That's Really Big of Him

Although George W. Bush is riding high, his stated philosophy of "compassionate conservatism" is not so popular. Liberals think it's a contradiction in terms. The press thinks it's meaningless spin. Many conservatives think it's way too defensive.

In fact, these criticisms are unfair. Compassionate conservatism is emerging as a doctrine with a specific meaning, which deserves to be treated seriously. The meaning can be glimpsed in Bush's promise to spend $8 billion financing social programs of "faith-based" and other private institutions. And it is reflected in the tax bill emerging from the Republican-controlled Congress.

In a nutshell, the meaning is this: the government should achieve desirable goals by creating incentives for private individuals and organizations, primarily in the form of tax cuts. Much of Bush's $8 billion would be used to expand the charitable deduction, provide "new incentives" for corporate giving and so on. The House tax bill is full of deductions and credits for this or that form of officially approved behavior, primarily saving and investment.

This is a serious philosophy of government. One thing it is not, though, is small government. Politically, compassionate conservatives try to have it both ways: they're reducing the burden of government (unlike liberals), and they're addressing society's problems (unlike traditional conservatives). It's certainly wonderful to be told, as a voter, that you can show your concern about the nation's have-nots, about the nation's moral values and so on by accepting a tax cut. But government-by-tax-credit is still government. It's "letting people keep more of their own hard-earned money," as the pols like to say, but only if they do what the government wants.

A tax incentive appears on the books as a reduction in the size of government. But this is misleading. To qualify for a dollar tax credit, you must use many dollars in some way the government dictates. So every new tax credit actually increases the fraction of the economy directed by the government.

In theory, tax incentives have two advantages over traditional government programs: (a) they're cheaper, because each dollar of lost tax revenue produces multiple dollars of the desired activity; and (b) they're smarter, because they tap into the creativity of the private sector. Both premises, though, are open to question.

One problem on the cost side is that some of the activity you're trying to encourage would occur anyway. In these cases the subsidies are wasted. This is egregiously true of tax incentives to promote savings, such as IRAs. People would save money even if there were no tax advantage. They may save more because of the tax incentive, but they get the break from dollar one.

Why is the tax code so hideously complex? It's not because the IRS is run by fiends. Every twist and turn is there because someone wanted to use taxes to influence other people's behavior. Tax simplification is a popular rallying cry, but compassionate conservatives seem intent on making the tax code even more ornate.