Are deductions for these guys a good idea?
The title of my post is one of my favorite economic maxims. People aren’t always rationale. People don’t always do a cost benefit analysis before making a particular decision. We don’t always make a decision that will optimize our benefit. As a general rule of thumb, though, I think it’s safe to say that people usually respond to incentives.
We’ve seen people respond to incentives created by the government lately, with the $8000 first time homebuyers credit and the Cash for Clunkers program. People are more likely to borrow money when interest rates are low. The Federal Reserve attempts to lower interest rates to give people (and businesses) this incentive. The tax code is littered with incentives, all created to encourage people to respond with some sort of behavior that legislators feel will be favorable for the economy or for the country in some non-economic way.
Companies create incentives for their employees to try to optimize productivity. All kinds of incentive based programs exist. Salespeople earn commissions. Executives have special compensation programs that are tied to their stock prices (people differ as to whether this is an effective incentive – it encourages risk taking for short term gain).
The question becomes who should decide what behavior we’re trying to encourage. Policy makers can be wrong, can’t they? I saw an interesting tax deduction on the table to be added in the near future the other day. It appears that U.S. Representative Thaddeus McCotter (R-MI) has introduced a bill that would create a tax break for pet owners.
Before I go any further, I’d like to openly proclaim that I love animals. And I’d like to go ahead and concede that owning a pet is extremely expensive. The question I have, that I’d like to raise with this particular piece of legislation is, what incentive are you trying to create? It appears to me that this piece of legislation would create and incentive to own a pet. What government purpose would this serve? Will this create more tax revenue in some way? What is the opportunity cost?
Josh, a new contributor to the site (his first post likely coming in early November), astutely pointed out to me that pet services create jobs. If more people owned pets, then they would buy more pet food, buy more chew toys and spend more money on veterinary services and services such as kenneling. He was saying this somewhat tongue in cheek – but he’s right. All of those things would be stimulated.
In a situation like this, I would think that it would be necessary to look at the opportunity costs. Will this create more tax revenue than you lose? Is there another place we could use this deduction that’s more productive? What about another $3500 for people that start manufacturing businesses? Or another $3500 dollars worth of deductions for people who put solar panels on their homes (something that would pay for itself in saved energy costs very quickly), or another $3500 for people who get engineering or hard science degrees? Those are just examples, but legislators need to be thinking about what kind of behavior we’re trying to encourage on a daily basis. If you’re in a position where you have the responsibility of shaping policy, you owe it to us to try to maximize your ability to do so. As nice as it would be to save money for having pets, I’m not sure I agree with this – though I love the novelty of it (that’s why I’m writing about it). What do you think about tax deductions for pets? What am I missing? Thanks for reading.
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