Scott Sumner  

Never say never

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I've been extremely critical of the Trump administration, but if the following Politico story is true it could be a very good sign going forward:

President Donald Trump's top aides and congressional leaders have made significant strides in shaping a tax overhaul, moving far beyond the six-paragraph framework pushed out in July that stoked fears about their ability to deliver on one of the GOP's top priorities.

There is broad consensus, according to five sources familiar with the behind-the-scenes talks, on some of the best ways to pay for cutting both the individual and corporate tax rates.

The options include capping the mortgage interest deduction for homeowners; scrapping people's ability to deduct state and local taxes; and eliminating businesses' ability to deduct interest, while also phasing in so-called full expensing for small businesses that allows them to immediately deduct investments like new equipment or facilities.


The article says there are still lots of hurdles to overcome, but this is actually more than I expected.

People often say, "the mortgage interest deduction will never be removed". I've learned over time that when it comes to politics one should never say never. (There was a time when I thought gay marriage would never be approved.)

Given the structure of our tax system, and the way it evolves over time, even just capping the mortgage interest deduction would likely be the first step toward repeal, if it happens. And ending the deductions for S&L taxes and business interest are even bigger wins.

Why is progress now possible? I see this as the GOP's revenge against the blue states, which benefit far more than red states from the deductibility of mortgage interest and state income taxes. (Compare California and New York with Texas, for instance.) Perhaps it's not the best of motivations, but the result would be a dramatic improvement in our tax system, and an economy that moves away from debt and toward equity financing of investment. And that would make another 2008-style financial crisis less likely. (Equity crises like the tech bubble collapse of 2000-01 do far less damage to the financial system.)

Still a long way to go, but this is a good sign given that the Treasury Secretary had previously opposed some of these changes.


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COMMENTS (10 to date)
bill writes:

Question: if the borrower doesn't expense his interest payments, will lenders still pay taxes on interest income? (double taxation) Or will lenders get the interest tax free? (that seems more logical). But if interest income is now tax free, will the amount of debt financing in the economy really change very much?

Hana writes:

'Hurtles' might be a really funny word.
Setting aside 'revenge' the changes will be helpful. In addition to a multitude of other policy changes, I always felt the bump in the qualifying mortgages after 2008 was a huge transfer from red to blue states.

Scott Sumner writes:

Bill, No, interest income would still be taxable, just like income from equity. And yes, it is double taxation.

Hana, Thanks--I do that a lot. :)

Thaomas writes:

From the standpoint of taxing consumption rather than income, why should state taxes (not just income taxes) NOT be deductible? As for capping the mortgage interest deduction, would a partial tax credit not be a better way to go, a what that should be extended to partial tax credits for charitable deductions, as well.

Also what a missed opportunity to shift from financing SS/Medicare from wage taxation to a consumption tax. And not talk of substantially raising the EITC and making it more of a wage subsidy.

Todd Moodey writes:

Scott--

There already is a cap on the mortgage interest deduction, no? I think it's currently set so that homeowners can deduct interest on mortgages up to $1 million. I'm surprised that someone at Politco didn't catch that and thereby modify the statement in the third paragraph you cite.

More importantly, it points out a constant worry I have about tax "reform"--that politicians will eliminate deductions, "loopholes", etc. but fail to deliver the promised rate reductions, thereby effectively increasing the tax burden.

Alan Goldhammer writes:

Todd Moodey is correct about the cap on mortgage interest deduction be $1M. Don't underestimate the amount of pressure that the home builders and realtors will bring to this issue when the rubber hits the road (my house is paid off so I could care less about the deduction!!). I would hope that we see true reform and that as many tax preferences are stripped out of the code as possible. Former Congressman Camp tried to address this a couple of years ago in his proposal but that never even got a committee hearing.

I'm skeptical about anything decent coming out because tax reform is difficult to explain. One needs to sit down and go through the calculations to see what the impact will be on individual filings and well over 90% (maybe 99%) of filers are not capable or willing to do so. When you tell people the 'standard deduction' will increase dramatically in return for elimination of tax preferences their eyes glaze over.

Scott Sumner writes:

Thaomas, Making those taxes deductible is a subsidy, and encourages wasteful S&L spending (as the Feds pick up part of the cost.)

2. Just eliminate the interest deduction. The worst thing about the tax system is its complexity, and a partial tax credit makes it even more complex.

3. A wage tax is a consumption tax. They are essentially identical in the long run.

Todd, I forget about that cap. I wouldn't worry about the GOP closing loopholes and not lowering rates--it'll NEVER happen.

Todd Kreider writes:

About predictions:

There is a difference between thinking: "Gay marriage will never happen" and "the mortgage interest deduction will never be removed." With the first statement, there was a trend where I don't see one with the second, although maybe I'm just missing it.

In 1996, I was talking with a gay friend who happened to have two of his gay friends with him, and they mentioned how conservative the small city was and that gay marriage would never be allowed. (The city was half liberal, half conservative)

I replied: "No, you guys have already won, but it will take a while. I'd say gay marriage is 15 years away but definitely within 20 years."

Of course, they thought I was nuts. But I explained that from my impression, we Gen Xers cared if people were gay much less than the baby boomers and that they cared less than their parents. Just give it 15 to 20 more years of this trend. Gay marriage became law 20 years later so even though correct, I probably shouldn't have been so confident saying "in 15 to 20 years" in 1997.

With the mortgage interest deduction, I still have no idea how likely it is that that will end any time soon. "Probably not anytime soon" seems like a good guess to me.



Thaomas writes:

Scott,

But is S&L government spending "consumption" in the same way as purchase of an automobile or can of soda? Most S&L spending is on more investment sorts of things, infrastructure, environmental protection, and schools.

While I agree that the mortgage interest deduction would be better eliminated totally, that is not the proposal. Isn't a partial credit better than a cap?

Jose writes:

I wonder what would be happening on this subject if Clinton were at the White House...

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