The Corner

Economy & Business

Keep (Some of) the Deductions

An iron rule of politics is never to legislate in a way that implies that your side will always be in power.

As Veronique points out, there’s plenty to praise in President Trump’s tax package, but there are, as  she observes, criticisms  to be made  too, including the failure to extend the territorial tax principle to individuals, a failure which (because of what it says about the relationship between the citizen and the state) is morally questionable as  well as being objectionable on practical grounds. Like Veronique I am also “not a fan of carving the tax code with family giveaways”.

I would, however, add a criticism with which Veronique would not agree, specifically of the idea that tax deductibility should be ended for mortgage interest and state and local taxes. 

And yes, I do understand the argument for removing the tax deductibility of mortgage interest, although, to follow the logic through, if interest paid is not a taxable expense, interest received should not be taxable income. I’m not holding my breath waiting for that point to be conceded. More broadly speaking, we may not want to see what this move could do to real estate prices. House prices may be “too high” at the moment, but a  change of this magnitude could well have consequences for prices (and consequences  of those  consequences) that no one should want to see, particularly in a  climate when interest rates seem set to creep up. That might suggest that, at the very least, such a change should be phased in (that’s effectively what happened in the UK three or four decades ago: A much less generous deduction was whittled away in stages).

But there’s a broader point. Purists may not like it, but this is a popular deduction that would be difficult for the left to dismantle. The Trump team’s argument is that removing it will help pay for their tax cuts elsewhere, but when those tax cuts are reversed—and most of them will be by some future Democratic administration—the elimination of the mortgage deduction will not be restored. The taxpayer will have lost another shield—for good.

Similar arguments apply to the removal of the deduction for state and local taxes. Again, I understand the case for this, although the argument that it will encourage blue states to rein in their taxing and spending is unconvincing, especially as more and more people are taken off the federal tax rolls (like Veronique I am wary of that: everyone should have a financial stake, even if only very modest, in the federal income tax debate) leaving local leftists free to continue doing their worst.

As with mortgage interest deduction, the state and local deduction is politically popular and  difficult for the left to touch. To eliminate it is to do their work for them and, if it is in exchange for easily reversible tax cuts, there’s no art in that deal.

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