Pethokoukis, Economics, Taxes and Spending

Here’s a $300 billion way to offset some of the sequester’s defense cuts

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The current US tax code subsidizes more expensive homes at the expense of more business investment — in the process offering the biggest tax benefits to the wealthiest taxpayers. It’s costly policy in more ways than one. The tax break may actually impede middle-class homeownership by driving up prices. And the inefficient use of capital hurts economic growth.

The housing tax benefit comes in two forms. First, it spares homeowners from any tax on imputed rent. If the income tax was neutral it would treat exactly the same both these situations: a) buying a house and renting it out and b) buying a house and living in it. But only the “income” from the former is taxed. That’s a $60 billion a year tax break. Second, homeowners are allowed to deduct mortgage interest. That’s another $100 billion a year. Here’s how AEI’s Alan Viard would alter the tax code in a way he thinks both economically smart and politically doable:

Starting in 2015, the mortgage interest deduction is converted to a 15 percent refundable tax credit available to all homeowners, including those who claim the standard deduction and those with no income tax liability. The credit is limited to interest on $300,000 of mortgage debt (in 2013 dollars), with no tax relief for mortgages on second homes or on home-equity loans. The dollar limit is indexed to the consumer price index (CPI) in the same manner as the bracket endpoints and other dollar values in the tax code. Taxpayers with existing debt are allowed to claim 90 percent of the current-law deduction in 2014 on that debt, declining 10 percent per year thereafter, with the option to switch to the credit at any time. … For the mortgaged portion of home purchases, everyone receives the same 15 percent marginal incentive on modestly priced homes and no one receives any additional incentive for expensive homes. The proposal substantially limits the tax preference for expensive homes while increasing homeownership assistance for taxpayers who are less well off.

Now, it would probably make more economic sense to tax the imputed rents rather than limit the deductibility of mortgage interest since rents are income and interest is an expense. But doing the former is administratively difficult. The Viard plan would raise roughly $300 billion a year in tax revenue, some 80% of which would be paid by those with cash incomes above $200,000, 18% by those with income above $500,000, 6% with income above $1 million. The result, Viard explains, would be to “direct economic resources away from expensive homes, which have been artificially advantaged by the tax system, and toward other sectors of the economy.”

What to do with the $300 billion? Lower deficits, lower investment taxes, even offset harmful defense or basic research cuts from the sequester. This is just the sort of smart, rational policy move that would reassure both domestic voters and international investors that Washington isn’t completely dysfunctional.

8 thoughts on “Here’s a $300 billion way to offset some of the sequester’s defense cuts

  1. So I have to lose deductions so the Pentagon can keep spending like the drunken sailors they are? Good luck selling that to the public/homeowners. Come back when defense spending has been stripped of the garbage (green fuels, a gazillon more generals than are likely needed, disability retirement enhancements given out like candy, the executive jets and golf courses, etc.)

  2. Taxing imputed rents would kill homeownership as you are now being taxed on your WEALTH not actual income!
    If taxing imputed rent makes sense why don’t we tax the imputed rent for the clothes we wear or the cars we drive? oops best not give the elitists anymore STUPID ideas that they actually own everything!

  3. The third biggie is employer-provided health insurance.

    The mortgage deal is pretty simple as there is already a cap on the interests but it’s obscenely high and also counts for 2nd homes, RVs, etc.. It ought to apply only to one home and probably limited to income – like the earned income credits and such.

    but there are two more issues.

    many people cannot even get the mortgage deduction because they do not have enough total deductions to do so and the one for health care deductions – kills those who have their own plans because they can only deduct how much they pay in excess of 7.5% of their AGI.

    Many, many people give serious money to their church and charities – but cannot deduct it because they do not own a home.

    there are disparities like this throughout the code which basically favors those who have higher incomes.

    • Hey Larry, what happened to your hero’s support of the sequester? You repeatedly assured us he was all in, unlike those chickenshit Republicans.

      • re: Obama’s love of the sequester…

        did I say that?

        here’s what I’ve come to believe and it’s nasty.

        that Obama egged the GOP into signed on to it and now is going to let them swing – as the polls seem to be confirming.

        Every time the GOP swings at Obama …they seem to hit themselves these days.

        you know ..they always have the option of saying – “this is dumb”….. “HERE is a better way -and we’re going to pass it in the House”. Of course, a majority of the Senate and Americans would have to be convinced it really is a better way and not just more attempts to kill Medicare and ObamaCare…

        who was it that said, lead, follow or get out of the way?

        both sides are getting hurt though looks like the big O has a slight advantage…

        • “did I say that?”

          Wow.

          Funny how you have this selective amnesia. You’ve even forgotten how YOU were portraying yourself as Larry the Mighty Deficit Slayer because you had the balls to support the sequester. But now you say, “this is dumb.” I guess all your boyfriend Barack has to do is lay out the line and Larry immediately discards his previous positions and comes a runnin’.

          “you know ..they always have the option of saying – “this is dumb”….. “HERE is a better way -and we’re going to pass it in the House”.”

          Comical. They’ve done that now twice. Both bills exceeded the sequester targets. Both bills were simply ignored by Harry Reid. The main problem the GOP has is low information voters like yourself haven’t a clue because Obama’s Palace Guard in the media are more smitten with him than even you are, and simply refuse to report it. Obama knows he can simply gets up there and lies through his teeth and people like you don’t have the knowledge and/or integrity to call him out on it.

          The sequester is a tiny sliver of the budget, not even a real cut. But your hero won’t give back a penny of his staggering spend-a-thon. He knows his slavish followers like you will always get his back with dishonest stuff like, “Obama only signs the appropriations the Congress sends him.”

          “both sides are getting hurt though looks like the big O has a slight advantage…”

          Gag. “Big O.” Is that your pet name for him?

        • A quick search gives a few of your previous sequester comments, Larry. These were all made, of course, before your boyfriend instructed you to say the sequester is a bad thing.

          “The dust-up over the sequester shows that the folks who yell the loudest about cutting spending – won’t actually agree to do it if it includes DOD.”

          And..

          “Even now, when we have the sequester, the GOP is hollering like stuck pigs saying that 50 billion in cuts from a 900+ billion DOD budget would be “devastating”.”

          and, my favorite:

          “that “plan” balanced the budget?

          hahahahahbhbhahahahh

          it was hypocrisy personified!

          the man is a grade A HYPOCRITE!

          Show him the budget sequester or similar and he runs screaming to hide in the closet.”

          FYI, you were talking about Paul Ryan, not your boyfriend Obama, the guy who is actually doing the screaming and running.

  4. We don’t need any offsets for the teeny tiny sequester Obama is doing his level best to freak everyone out over. We need to make some real cuts, not piddily reductions in the rate of spending.

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