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NRO’s domestic-policy blog, by Reihan Salam.

Does Wyden-Gregg Go Far Enough?



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Howard Gleckman has a characteristically insightful analysis of the revenue-neutral (according to CRS and not the JCT, which hasn’t weighed in) Wyden-Gregg proposal. 

How would the Wyden-Gregg plan work? Individuals would face three tax brackets—15 percent, 25 percent and 35 percent. The Alternative Minimum Tax would be repealed. The proposal would encourage more people to take the standard deduction by nearly tripling its size, and filing would easy for those who chose this route.

However, the proposal would retain a number of popular credits and deductions for itemizers. Among those Wyden and Gregg would keep: deductions for mortgage interest and charitable gifts, and the child credit, earned income credit, and dependent care credit.  The plan would enhance and somewhat simplify retirement savings incentives. Investors could exclude 35 percent of their capital gains from tax.

For me, the mortgage interest deduction functions as a brown M&M. The latest issue of Fast Company has a wonderful column by Dan and Chip Heath of Van Halen’s managerial insights.

Van Halen did dozens of shows every year, and at each venue, the band would show up with nine 18-wheelers full of gear. Because of the technical complexity, the band’s standard contract with venues was thick and convoluted — Roth, in his inimitable way, said in his autobiography that it read “like a version of the Chinese Yellow Pages.” A typical “article” in the contract might say, “There will be 15 amperage voltage sockets at 20-foot spaces, evenly, providing 19 amperes.”

Van Halen buried a special clause in the middle of the contract. It was called Article 126. It read, “There will be no brown M&Ms in the backstage area, upon pain of forfeiture of the show, with full compensation.” So when Roth would arrive at a new venue, he’d walk backstage and glance at the M&M bowl. If he saw a brown M&M, he’d demand a line check of the entire production. “Guaranteed you’re going to arrive at a technical error,” he wrote. “They didn’t read the contract…. Sometimes it would threaten to just destroy the whole show.” 

If your tax plan doesn’t scrap the mortgage-interest deduction and replace it with a simplified home credit, we can probably do better. Jason Furman, deputy director of President Obama’s National Economic Council, made the case against the mortgage-interest deduction in 2005, praising President Bush’s tax commission for offering a simpler, more progressive approach.

As Gene Steuerle and his co-authors at the Urban Institute have documented, more than 80 percent of the major tax incentives for housing go to the top 20 percent of Americans (they get an average annual tax break exceeding $2,000) while less than 5 percent go to the bottom 60 percent (who get an average annual tax break of less than $50). Nearly half of all families with mortgages do not get any housing tax benefit at all.

This fact alone should be enough to give progressives pause when they tout the mortgage-interest deduction as a great boon to the average American. But it’s worse: Only a small portion of this housing-tax break could conceivably be construed as supporting the goal of helping American families own their own homes. Since the mortgage cutoff is so much higher than the cost of buying a basic home, the bulk of the subsidies end up encouraging families who would have bought a home anyway to buy a larger house and/or to borrow more against it.

Really, almost anything would be better than this. One of the nice things about capping the benefit is that it has the potential to dampen the structural increase in home prices in dense, tightly-regulated housing markets, as Ed Glaeser and Joe Gyourko argue in their felicitously titled book Rethinking Federal Housing Policy.

Granted, Wyden-Gregg might be better than the status quo. But if you’re going to pursue tax reform, we need to think about going beyond revenue neutrality to proposals that might be revenue positive. My own bias is in favor of scrapping the state and local tax deduction as part of a larger bargain that would include federalizing Medicaid. There are other ways to get there, including the dreaded VAT. 



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