Will GOP Back Tax Breaks Over Deficit Cutting?
Martin Feldstein has an important idea.
Despite the strong case for limiting tax expenditures, it is politically difficult to do so because no one wants to give up benefits.
So here is a way to curb this loss of revenue without eliminating any individual deduction: limit the total tax saving for any individual to a maximum percentage of his total income. Daniel Feenberg of the National Bureau of Economic Research, Maya MacGuineas of the New America Foundation and I have been studying a reform that would cap the tax reduction that each taxpayer could get from tax expenditures to 2 percent of his adjusted gross income.
What’s the result? Taxpayers with incomes of $25,000 to $50,000 would pay about $1,000 more in taxes; those with incomes of more than $500,000 might pay $40,000 more.
The cap would affect more than 80 percent of taxpayers. Although they would continue to benefit from the mortgage deduction, the health insurance exclusion and other tax expenditures, their tax savings would not increase if they took out a larger mortgage or a more expensive insurance policy. Similarly, they would not be penalized and get a lesser tax benefit if they scaled back their mortgage or their health insurance premium by moderate amounts.
The important thing to appreciate is that these tax credits and deductions not only act as substitutes for government spending, but that they actively distort the US economy in harmful ways.
My own favored example: the mortgage interest deduction.
The mortgage interest deduction is supposed to promote home ownership. Yet before the subprime mortgage bubble, home ownership rates were no higher in the US than in Canada, where home mortgage interest is not deductible. What was different between the two countries was the size of new homes: on average, 500 square feet larger in the US. The tax expenditure utterly failed of its goal to put more people in homes. (A dubious goal in any case, as we now see.) What it did instead was to put people into larger homes.
And why would the US government subsidize that?
The deduction for state and local taxes is equally perverse, subsidizing states for overspending and overtaxing.
We all now appreciate the malign effects of the exclusion for fringe benefits and health coverage.
It would be worthwhile doing away with these deductions even if they did nothing to reduce the deficit. But if they help to curtail it? All the better. Of course, some will oppose any such reforms. What can we call this stubborn, diverse group? They need a snappy name that sums up in a few words their policy goal. Got it! How about: Americans Against Tax Reform? They can share offices with the misnamed Americans for Tax Reform, who will say the very same thing.
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