The Case Against Targeted Disaster Relief

October 6, 2005

Targeted tax relief makes good headlines, but it’s almost always bad tax policy. Why? For one, tax policy is an extraordinarily blunt policy instrument, often spreading benefits and costs in a capricious way.

With the Senate Finance Committee holding hearings this morning on the use of targeted tax incentives to encourage Gulf coast rebuilding, The New York Times reports many economists are questioning the effectiveness of the targeted-relief approach:

Proposals to use tax breaks for rebuilding areas devastated by the recent hurricanes may provide only limited help to people and businesses that suffered actual losses, according to many economists.

The biggest beneficiaries could turn out to be companies from outside the devastated areas that have big federal contracts to carry out cleanup and reconstruction work…

The Bush plan would cost $2 billion, according to White House estimates, and the broader plans could cost several times that much.

But economists say the most valuable tax breaks would benefit companies and investors from outside the damaged areas because the tax breaks are useful only to companies that have profits.

The paradox of employing tax policy as an all-purpose policy tool is that the more targeted relief that’s dispensed, the worse the tax system becomes overall, both in terms of complexity and how much it distorts behavior in the marketplace. General tax relief is economically superior to targeted provisions by nearly every criteria of sound public policy.

As we’ve written before, the more we ask of the tax system the more it asks of us. With broad consensus in Washington that the federal tax code should guide social outcomes, internalize externalities, promote public health, discourage bad behavior, promote marriage and childbirth and reward education—in addition to its core function of raising revenue—is it any surprise we work until mid-April to pay our annual tax bill?


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