It is possible to spend $100,000 on a luxury car. Most people don’t do so, and not just because they cannot “afford” one. Even among Americans with over $100,000 in wealth, only a tiny fraction would choose to spend $100,000 on a luxury car.
You can also spend $35,000 on a luxury car, something like a Toyota Camry. You might object that a Camry is not a luxury car. Actually, it is. Car manufacturers have basically perfected the art of building a high quality car. Today, the quality difference between something like a Camry and a $100,000 car is so slight as to be hardly worth commenting on.
What would get me to buy a $100,000 car? Perhaps if the government paid 95% of the cost of my new car. In that case, I might prefer to spend $5000 (out of pocket) on a fancy Mercedes rather than $1750 on a new Camry.
It would be extraordinarily wasteful if price distortions caused our economy to switch from producing $35,000 cars to producing $100,000 cars. In other sectors, however, we’ve done something very much like that—because of subsidies.
What would get me to spend $100,000 on a medical procedure rather than $35,000 on an almost as good procedure? Subsidies. If I only had to pay a small percentage of the cost out-of-pocket, then the highest quality procedure would become much more attractive. That’s one reason why America spends 17% of GDP on medical care.
This Bloomberg story caught my eye:
Trump’s economic advisers are considering doubling the state and local tax deduction, a popular — but expensive — tax break that could deliver big savings to many residents of New York, New Jersey, and California.
Economist Stephen Moore, a member of President-elect Donald Trump’s economic advisory transition team, told Bloomberg Thursday that the group has discussed expanding the tax write-off limit from $10,000 to $20,000.
In my view, the decision to cap the SALT deduction at $10,000 was the single most successful economic policy initiative of the past decade. It had two important benefits:
1. The deduction greatly simplified tax preparation for many taxpayers (including me.) Now you could simply take the standard deduction, avoiding lots of time-consuming paperwork.
2. The SALT cap took away a major subsidy to spending at the state government level. For people in the 40% federal tax bracket, the SALT deduction meant that the federal government effectively paid 40% of their state income tax bill, at least in those states that have an income tax. In the period since the change, a number of states have begun reducing their state income tax rates, which is exactly what I would have expected. If the cap goes up to $20,000, then states will have a strong incentive to do additional wasteful spending.
PS. Of course, the claim “single most successful economic policy of the past decade” is a very low bar, as the past decade has been one of almost unrelenting policy mistakes.
READER COMMENTS
Thomas L Hutcheson
Dec 13 2024 at 9:47pm
Judging changes in the income tax system as as movement toward or away from a personal consumption tax, I judge capping the SALT deduction as a move away. The additional revenue was good, but could have been achieve with higher rates or with converting deductions for tax favored consumption into partial tax credits as a rate below the higher marginal rates.
Mactoul
Dec 13 2024 at 11:22pm
For all this 17 percent medical care, America has the lowest life expectancy among developed nations, and not just by decimal points. So it is getting some Soviet worth of car by paying for Mercedes.
The politics of doubling SALT deduction is unclear. Are the Republicans seeking inroads in the Democratic strongholds or it is the usual Republican idea to reward their opponents.
MarkW
Dec 14 2024 at 6:04am
So it is getting some Soviet worth of car by paying for Mercedes.
No. Shorter US life expectancies are not an outcome of the healthcare system, they are an outcome of things like sedentary lifestyles, obesity, traffic deaths, and especially in recent years — opiate overdoses. Some of the places with the highest US life expectancies are rural places lacking ready access to cutting edge medical care (it’s hard to be more ‘in the middle of nowhere’ than Billings County, North Dakota or Presidio County, Texas). When it comes to life expectancy, lifestyles matter much more than access to health care (or the type of health care system).
Richard W Fulmer
Dec 14 2024 at 6:52pm
Adding to Mark W’s point, if you look at medical conditions that the healthcare system can address, the U.S. stacks up well against other countries. For example, the cancer survival rate is higher in the U.S. than in Canada, the UK, Europe, New Zealand, and Japan. Australia and South Korea have higher survival rates for some cancers, lower rates for others.
Craig
Dec 14 2024 at 2:12am
“at least in those states that have an income tax.”
I believe at one point there was a selectiom betwwen sales tax and income tax.
MarkW
Dec 14 2024 at 6:08am
In general, I agree, and it’s a little hard to see the political calculus here — why would Trump want to direct the benefits of tax cuts primarily to wealthier homeowners in high-tax blue states? That said, indexed for inflation (which the limit arguably should be), $10K in 2017 is nearly $13K now, so going to $20K would be more like a 50% increase than a doubling.
Craig
Dec 14 2024 at 2:38pm
“little hard to see the political calculus here — why would Trump want to direct the benefits of tax cuts primarily to wealthier homeowners in high-tax blue states?”
Speculation on my part is that last time in midterms the suburban wealth belt in places like NJ swung against him and he might be trying to prevent similar in 2026?
JoeF
Dec 15 2024 at 7:40am
Trump’s original SALT cap (from 2017) was $10K and that is set to expire in 2025. The GOP (with a very slim House majority) may not have enough votes to extend the cap in 2025 unless they agree to raising the cap to $20K. They will need the votes of representatives from NY, NJ and CA to pass an extension of the cap and those representatives are pushing for a higher cap.
Alan Goldhammer
Dec 15 2024 at 1:28pm
I agree about the SALT deduction being a good thing but until all tax preferences, corporate & individual are eliminated (including charitable contributions and home mortgage interest), I will not rejoice. If we had a modest VAT, much lower corporate tax rate and cleaned up the tax code we could move to a system where those with incomes under $70K would pay no Federal income tax. We could have just one or two tax brackets for all the rest.
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