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Wednesday, October 12, 2005

Tax Panel Seeks to Limit Mortgage Interest and Healthcare Deductions

The president's tax reform panel is seeking to limit the mortgage interest rate deduction, as first noted here, and to limit employer provided healthcare deductions. I want to encourage this because it will be entertaining to watch congress try and actually implement this proposal:

Tax panel seeks cap on break for homeowners, by Christopher Swann, Financial Times: The president's panel on tax reform is pushing for a cap on the mortgage interest tax deduction, long considered one of the country's untouchable tax breaks. The loophole, which along with other tax breaks for homeownership costs the US Treasury about $100bn (€83bn, £57bn) a year in lost revenue, disproportionately benefits wealthier Americans. George W. Bush had instructed the panel ... to take account of “the importance of homeownership and charity in American society”, a statement that led some to suggest that tampering with existing generous incentives for property ownership would be taboo. But in the final weeks of its deliberations it is leaning towards curbing the tax privileges of higher-end homeowners. The committee ... has been searching for ways to plug a hole in government finances that would be left by the abolition of the Alternative Minimum Tax... This has led them to look at housing and healthcare, the two most costly deductions. Jim Poterba, an economics professor at MIT and a member of the panel, said there was only shaky evidence that the existing system encouraged homeownership and a strong case that it led to overinvestment in residential property to the detriment of other investments. ... Charles Rossotti, senior adviser to the Carlyle Group ... and a member of the panel, says the system tends to encourage the construction of bigger houses rather than an increase in the number of people who own their home. The panel is now considering where to recommend capping the tax deduction. Given wide regional variations in US home prices, it said, it would consider caps based at a certain level above local median prices. However, it warned that any abrupt move to curb tax benefits for housing could be disruptive and unfair. Prof Poterba suggested that it could even consider leaving intact the existing tax structure for the life of existing mortgages. The panel was almost unanimous in arguing that the existing tax structure for healthcare also needed to be overhauled. Individuals are not currently taxed at all on employer-provided healthcare coverage, which has created the single largest tax loophole in the US code, costing the Treasury $125bn a year. That may have contributed to runaway price rises in the healthcare system, the panel said, with some companies offering employees costly insurance plans in part because of their tax-privileged status.

Here are a couple of things I don't quite understand.  If the deduction is eliminated on new mortgages only, not on existing mortgages, and it is capped, how much revenue can it bring in over, say, the next five to ten years?  Without a fairly low ceiling, I'm skeptical it will provide much of the needed AMT offset.  Also, the main argument seems to be that the taxes are distortionary and provide no benefits to compensate.  If so, why cap the deduction?  Shouldn't it be eliminated entirely?  And a point of clarification, saying there is shaky evidence that the mortgage deduction provides benefits simply says the data aren't clear on this point.  It does not say that there aren't any benefits.

Yes, taxes and tax deductions are generally distortionary.  They may kick me out of the economist's club for not railing against a market inefficiency, but I hope they'll allow me this one.  Somehow having too much healthcare and too many houses that are too roomy (got kids?), or both, doesn't bother me too much, though if the mortgage interest deduction is capped at a high enough level, it will bother me less (just above my house value is perfect). There are other places to look besides healthcare and housing to solve the deficit problem and most any tax you examine can be pegged with the distortionary label.  It appears the main reason they are targeting these two deductions is simply because they are the two largest potential pools of money, not because they are the source of the large distortions in the economy.

    Posted by on Wednesday, October 12, 2005 at 12:41 AM in Budget Deficit, Economics, Health Care, Housing, Taxes | Permalink  TrackBack (1)  Comments (12)

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