3:32am

Thu October 18, 2012
Planet Money

A Tax Plan That Economists Love (And Politicians Hate)

Originally published on Fri October 19, 2012 12:51 pm

Watching a presidential campaign, it's easy to think that the nation is deeply divided over how to fix the economy. But when you talk to economists, it turns out they agree on an enormous number of issues.

So we brought together five economists from across the political spectrum and had them create their dream presidential candidate. Over the next few days, we'll have a series of stories on our economists' dream candidate. We start this morning with some changes to the tax code.

Every single one of our economists said a dream candidate would kill off a giant perk that millions of Americans love and enjoy: the mortgage-interest tax deduction.

If you pay a mortgage on your home, you can write off the interest you pay on that loan. And if you get this benefit, it seems great. A little help from the government to live the American dream of homeownership.

But to an economist, a tax break is the same as the government writing you a check.

"It just makes no sense that if we have Bill Gates or some very wealthy person, we're subsidizing them to get a very expensive home," said Dean Baker, of the Center for Economic and Policy Research.

"So because rich people receive a larger subsidy, the price of houses increases so much it actually makes it less affordable for the poorer people," said Luigi Zingales, of the University of Chicago Booth School of Business.

This deduction costs the U.S. government about $100 billion a year. And to understand why the government keeps the deduction in place, imagine what a presidential candidate would sound like if he promised to eliminate it:

"When I'm elected president, I have a special plan for the middle class: All of you Americans who own your own homes, I promise to raise your tax bill by thousands of dollars a year."

Also on the chopping block: the rule that allows employee health benefits to go untaxed. As with the mortgage-interest deduction, the rule distorts markets and disproportionately favors the well-off, who pay higher tax rates and tend to have better health care plans.

So far, our economists' dream candidate is not doing so well with the middle class. A lot of people would probably pay more taxes.

I asked our panel: Aren't there some taxes that we can cut or get rid of? They all agreed: Get rid of the corporate tax!

Another hard sell. Right now, President Obama and Mitt Romney are advocating lower corporate taxes, but nothing?

It may sound unfair. But two of the most liberal economists on our panel agreed.

"The corporate income tax makes no sense whatsoever," said Robert Frank, a professor at Cornell. "We don't want to prevent Microsoft and General Motors ... from investing more and improving their product line," Baker said. "That's a good thing in my view."

Our economists said if you want to tax rich people as public policy, then tax rich people — tax the people who own corporations. But taxing the corporation itself is taxing the thing that really does create jobs.

The five economists on our panel are: Dean Baker, Katherine Baicker, Robert Frank, Russ Roberts and Luigi Zingales. We'll have more from them later today. For a response from Dean Baker, see this post. For our complete platform, see this post.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

DAVID GREENE, HOST:

When you watch a presidential debate, it's easy to think that the nation is deeply divided over economic policy. But when you talk to the experts, to economists, turns out they agree on an enormous number of issues. Our Planet Money team wondered what it would sound like if you could take some of those academic ideas about the economy and put them in a candidate's mouth.

NPR's Robert Smith finds out.

ROBERT SMITH, BYLINE: To create a dream candidate, you need a dream team. We took five leading economists of all different stripes - conservative, liberal.

UNIDENTIFIED MAN #1: You could probably describe me as left of center, to be fair.

LUIS ZINGALES: Pro-market but not necessarily pro-business.

UNIDENTIFIED MAN #2: I'm a pretty hardcore free market guy.

KATHERINE BAICKER: I'm a professor of health economics at the Harvard School of Public Health.

UNIDENTIFIED MAN #3: I think of myself as a radical pragmatist.

SMITH: And we said to this team, put all your differences aside and tell us what can you actually agree on. In an ideal world, what should the presidential candidates be talking about? Luigi Zingales from the University of Chicago Booth School started off with something pretty uncontroversial - the United States tax code is a disaster.

ZINGALES: All the loopholes and differences and in particular deductions.

SMITH: Now, politicians say this all the time and they rarely give a solution. But our economists all agree on a pretty good way to fix it. The United States, they all said, needs to get rid of a giant tax deduction that unfortunately millions of Americans love and enjoy.

UNIDENTIFIED MAN #4: The mortgage interest deduction.

BAICKER: The mortgage interest deduction.

ZINGALES: Mortgage interest is extremely perverse.

SMITH: If you own a home, pay a mortgage, you can write off the interest on your taxes. And if you're one of the lucky ones, it's awesome. A little help from Uncle Sam to live the American dream. But to an economist, a tax break is a multibillion dollar gift to a very particular group, in this case a group that doesn't always need the money. Here's Dean Baker. He's a liberal with the Center for Economic and Policy Research, and a conservative, Luigi Zingales.

DEAN BAKER: It just makes no sense that, you know, if we have Bill Gates or whoever, some very wealthy person, we're subsidizing them to get an expensive home.

ZINGALES: So because rich people receive a much larger subsidy, the price of houses increases so much it actually makes it less affordable for the poorer people.

SMITH: If you totally eliminate this deduction, the U.S. government would have an extra $100 billion a year to pay down the deficit or maybe lower overall taxes. Why wouldn't a politician at least float the idea? Well we wanted to see how it would sound so we hired an actor. We wrote him a stump speech and put him in front of a fake audience.

UNIDENTIFIED MAN #5: That's why when I'm elected president of the United States, I have a special plan for the middle class. All of you Americans who own your own homes, I promise to raise your tax bill by thousands of dollars a year.

BAICKER: And that's why no one elects economists.

SMITH: Katherine Baicker from Harvard says as painful and as unpopular as eliminating deductions would be, there is an upside. The system would be more fair and it would bring in all this extra revenue to the government. So I asked the panel, any chance with all that extra money you could maybe lower some tax rates too? Well, our economists did agree on one tax that has to go.

UNIDENTIFIED MAN #5: Read my lips, no taxes for corporations. Zero, nada, nothing.

SMITH: This is not going to go over well with the middle class either. Right now President Obama and Mitt Romney are advocating lower corporate taxes, but no one said get rid of them altogether. But our conservative and liberal economists agree, in principle at least. Here's Dean Baker.

BAKER: We don't want to prevent Microsoft or General Motors or whoever it might be from investing more and improving their product line. That's a good thing in my view.

SMITH: Our economists said that if you want to tax rich people as part of public policy, tax rich people, tax the owners of the corporation, but don't tax the profits from the corporation that are reinvested and creating jobs. Now, before you think that our economic dream team has nothing but unpopular ideas, there is more to the plan.

Later today on ALL THINGS CONSIDERED, our economists say there might just be a way to get rid of income taxes altogether and they unveil their big plan to combat illegal drugs.

UNIDENTIFIED MAN #6: Make them legal.

SMITH: And other economic wisdom you won't hear in the debates. Robert Smith, NPR News, New York. Transcript provided by NPR, Copyright NPR.

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