deductions or ethanol subsidies, the real problem with our current tax policy is that it creates inefficiency in our economic system by distorting the real value of goods and services. As a result, individuals and businesses make decisions based on tax effects rather than on sound financial analysis.

The free market components of demand and supply, unfettered by governmental manipulation, are the best determinants of economic efficiency. Artificial price supports and tax credits/rebates merely add a false value to selected goods and services which otherwise represent less efficient allocation of resources.

For example, most solar panel applications are terribly inefficient compared with other means of producing electricity. However, tax credits, subsidies and "buy back" schemes have reduced their apparent cost to a fraction of their real cost, which must be borne by the public at large. If they really saved money, why wouldn't they sell on their own merits? These price distortions end up rewarding inefficient behavior and retarding real economic growth.

Politically, we can't end all of these subsidies overnight. But we should recognize their negative economic impact and begin to phase them out as part of a plan to restore our economy.

Overall I agree with you on this, but there are times that these subsidies are worth having. For instance, the tax credits available for solar energy make sense, because it makes solar cheap enough that companies will continue to research and develop better technologies for this type of power. We all know that alternative energy is the future, so helping it along is actually a good thing. This will help us to stay competitive in this field and not allow other countries to jump far ahead of us. Allowing that to happen would be a detriment to our economy in the long run.

 

[jwoodie]

Solar tax credits give public money to individuals who pay contractors to install soon-to-be outmoded systems. Solar subsidies are political payoffs to companies like Solyndra. Why should we support these activities when conventional power generation will remain a more efficient source for the foreseeable future? Why not let the free market determine their relative values?

 

[320 Years of History]

Whether it be mortgage interest deductions or ethanol subsidies, the real problem with our current tax policy is that it creates inefficiency in our economic system by distorting the real value of goods and services. As a result, individuals and businesses make decisions based on tax effects rather than on sound financial analysis.

The free market components of demand and supply, unfettered by governmental manipulation, are the best determinants of economic efficiency. Artificial price supports and tax credits/rebates merely add a false value to selected goods and services which otherwise represent less efficient allocation of resources.

For example, most solar panel applications are terribly inefficient compared with other means of producing electricity. However, tax credits, subsidies and "buy back" schemes have reduced their apparent cost to a fraction of their real cost, which must be borne by the public at large. If they really saved money, why wouldn't they sell on their own merits? These price distortions end up rewarding inefficient behavior and retarding real economic growth.

Politically, we can't end all of these subsidies overnight. But we should recognize their negative economic impact and begin to phase them out as part of a plan to restore our economy.

Overall I agree with you on this, but there are times that these subsidies are worth having. For instance, the tax credits available for solar energy make sense, because it makes solar cheap enough that companies will continue to research and develop better technologies for this type of power. We all know that alternative energy is the future, so helping it along is actually a good thing. This will help us to stay competitive in this field and not allow other countries to jump far ahead of us. Allowing that to happen would be a detriment to our economy in the long run.

Would you please explain why the credits make sense and why the profit motive is insufficient incentive for companies to develop ever better solar energy technologies?

I would argue that solar credits don't make sense because if the prospect and actuality of using solar power rather than other means of power generation makes sense, there should necessarily be a quantitatively driven business case for doing so. If there is such a case, a company (or their customers) should need not tax credits. The cost savings differential, or the greater profit potential, would be all the motivation either needs.

Tax credits, or some other cost offsetting measure, are necessary only when there is no credible business case for taking a given course of action. Even then, however, if the desire is to spur research, a tax credit isn't necessary. Funding research by universities, arms of the government itself, or by partnerings of either with companies can accomplish that much, particularly if there are committed individuals from any of the three sectors who believe exploring whatever potentialities may exist in solar energy production, storage, and/or distribution/usage.

The Solar Investment Tax Credit is an incentive designed to inspire energy consumers to implement solar energy collection/production systems in their homes. Now I'm not saying it hasn't resulted in job creation and other beneficial outcomes. Indeed, whether it has or not isn't even the point of what I'm asking about. What I'm saying, and hoping you will address, is that it's far from clear that investing those resources -- both the money spent by consumers and the money forgone by governments -- was a better use of them than would be directing them toward other uses. In other words, I'm hoping that as part of your answer, you'll provide some sort of quantitative evidence that shows the opportunity cost plus revenue gains of partaking and investing in the SITC (and the corresponding research of which you wrote) is less than that of other things that the money may have been spent on.

Note:
Because some folks around the forum cannot tell the difference between a question and a statement, let me be clear. The questions above are just that.

 

[auditor0007]

Whether it be mortgage interest deductions or ethanol subsidies, the real problem with our current tax policy is that it creates inefficiency in our economic system by distorting the real value of goods and services. As a result, individuals and businesses make decisions based on tax effects rather than on sound financial analysis.

The free market components of demand and supply, unfettered by governmental manipulation, are the best determinants of economic efficiency. Artificial price supports and tax credits/rebates merely add a false value to selected goods and services which otherwise represent less efficient allocation of resources.

For example, most solar panel applications are terribly inefficient compared with other means of producing electricity. However, tax credits, subsidies and "buy back" schemes have reduced their apparent cost to a fraction of their real cost, which must be borne by the public at large. If they really saved money, why wouldn't they sell on their own merits? These price distortions end up rewarding inefficient behavior and retarding real economic growth.

Politically, we can't end all of these subsidies overnight. But we should recognize their negative economic impact and begin to phase them out as part of a plan to restore our economy.

Overall I agree with you on this, but there are times that these subsidies are worth having. For instance, the tax credits available for solar energy make sense, because it makes solar cheap enough that companies will continue to research and develop better technologies for this type of power. We all know that alternative energy is the future, so helping it along is actually a good thing. This will help us to stay competitive in this field and not allow other countries to jump far ahead of us. Allowing that to happen would be a detriment to our economy in the long run.

