If I worked for The New Yorker,

I’d write great columns like Surowiecki’s upcoming explanation of government debt-subsidies.  I’ve said before that the tax breaks we give, especially for interest deductions like for mortgages and corporate debt, are really subsidies and the opportunity cost should be counted as part of our government’s size.  I have a feeling if they were correctly interpreted you’d have a lot of soul searching by Republicans; on the other hand, they’d probably just support it since the breaks are good for business.    Presumably, Surowiecki was inspired by my posts.  His article created its own meme today, with Felix Salmon and Matt Yglesias weighing in.

Choice quotes are after the jump.

Yglesias:

Our political culture is highly biased in favor of tax cuts, which leads to a lot of subsidies being doled out that nobody would take seriously. If I said “every time a business makes $1 in interest payments, we should give them a quarter and pay for it with higher overall corporate tax rates” nobody would think that made sense.

Surowiecki:

There are a couple of peculiar things about these tax breaks—which have been around as long as the federal income tax. The first is that they’re unnecessary. Few people, after all, can save enough to buy a home with cash, so home buyers naturally gravitate toward mortgages. And businesses like debt because it offers them tremendous leverage, making it possible to put down a little money and potentially reap a huge gain. Even in the absence of the deductions, then, there would be plenty of borrowing. The second thing about these breaks is that their social benefits are pretty much nonexistent. Advocates of the mortgage-interest deduction, for instance, claim that it increases homeownership rates. But it doesn’t: in countries where mortgage deductions have been eliminated, homeownership rates haven’t dropped. Instead, the deduction simply inflates house prices. The business-interest deduction, meanwhile, may lower an individual company’s taxes, but it also means that the over-all corporate tax rate is higher, so its real impact is to give companies with lots of debt an unjustified advantage.

If the benefits are illusory, the costs are all too real. Economies work best, generally speaking, when people are making decisions based on economic fundamentals, not on tax considerations. So, as much as possible, the tax system should be neutral between debt and equity, and between housing and other investments. It’s not, and, worse still, as we’ve seen in the past couple of years, debt magnifies risk: if companies or individuals rely on large amounts of leverage, it’s much easier for bad decisions to lead to insolvency, with significant ripple effects in the wider economy. A debt-ridden economy is inherently more fragile and more volatile. This doesn’t mean that the tax system caused the financial crisis; after all, the tax breaks have been around for a long time, and the crisis is new. But, as a recent I.M.F. study found, tax distortions likely made the total amount of debt that people and companies took on much bigger. And that made the bursting of the housing bubble especially damaging. So encouraging people to take on debt qualifies as a genuinely bad idea.