Mettler discussed the concept of the Submerged State and how
the government designed policies through tax expenditures (tax credit, breaks
and subsidies), to avoid the image of an enlarging government whilst providing
social benefits to the people. I will discuss some of the motivation for the
government to adopt this approach that has achieved the durability politicians
sought, but economic unsustainability that impacts Americans as a whole.
Designing Policies to be Invisible
In her book, Mettler shared that many Americans were unaware
that they received governmental support through initiatives such as the Home
Mortgage Interest Deduction and Student Loan Interest Deduction. On that front,
policies through tax expenditures had created the impression of smaller
governmental control following the Great Society period. Instead, these
policies worked quietly in the background. The lack of awareness also meant
little debate on the matters, thus ensuing durability. For example, the Home
Mortgage Interest Deduction had been in place since 1965 despite minor tweaks
along the way.
Beyond the debate of creating enlarged or smaller
governmental control, policies that work through tax expenditures yield
efficiency in the Administration. With an already well-established
institution of the IRS to administer tax breaks or credits, there is
relative ease of implementation with low administration costs. The policy
would also reach every Americans as they file for taxes. Contrasting this to direct
policies, where specific agencies had to be established to administer the
policies, and policy beneficiaries have to engage with the relevant government agencies.
Thus, policies through tax expenditures provide equity in access to the
benefits at low administration costs to the government. The flipside is that a
lack of dedicated institutions to oversee the policy implementation could
result in lack of overview of trends and to exercise control mechanisms to
mitigate negative effects of the policies. The lack of overview could also
bring about an abuse of the policy.
Policies that utilizes tax expenditures
and subsidies worked through the market to provide social benefits to citizens.
This has indirect and multiplier effects for the market. Taking the Home
Mortgage Interest Deduction as an example: the policy encourages citizens to
take up loan to purchase their homes. The resultant effect creates valuable
jobs in many industry sectors including construction, transportation, banking,
advertisement and so on. Designed properly, such policies develops key
industries and become self-sustaining.
Given the various reasons, policies through tax expenditures
presented a very attractive approach to politicians, and many presidents have
used this approach in some form to push their agendas and initiatives.
Over-consumption and Runaway Prices
Entrusting the market to implement and manage public
policies is not without risks. After all, the mission objectives of government
and market often do differ. Whilst government seeks to shape social behavior, deliver
social benefits and to maximize social value as a whole, industries and corporations
seek to maximize value for shareholders. Without clear oversight and regulation,
policies through tax expenditures encourage consumption, or worse still,
overconsumption. This drives up demand unnecessarily. As the market controls
supply, price increases. This is evidence in sharp rises in housing prices,
college fees and medical costs at rates higher than inflation since inception
of the policy. The increasing cost of living worsen the widening income gap,
with the poor becoming poorer. Yet, the tax credits and breaks bring ever
dwindling tax receipts for the government to channel funds to help these poor. Removal
of tax expenditure could bring in $1 trillion each year that could fund social and
other programs directed to target groups. Unfortunately, such policies remain submerged
from public scrutiny and faces headwind for any policy review. (609 words)
References:
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