The good news for wary conservatives is that Mitt Romney has finally gotten specific about his plans for reforming the tax code and shrinking the federal government. The bad news is that he did so at a private gathering of donors, and for purposes of analysis we have only what reporters lurking outside the event overheard. But with that caveat, we can report that much of what Romney proposes is constructive.
Romney has long promised a revenue-neutral simplification of the tax code that would couple a 20 percent across-the-board rate cut with the elimination of certain deductions. In his off-mic comments he named names, singling out federal deductions for state and local taxes, and for mortgage interest on second homes, as potential offsets. Both changes would be welcome.
President Reagan saw the elimination of the deduction for local taxes as a “nonnegotiable” piece of his own 1986 tax-reform plan, but his efforts were ultimately beaten back by representatives of high-tax states in Congress. This is because the deduction functions in practice as a subsidy to high-tax jurisdictions from low-tax ones. Its elimination would put locales in clearer fiscal competition with one another for the most tax-sensitive residents, who would in turn feel the full effect of differing tax rates instead of having their impact blunted considerably by the federal government.
As for the mortgage-interest deduction, under an ideal federal tax policy it wouldn’t exist at all. But given the fragile state of the housing market, it is perhaps wiser to start by merely trimming it back in places where it is not likely to do economic damage. One approach would be to scale back the maximum amount of the deduction, either directly or by ending the automatic adjustments for inflation. Romney’s approach — eliminating the deduction for second homes — would have a similarly piecemeal effect, though the governor’s comments on the matter are ambiguous. Romney is quoted as saying he would “eliminate for high-income people the second-home mortgage deduction.” If this is a loose way of expressing that owners of second homes are ipso facto “high income,” then it is fine so far as it goes. But if Romney intends to have two different treatments for the deduction — as he does for, e.g., dividend and capital-gains taxes — then he would do well to remember that among the goals of his plan is the reduction of complexity, not the introduction of new levels of it.
Romney also spoke in general terms about the size of the federal government, suggesting that under his administration the Department of Housing and Urban Development — once led by George Romney — would be on the chopping block, while the Department of Education would be slated for substantial downsizing. This is a trickier matter. We certainly agree that much of these departments’ business is no business of the federal government, but too often plans to eliminate or downsize federal agencies amount to little more than fiddling with organizational charts. If Romney intends to actually do away with whole functions and capabilities of DOE and HUD, bully for him. If he intends merely to shuffle them about in the interest of marginal and often illusory returns on bureaucratic efficiency, then it probably isn’t worth the political hassle.
While these fixes alone won’t bring order to the tax code, balance the budget, or corral the Leviathan, they do strike us as steps in the right direction. Of course, a handful of proposals gleaned from eavesdropping reporters do not a governing platform make, and we look forward to (over)hearing more specifics from the Romney campaign — perhaps in a room with better acoustics.