A Tale of Two Editorials

by Dave Schuler on February 27, 2014

The editors of the New York Times and Washington Post have, more or less, come out on opposite sides on the proposed tax reform on which I posted yesterday. The NYT editors oppose the measure for what are to me short-sighted and puzzling reasons. Their first argument is that if tax expenditures are cut or limited, they can’t be cut or limited in the future for a more worthy goal, i.e. increasing revenues:

The plan, intended only to simplify the tax code rather than redistribute the burden, reduces the number of tax brackets from seven to three. Low-income taxpayers would pay a 10 percent rate, those in the middle would pay 25 percent, and families making $450,000 and above would pay 35 percent instead of the current 39.6 percent.

In many cases, that represents a tax cut, and to make up for the loss in revenue — since the plan aims to be revenue-neutral — a large number of deductions and breaks are eliminated. But ending those breaks just to reduce rates means the savings can’t be used for important expenses in the future — which is a Republican goal.

The second objection is that putting a cap on the home mortgage deduction and eliminating the deductibility of state and local taxes would be unfair to New York:

One big break that would be affected is the mortgage-interest deduction. By limiting it to $500,000, the plan would hurt many middle-class families that must borrow more than that to afford a house in expensive markets like New York. Even worse, it would repeal the deduction for state and local taxes, a deliberate attempt to make it more difficult for “blue” states to provide the services and safety-net protections that they have decided are necessary.

IMO this is flummery. According to the Census Bureau the median home price in New York County is more than $800,000 and, understandably, it has one of the lowest rates of home ownership—a bit over 50%. Nearly by definition people who buy homes valued at more than $800,000 aren’t middle income—they’re upper middle income or upper income. In New York middle income people rent. Additionally, I find it excessive to expect the federal tax code to solve New York’s problems with home affordability. That’s properly a role for the state.

However, the NYT’s complaints bring into sharp relief the problem with the home mortgage deduction and many of the other “tax expenditures”: they are subsidies to people with higher incomes. They go overwhelmingly to the 3% or the 1%. I would think that a tax code that reduced subsidies to the rich would be an improvement.

The editors of the Times do not seem to recognize that a simple tax code will itself be a better tax code, trimming the costs of compliance and reducing the opportunities for gaming the system, opportunities most available to the highest income earners.

The editors of the Washington Post on the other hand seem favorably predisposed to the plan, would be even more favorably disposed to beginning a discussion of tax reform, but are mournful about tax reform’s chances of being enacted into law:

In a properly functioning Washington, the tax reform plan unveiled Wednesday by House Ways and Means Committee Chairman Dave Camp (R-Mich.) would kick off a major debate over how to fix the federal government’s inefficient system of revenue collection. Mr. Camp proposes to overhaul both the corporate and individual tax codes, based on the principle that lower rates should be applied to a broader base of income — that is, one that is purged of many loopholes and deductions that litter current law.

[…]

In the actual Washington, alas, Mr. Camp’s proposal has basically no chance of passage, or even of being acted upon this year. Much of the blame for that belongs with the leaders of his party, who smell victory in the November elections and don’t want to do anything controversial — such as committing themselves to an actual positive agenda — that might put that prospect at risk. Instead of praising their fellow Republican’s plan, House Speaker John A. Boehner (Ohio) and Senate Minority Leader Mitch McConnell (Ky.) threw cold water on it.

{ 10 comments… read them below or add one }

steve February 27, 2014 at 6:58 pm

The fewer tax expenditures, the better. The only one I would think about keeping might be the EITC. When folks from the right (Milton Friedman) and from the left both think it serves as an incentive to work, it might be worth keeping. Anything that puts tax lawyers out of work is a plus in my book so I like a lot of this bill. Have not read in detail, so I have a hard time believing there are not hidden giveaways to the rich in it, but who knows?

Steve

Dave Schuler February 27, 2014 at 7:06 pm

Nothing hidden about it—it’s right out in the open. The top marginal tax rate (even including the 10% surcharge on the highest earners) is 35%.

jan February 27, 2014 at 8:08 pm

Eliminating the home mortgage deduction may be favored by some people. But, most agree that one of the unintended consequences will be to lower the value of housing across the board — perhaps by as much as 15-20%. I think the question to ask oneself is do you think our shaky economy can weather another dip in one of it’s fiscal staples — housing? Less risky choices might be the elimination of mortgage deductions for 2nd homes, and raising that $500 thousand ceiling to $750 thousand – 1 million.

