The mortgage interest deduction, for instance, contributed to the recently burst housing bubble by driving up the cost of homes, benefiting builders, real estate agents and homeowners at the expense of renters. The policy of not counting employer-provided health insurance as income feeds medical inflation by cutting off price signals to consumers. The deduction for state and local taxes (as well as the one for interest on municipal bonds) encourages state and local governments to spend more than they otherwise would.
Such preferences nevertheless remain highly popular, since their benefits are more obvious and immediate than the benefits of lower rates. "The dirty little secret is that the largest special interests are us -- the vast majority of U.S. taxpayers," Olson writes. "We cannot pretend that broadening the tax base means eliminating someone else's tax break while preserving our own."
Here is another pretense that stands in the way of a simpler, fairer, more efficient tax code: the idea that politicians can improve our decisions by using tax preferences to encourage officially approved behavior, whether it's giving to charity, going to college, adopting children, investing in research, converting corn into fuel, or buying a house, a hybrid car or a health insurance policy. It's bad enough that the government forcibly extracts a share of our income -- it should not presume to direct the spending of the rest.
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