Would you please explain why the credits make sense and why the profit motive is insufficient incentive for companies to develop ever better solar energy technologies?

I would argue that solar credits don't make sense because if the prospect and actuality of using solar power rather than other means of power generation makes sense, there should necessarily be a quantitatively driven business case for doing so. If there is such a case, a company (or their customers) should need not tax credits. The cost savings differential, or the greater profit potential, would be all the motivation either needs.

Tax credits, or some other cost offsetting measure, are necessary only when there is no credible business case for taking a given course of action. Even then, however, if the desire is to spur research, a tax credit isn't necessary. Funding research by universities, arms of the government itself, or by partnerings of either with companies can accomplish that much, particularly if there are committed individuals from any of the three sectors who believe exploring whatever potentialities may exist in solar energy production, storage, and/or distribution/usage.

The Solar Investment Tax Credit is an incentive designed to inspire energy consumers to implement solar energy collection/production systems in their homes. Now I'm not saying it hasn't resulted in job creation and other beneficial outcomes. Indeed, whether it has or not isn't even the point of what I'm asking about. What I'm saying, and hoping you will address, is that it's far from clear that investing those resources -- both the money spent by consumers and the money forgone by governments -- was a better use of them than would be directing them toward other uses. In other words, I'm hoping that as part of your answer, you'll provide some sort of quantitative evidence that shows the opportunity cost plus revenue gains of partaking and investing in the SITC (and the corresponding research of which you wrote) is less than that of other things that the money may have been spent on.

Note:
Because some folks around the forum cannot tell the difference between a question and a statement, let me be clear. The questions above are just that.

The case is simple. There is no economic reason to pursue solar currently because there are much cheaper sources of energy. The problem is that other countries are investing big money into solar and they will be the ones leading the way in new breakthroughs. Most people understand that solar is the most likely source of our energy for the long term. If we are not at the forefront technologically with solar, then we will be purchasing all the equipment and technology from other countries down the road, and the jobs lost will be a great loss to our economy. Sometimes we need to invest in things that may not yet be cost effective, because we know it will lead to better things down the road.

 

[jwoodie]

solar is the most likely source of our energy for the long term.

I'm not sure what you mean by "likely" (politically popular?), but solar and wind power are among the most situational and undependable sources of electrical energy production. Nuclear power is the ultimate solution, once people get over their bugaboos from watching The China Syndrome.

 

[320 Years of History]

Would you please explain why the credits make sense and why the profit motive is insufficient incentive for companies to develop ever better solar energy technologies?

I would argue that solar credits don't make sense because if the prospect and actuality of using solar power rather than other means of power generation makes sense, there should necessarily be a quantitatively driven business case for doing so. If there is such a case, a company (or their customers) should need not tax credits. The cost savings differential, or the greater profit potential, would be all the motivation either needs.

Tax credits, or some other cost offsetting measure, are necessary only when there is no credible business case for taking a given course of action. Even then, however, if the desire is to spur research, a tax credit isn't necessary. Funding research by universities, arms of the government itself, or by partnerings of either with companies can accomplish that much, particularly if there are committed individuals from any of the three sectors who believe exploring whatever potentialities may exist in solar energy production, storage, and/or distribution/usage.

The Solar Investment Tax Credit is an incentive designed to inspire energy consumers to implement solar energy collection/production systems in their homes. Now I'm not saying it hasn't resulted in job creation and other beneficial outcomes. Indeed, whether it has or not isn't even the point of what I'm asking about. What I'm saying, and hoping you will address, is that it's far from clear that investing those resources -- both the money spent by consumers and the money forgone by governments -- was a better use of them than would be directing them toward other uses. In other words, I'm hoping that as part of your answer, you'll provide some sort of quantitative evidence that shows the opportunity cost plus revenue gains of partaking and investing in the SITC (and the corresponding research of which you wrote) is less than that of other things that the money may have been spent on.

Note:
Because some folks around the forum cannot tell the difference between a question and a statement, let me be clear. The questions above are just that.

The case is simple. There is no economic reason to pursue solar currently because there are much cheaper sources of energy. The problem is that other countries are investing big money into solar and they will be the ones leading the way in new breakthroughs. Most people understand that solar is the most likely source of our energy for the long term. If we are not at the forefront technologically with solar, then we will be purchasing all the equipment and technology from other countries down the road, and the jobs lost will be a great loss to our economy. Sometimes we need to invest in things that may not yet be cost effective, because we know it will lead to better things down the road.

By your comments immediately above, there is then no economic or logical reason to pursue solar energy production or use. No economic one because that's what you wrote. No logical one because the substance of your emboldened text asserts what is called "first mover advantage." (The Half-Truth of First-Mover Advantage)

So I ask, if you assert there is no economic reason and seeing the logical invalidity of the "first mover" basis, can you (attempt to) identify any other good reason, case, for our investing in solar energy initiatives via our tax dollars, be they paid and used to fund research or lost by according tax credits to folks who pursue solar energy production/use?

I still maintain that the profit motive should be enough motivation and anything other than that is purely speculation. I can't assert that one/we shouldn't speculate positively on solar energy's prospects any more than I can advise a poker player to bet on a pair of fives or encourage a roulette wheel bettor to play the number 16. I can say with certainty that the greatest profits are earned by producers and sellers who sell to early adopters.

Given that is so, the profit motive should be more than sufficient to incent commercial producers/investors in solar energy goods and services to do so. Absent profits, the only reason I can identify for investigating solar energy production, storage and distribution is to gain that knowledge for its own sake, much as happens with most academic pursuits. I don't have a problem with making those sorts of discoveries, but I don't believe a tax credit is necessary to inspire researchers to do so.