Defending the Tax Code

As I’ve written in the past, one of the reasons that reforming the tax code is so difficult is that every single provision in it has a constituency that will defend their pet provision strenuously. The editors of the New York Times leap to the defense of the deduction for state and local taxes, a subsidy to jurisdictions that depend on high taxes:

One change is getting a lot of attention: Republican leaders want to eliminate the state and local tax deduction. This would hurt many Americans, especially those who live in states like California and New York with high state and local taxes.

That group clearly includes many rich families, but more than half of this deduction benefited taxpayers with incomes of less than $200,000 in 2015, according to Government Finance Officers Association, which represents officials from local and state governments. Some of these people might do fine under the framework, but tax experts say many will clearly be hurt because their total itemized deductions exceed the new, higher standard deduction proposed by the framework – $24,000 for couples and $12,000 for singles.

They also provide some eye-catching infographics. One of those infographics shows the pictures of House Democratic and Republican leadership and the percentages of their constituencies who “use this deduction”. Unsurprisingly, the numbers vary from 20% “using” in Luke Messer’s Indiana congressional district to 48% “using” in Steny Hoyer’s Maryland district.

I wish they’d been simultaneously a little broader and a little narrower and shown us the percentages of all Congressmen’s districts who benefit by $2,000 or more per year from the deduction. I agree with the NYT editors that it’s puzzling that Congressmen would want to hurt their own constituents but defending deductions for the rich in the name of not hurting the little guy is equally “pathetic” to use the NYT editors’ word.

All of this illustrates why I’d support a revenue neutral reduction or elimination of the income tax on corporations in the interest of efficiency and increasing economic growth, balancing that with adding a new, higher personal income tax bracket above the presently highest one of 39.6% for those with taxable incomes above $418,400.

3 comments… add one
  • Guarneri Link

    Simplification/efficiency is such an obvious and needed benefit that it shouldn’t require defense. I’ve noted a number of times that I’m always on extension and my total return and schedules routinely reaches an inch to an inch and a half or so. And so many of those schedules are either unintelligible or full of zeros – just reporting requirements. I bet my tax prep bill is as large as a significant fraction of taxpayer’s income tax bill. Its absurd.

    The two largest “tax breaks” must currently derive from the mortgage interest deduction and the state tax deduction. Surely adding property taxes would capture the lions share. I’d like to see a (fairly produced) study, but I strongly suspect that those tax breaks for “the rich” impact people starting squarely in the middle class, variously defined. However, I also suspect that a SWAG increase in the personal deduction would roughly be an economic make-whole. Close enough to justify the efficiency while eliminating the high tax state subsidy.

  • Both the mortgage interest deduction and the deduction for state and local taxes are severely regressive. IIRC the top 1% of income earners capture 10% and 7% of the benefits from those deductions respectively and the top 10% of income earners capture nearly 40% of both.

  • Guarneri Link

    That’s a mindset that starts with the notion that the government has first claim on the money. Further, didn’t the OMB come out today with a 95% of income tax paid by 20% stat? And in theory, payroll taxes are returned later in life.

    That all said, to start on the path to stop fucking around, let’s eliminate both the state income tax deduction and mortgage interest.

    Damn that was good whiskey.

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