Eliminating both the mortgage interest deduction and the exclusion for employer contributions would be huge steps in the right direction. They both put a drag on taxpayers/employees from maximizing their earning because they both incentivize non-mobility in the job marketplace. People are stuck at jobs with little chance of advancement because (a) they can't forgo the health insurance they receive or (b) they can't move.

Dear KCRob -- Tax expenditures do not allow people to "keep their own earnings." "Keep" implies that people could do exactly what they wanted with this money -- which they can't.

Through tax expenditures, the government takes money from people who don't adhere to the government's preferred behaviors and gives it to people who do.

For that reason, you are right -- a flat(ter) tax would be much better.

2 and 9 would be my top priorities, especially 9. There are several other tax breaks for charities, which more than double the figure given. Of all the diversion of resources into unproductive uses, charities are the worst; the vast majority of them are prosyletizers for unpleasant and economically damaging political positions.

According to the author, a lower rate for capital gains is equivalent to a deduction? Ummm, that's apples and oranges. If reduced rates are in play, why not include the income tax rate?

Leaving that complaint aside, I'm all for getting rid of mortgage deduction and state and local tax deductions.

Also not listed here are specific industry deductions or credits that should be done away with, or credits to consumers of certain, government approved industries (electric cars, green power, energy efficient appliances). Get rid of them now.

I'm disappointed to see that Ryan is adopting the tax expenditure terminology. He is (I'm sure unintentionally) adopting pro-tax propaganda. Most of these exclusions are already built into the rates: for example the home mortgage interest deduction goes back far beyond not only the 1986 code, but even the predecessor 1954 code. Why do currently rates have to be as high as they are? Because there are these longstanding exclusions and exemptions, so the current rates have to be corresponding higher on the remaining income. But then don't turn around and tell us we're getting some undeserved break by not having to pay the same corresponding higher rate on the exclusions!

Commendably Ryan is arguing for transitioning to lower tax rates, and he's correct that this would eliminate distortions. But he also says that these "expenditures" "have a huge impact on the federal budget". Why? This is muddled thinking. If the exclusions are eliminated and the rates adjust, no revenue is lost! If the rates don't adjust, he has fallen into the tax-raisers trap!

Elminating the state/local tax deductions would be a good way of eliminating the perverse incentive of states to impose higher taxes on their citizens. A better way would simply be to elect state leaders that want to shrink state governments.

Unfortunately, even if all these "loopholes" and other expenditures were elminated, they would simply be added back later as future Congress' tinker with the system. Another reason why the 16th amendment is the worst we have (other than the 18th which was repealed).

What would Congress do if they didn't have the tax code to play with.

In the long run, they all should probably be eliminated, although the corporate income tax should be eliminated before we move to taxing capital gains and dividends at ordinary-income rates, and the estate tax should be eliminated before we do away with the basis step-up on death. I do think there's an argument for allowing a carryover basis upon death, without immediate realization of capital gains, but the step-up basis can't really be justified.

The tax system should be set up so that, whether you are a business or an individual, whether you own or rent, whether its a capital gain or not, whether its investment or consumption, everything should be taxed at the same rate. Complete neutrality is what the tax system should strive for. What to do with money should not be "biased" based on what tax break you can get. Nicole makes it clear that tax rates could be greatly reduced by eliminating tax expenditures. Efficiency would be improved too if we could just eliminate the distortions.

Each of these so-called "tax expenditures" is rooted in good public policy justifications. I will specifically address the first three.

(1) The exclusion of premiums paid by an employer or a self-employed person for health insurance is designed to subsidize the purchase of health insurance policies. This exclusion should be expanded so that all premiums paid for health insurance are deductible. Such an expansion would de-link health insurance from employment, and would make health insurance policies portable as people switch jobs. This exclusion should also be modified so that it is limited to catastrophic health care insurance policies that have a large deductible, and it should be coupled with tax-free health care savings that can be used to pay the deductibles. This will create the incentives people need in order to bring competition on price into health care and reduce prices.

(2) The mortgage interest deduction is designed to subsidize home ownership. People who own their own home are more stable, responsible, and take more of an interest in their communities than do renters. Society benefits by having a large number of its citizens be homeowners and the income tax code recognizes this fact.

(3) The 15% top rate for dividends and capital gains are designed to address several issues.

First, the 15% rate for dividends is a way of partially dealing with the fact that corporate income is double taxed. Corporations pay a 35% federal income tax and state income taxes of approximately 8% when the income is earned, and the shareholders pay a 15% federal tax and approximately 7% state income tax when the corporation distributes profits to its shareholders. The combined tax rate on corporate income is approximately 55%. To achieve parity with income earned outside of a corporation, the income tax on dividends should be eliminated or the corporate income tax rate should be reduced by the rate of tax on dividends.

Second, the 15% capital gains rate is designed to address two major issues. Much of the gain that individuals recognize when they sell an asset is phantom gain attributable to inflation. Also, individuals can choose when to sell an asset and will choose to not sell assets if the tax rate is too high. This phenomena is called capital lock and it causes an economy to not allocate capital to its most efficient use. The reduced tax rate is designed to alleviate both of these problems. Again, this so-called "tax expenditure" should be expanded by indexing capital gains to inflation so that we stopped taxing phantom income that is attributable to rising price levels across our economy.

The next seven alleged "tax expenditures" all have their own public policy justifications, and I view almost all of them as compelling.

I have to say that I am disappointed with the ignorance on display by Ms. Gelinas. I know that there are tax knowledgeable people at NRO and one of them should have stepped in before Ms. Gelinas wrote such an ignorant piece and published it on NRO.