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American Interest

GOP Tax Cut Shows Why Administrative State Needs Pruning

walter_russell_mead
walter_russell_mead
Ravenel B. Curry III Distinguished Fellow in Strategy and Statesmanship

The Wall Street Journal reports on one unexpected market adjustment to the GOP’s promised corporate tax cut:

The possibility of a tax-code overhaul is casting a shadow over the $10 billion affordable-housing industry, which receives tax credits so valuable they often determine whether or not projects get off the ground.

Members of Congress and President Donald Trump have proposed reducing the corporate tax rate to 15% to 20% from the current 35%, dimming the allure of a credit investors such as big banks and insurance companies receive to offset income taxes. Affordable housing, which represents about one-quarter of all new apartment construction in the U.S., relies on the credit for capital.

Overall, this reallocation of capital is a good thing, not a bad thing. The pullback illustrates one of the many ways the tax code saps the vitality out of the economy encouraging people to invest in order to produce tax savings rather than to produce goods and services in greater need. Lowering rates will make investments more efficient and productive.

There are many ways governments can support the construction of affordable housing. One is to pare back some of the byzantine regulations that control housing development at the state and local level—NIMBY land use and zoning restrictions, unrealistic regulations regarding construction and labor procurement methods—that drive the cost of new housing through the roof. And when that doesn’t work, city and state governments can subsidize rents.

But to create an elaborate investment tax code workaround for problems that blue model governance has created through overregulation, cost inflation, and bureaucratic micromanagement only builds new layers of cost and complexity over the old ones. And of course there is the problem of moral hazard created when it becomes impossible to build housing for the average person with an average income in a given area without getting “help” from insiders who can guide you through the bureaucratic morass.

Zealots who want to burn down the whole administrative state have it wrong; in a complicated modern society we actually need government that performs various important tasks competently. But there are lots of places where the administrative state needs pruning, rather than further maintenance and expansion. The affordable housing landscape is one of them.