Andy February 27, 2014 at 11:11 pm

As always, the problem is that marginal rates are not effective rates and it is effective rates that matter at the end of the day. The difference between marginal and effective rates is a basic fact major news organizations somehow can’t seem to comprehend.

steve February 28, 2014 at 9:57 am

Jan- You need to explain why renters should subsidize homeowners. Lowering home values is an intended consequence. I don’t have any problem with fazing it in, but it would be good to get rid of this market distortion.

Steve

PD Shaw February 28, 2014 at 10:12 am

Just playing with the numbers: To qualify for a $500,000 mortgage, assuming 4.37% rate on a 30-yr, with a property tax rate of 1.37%, a household would need income of $118,836.85. That’s approximately the top 16% of household in the U.S.

TastyBits February 28, 2014 at 1:25 pm

Liberals beg to have their tax rate raised because they want to pay their fair share, but when their tax rate is lowered they squeal like pigs because they are actually going to pay their fair share.

Dave Schuler February 28, 2014 at 1:29 pm

I don’t think that’s it, TastyBits. I think that for some people a system that can’t be gamed is the worst possible outcome because it means they might actually have to compete on an equal footing.

He either fears his fate too much
or his deserts are small
that dares not put it to the touch, etc.…

TastyBits February 28, 2014 at 2:54 pm

@Dave Schuler

To me, they expose themselves with the desperation over the mortgage deduction. They are getting into the rich man’s income bracket with their $500,000 example, and if they are worried about inadvertently affecting the non-rich, they would advocate to have it eliminated for income above $450,000.

You have noted many times that this is a huge tax deduction, loophole, shield, incentive, or whatever for the top income bracket. If one is pushing for the top bracket to pay more, one would not be whining about lowering the mortgage deduction for the top bracket.

jan February 28, 2014 at 2:57 pm

“Jan- You need to explain why renters should subsidize homeowners. Lowering home values is an intended consequence. I don’t have any problem with fazing it in, but it would be good to get rid of this market distortion.”

If you read my above post, Steve, no value judgment was given. It was merely a cautionary note discussing what many predict will happen should such a popular and widely used deduction is eliminated. After all, home ownership is frequently a family’s most prized and valuable asset. A shift downward in evaluation is not exactly a cheering event for these people. And, when prices plummeted after the fiscal crisis of 2008, such a fall negatively rolled over the entire economy. Housing is finally coming back (too much so for my comfort), along with construction jobs, which is also helping whatever recovery we are said to be experiencing.

Should prices again suddenly decrease, the next question is who will benefit from this? In the example of the 2008 sub prime aftermath, speculators and foreign investors sought out housing foreclosure bargains. Maybe, this time around, sacrificing the mortgage interest deduction incentives, resulting in lower overall prices, might offer first time buyers an affordable foothold. That would be a good thing. Nonetheless, these buyers will still have little to offset the myriad of fixed and unexpected costs, along with the added responsibilities of home ownership, maintenance, mortgage payments, property taxes, buying/selling expenses and the like, which tenants don’t have to deal with. A tenant moves in, pays their rent, calls the owner when problems arise, gives a 30-day notice when it suits them to leave, and is gone. It’s a far different lifestyle, set of financial criteria to meet, and risk management juggling foisted upon a person being a property owner over being a tenant.

Furthermore, that line about tenants subsidizing home ownership is kind of misleading, especially in areas having rent control. Also, when it comes to any school bond, water, sewer, beach upgrade issues, all these additional costs, usually voted in by owner and tenants alike, are directly funded through increases in property taxes. Property owners, only share this higher overhead with tenants if their building is a multiple residential one, and usually through recovering the costs in monthly fractions, while, as property owners, they have the semi-annual property tax bills to pay in lump sums.

Should government want to reinvent the housing market place by way of deleting mortgage interest deductions, they should at least do so by a long faze-in process, giving ample time for distressed or on-the-edge homeowners to put their ducks in a row, and perhaps just sell their property before it gets to be too fiscally unmanageable for them to maintain and own.

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