By Mark Schmitt
Issue Date: 04.04.07

If you start to read the policy proposals of the Democratic presidential candidates and the mainstream Democratic think tanks, you will quickly get the impression that, while Democrats see lots of problems, there's always just one solution: a tax credit.

John Edwards proposes an "American Dream Tax Credit" -- up to $1,000 a year for five years to help buy a first home. Barack Obama has a new tax credit to promote fatherhood. Outside of the candidates, competition for the tax-credit championship is fierce: The leaders are Senator Chuck Schumer's four-part "Middle-Class Opportunity Act," which has new child-tax credits, a new tax credit for college tuition, and a new credit for families caring for older parents; and the Hillary Clinton–linked group, Third Way, which offers some of the same, plus a new-baby tax credit. Everyone wants tax credits to encourage savings and energy conservation.

It's easy to see why tax credits are appealing. The Earned Income Tax Credit (EITC), for example, lifts more children out of poverty than any other program, and it has bipartisan support. But how did tax credits become the answer to everything? Are there no other tools left in the box? What happened to the kind of liberalism that could build the Social Security system or the great public colleges and universities?

Part of the appeal of tax credits is that they can be a kind of positive government by subtraction: They allow liberals to retain the promise of an active, engaged government without challenging the anti-government ethos of the right by calling for a new program supported by taxes. Indeed, tax credits are the only instrument available if you can't bring yourself to admit that we will have to raise taxes to pay for the services we want. By packaging new benefits as if they really were tax cuts, Democrats seem to think they can dodge the tax-and-spend issue altogether.

Besides, nothing says we love the middle class, with all of its crucial swing voters, like a tax credit. A tax credit is the perfect bullet for the middle class: The poor get nothing, because they pay no taxes, and the wealthy seldom qualify, because most credits are phased out for the upper brackets.

Finally, tax credits are the ideal expression of the motto that many Democrats adopted from David Osborne's 1992 book, Reinventing Government: Government should "steer, not row." Instead of taking charge of problems and putting real money and programs behind them, government should deploy incentives to gently prod the natural forces of the world in the direction we want them to go.

This decade's version of Reinventing Government is Freakonomics, by Steven Levitt and Stephen Dubner, which in its 95 weeks on The New York Times' best-seller list has popularized the idea that "incentives are the cornerstone of modern life." Freakonomics brings Chicago School economics to the masses. The idea that people are homo economicus, always calculating their decisions based on rational and fully informed analyses of their economic utility, is deeply conservative, associated with the public-choice school that brought neoclassical economic doctrine into political science.

Ironically, at the very moment that Chicago School doctrines seem to have transfixed even progressive policy wonks, economics is moving on. The hottest work now is in "behavioral economics," which tries to figure out why monetary incentives so often don't work. People, it turns out, don't always contribute to a savings or pension plan just because there's a financial match. Seeing what other people do, having personal contact with someone who encourages them to do it, or making saving an automatic option are all as important as the monetary incentive itself. And if incentives don't change such a purely economic decision as saving, why should we think that tax credits will affect such profoundly personal decisions as whether to go to college or be a responsible father?

We've reached the limit of government by tax credit. The longer we go without raising the minimum wage, the more the EITC is just a subsidy for low-wage employers. A tax credit for tuition won't open the door to college to anyone who is not already going to college. And you can't "steer, not row" your way to universal health care.

If we have any hope of restoring the promise of active, problem-solving government, we have to be willing to use some of the other tools in the policy box. Sometimes we just have to mandate things, or regulate them. Sometimes we have to be willing to build new public structures. Sometimes we have to put some real money behind solving a major public problem, and be willing to raise taxes to do it.

Perhaps it's time to put down Freakonomics and read some Keynes.

Mark Schmitt is a senior fellow at the New America Foundation.