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TAX REFORM PANEL STIRS UP HORNETS NEST

October 13, 2005

If you ever have wondered why it's so hard to get good tax policy enacted, the frenzy caused by this week's meeting of the President's Advisory Panel on Tax Reform will give you some insight.

The panel discussed two ideas that policy wonks have long considered as worthwhile targets for reform: the home mortgage deduction and the tax preference for employer-provided health coverage. Many economists believe both sets of tax breaks distort their markets and subsidize uneconomical behavior (i.e., excessive investment of family wealth in real estate and "gold-plated" health plans).

The result: outrage on the left and right. From the right:

So in order to make the elimination of the Alternative Minimum Tax "revenue-neutral," the Bush-appointed tax commission proposes the elimination of the housing-mortgage deduction over $340,000. The result of such a phase-out: A colossal real-estate crash in New York, Florida, Illinois, California and, yes, even Texas, with a cascading effect throughout the country. This may be the dumbest major independent-commission proposal in all of human history.

From the left:

So while Bush is looking for ways to **** over the middle class while protecting the tax cuts to the rich.

(sic; asterisks added)

So tax-deductible mortgages on $1 million houses are now a rallying point for the left. Who knew? Left-leaning tax prof Daniel Shaviro apparently didn't get the memo:

Okay, the Republicans have so exploited the tactic of mindlessly repeating talking points ad nauseum that it's understandably tempting for Democrats to play the same game, and trot out good old Paris Hilton every five minutes. But is supporting the AMT, and opposing limits on wasteful upper-end health insurance tax benefits, as well as on tax breaks that promote borrowing and big homes, really a good place to deploy this strategy?

I saw a little bit of the tax reform panel's session rerun on C-span last night (yeah, my life is pretty darn exciting). They seemed to approach the mortgage deduction very gingerly, and they were well aware of the need to transition carefully to a reduced deduction to avoid a real-estate crash. Yet they still stirred up a hornets nest.

The promised land of tax reform is low rates. If rates are low enough, you don't need so many deductions, and taxes matter less. If the biggest tax breaks are off limits, you'll never see the promised land:

(Source: Tax Policy Blog)