Insane libertarian fixation on mortgage interest deduction, edition 4716

You would think a libertarian would acknowledge that shielding YOUR money from taxation is a good thing, but you would be wrong. There are at least seven tax loss expenditures more costly to the tax man than the mortgage interest deduction, but their crazy war on it continues nonetheless. What it masks is the underlying hatred of conservatism homeownership represents. Homeowners settle down and raise kids instead of sacrificing themselves to the needs of global capitalists. That's their real problem with it.

Your mortgage interest deduction is only eighth in the latest list of top things on which government claims it loses revenue

But libertarians especially hate it. Expect more articles telling you it's got to go as tax reform talk heats up in Congress.

Here are the top 20 "tax loss expenditures" for 2016-2020:

1.  Exclusion of employer contributions for health care and insurance: $863 billion

2.  Lower tax rates on dividends and long term capital gains: $678 billion

3.  Income made by controlled foreign corporations: $587 billion

4.  Contributions made to IRAs and 401k plans: $584 billion

5.  Pension plan contributions: $424 billion

6.  Earned Income Tax Credit: $373 billion

7.  Deductions taken for state and local income taxes, sales taxes, property taxes: $369 billion

8.  Deductions taken for mortgage interest on owner occupied homes: $357 billion

9.  Obamacare "subsidies": $327 billion (what a laugh: they raise the cost, give you a subsidy, and count the subsidy as a tax-free gift)

10. Child tax credit: $271 billion

11. Expensing depreciable business property: $248 billion

12. Deductions taken for charitable contributions: $231 billion

13. Social Security benefits: $214 billion

14. Municipal bond income: $195 billion

15. Deductions taken for taxes on real property: $180 billion

16. Capital gains taxes excluded at death: $179 billion

17. Medical expenses and over the counter medications under cafeteria plans: $169 billion

18. Capital gains taxes excluded on sale of principal residence: $166 billion

19. Life insurance proceeds: $128 billion

20. Deduction for income from domestic production activities: $102 billion.

Total revenue the government claims it's "losing" because of its "benevolent" tax policy on these items: $6.645 trillion over five years, or $1.329 trillion annually.

My, how nice of them. 

Libertarians At Forbes Completely Misrepresent The Mortgage Interest Deduction

Here:

The mortgage interest deduction (MID) is the largest personal tax deduction on the books and is widely considered one of the most sacrosanct tax benefits in the country because it is seen as making homeownership more affordable for middle-class Americans. Our new Reason Foundation research suggests, though, that the average benefits from the MID are not enough to be the difference between renting and home owning for a household.

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If there's a sacrosanct tax benefit in this country, which by the way benefits mostly upper income people who also pay most of the taxes, it's reduced rates of taxation on dividends and long term capital gains, which the Joint Committee on Taxation says costs the federal government $596 billion in lost revenue between 2012 and 2016. The mortgage interest deduction, by contrast, will cost the feds $364 billion. Leave it to Forbes not to mention that.

The mortgage interest deduction may or may not be "the largest personal" deduction, but in the big picture of revenue forfeited by the feds due to tax preferences, which is categorized as "tax loss expenditure", the mortgage interest deduction represents just 6.9% of the revenue lost out of the largest 21 line items in the JCT's report representing $5.25 trillion in tax loss expenditures for the period mentioned (here).

Preferential treatment of income from stocks isn't the biggest preference either (11.4%), but it is much bigger than the preference given to mortgage interest. But businesses do get the biggest preference. When employers provide healthcare contributions, health insurance and long term care insurance, they get to deduct all of that. Cost to the feds? A whopping $706.6 billion (13.5%). And that figure will only grow under ObamaCare.

And how about retirement plan contributions? Cost of excluding both defined benefit and defined contribution plans comes to $505.3 billion over the period (9.6%).

Compared to these, the mortgage interest deduction comes in a distant fourth (in fifth is the earned income tax credit at $319.7 billion).

The much-maligned charitable deduction, meanwhile, which was the original basis for the standard deduction in the tax code, at $172.4 billion represents just 3.3% of the lost $5.25 trillion in revenue from 2012 to 2016. It comes in fourteenth.

There's lots of things wrong with the world, but changing the home mortgage interest deduction isn't going to fix them. For libertarians to focus on it as they do should tell you there's more going on here than meets the eye: an ideological bias against home ownership because it limits "freedom". Millions beg to differ.

Top Tax Loss Expenditures Projected For 2011-2015

From the Joint Committee on Taxation's January 2012 projection, here are the top individual categories of lost tax revenue, commonly referred to as tax loss expenditures (the revenue value of tax deductions, tax exclusions, and tax credits), for the five year period from 2011, annualized:

1. Healthcare, healthcare insurance, long term care insurance = $ 145 billion

2. Mortgage interest = $ 93 billion

3. Dividends, long term capital gains = $ 91 billion

4. 401k plans = $ 75 billion

5. Earned income credit = $ 59 billion

6. Pension plans = $ 53 billion

7. State, local income, sales, personal property taxes = $ 46 billion

7. Capital gains at death = $ 46 billion

8. Cafeteria plan benefits = $ 40 billion

9. Untaxed Social Security and Railroad Retirement = $ 38 billion

10. Charitable giving = $ 37 billion

11. State and local government bonds = $ 36 billion

12. Medicare Part A = $ 35 billion

13. Child tax credit = $ 34 billion

14. Life insurance and annuities = $ 30 billion

15. Medicare Part B = $ 27 billion

16. Capital gains on sale of primary residence = $ 25 billion

17. Property taxes on real property = $ 23 billion

Red = housing related ($ 118 billion)

Green = health related ($ 247 billion)

Blue = investment related ($ 137 billion)

Yellow = retirement related ($ 196 billion)

Purple = social welfare related ($ 130 billion)

Black = state and local government related ($ 105 billion)                                    

Amity Shlaes Thinks The Mortgage Interest Deduction Is The Only One Distorting Markets

Amity Shlaes is in full-throated opposition to the mortgage interest deduction, here:

The distortion of the housing market, we now know, stemmed not only from the tax deduction but also from the subsidies of government-sponsored entities such as Fannie Mae and Freddie Mac (FMCC) and from inappropriately loose monetary policy promulgated by the Federal Reserve. ...

Opponents of deduction abolition today argue that abolition will make the market crash some more, as per Thomas of the Realtors. One could argue this the other way. Now Americans see houses for what they really are: boxes that depreciate. This is therefore the least expensive time to abolish the deduction. We have already taken the hit -- and 2012 is also the time when we most need the $100 billion or so from the elimination.

No mention here of the cost of, say, the reduced rates of taxation on capital gains and dividends, which came to $91 billion last year. Nor of the costs of any of the other tax loss expenditures which benefit everyone.

She's worried about the distorting effects of the deduction on house prices, but fails to address the distorting effects on stock prices of the lower capital gains tax rate. All tax loss expenditures have distorting effects, not just the one for housing. 

Worse to me is her objectification of the home as a depreciating box. The fact is housing was long stable in America, until Republicans in league with Bill Clinton started fiddling with it and the tax law surrounding it in 1996. What they did was turn the home into a commodity, which abnormally shot up in value and now has shot down.

The question going forward isn't whether to gut the home some more by removing the tax deduction. Even with it home values have declined dramatically today, and could go even lower despite it as they have in the past. And they probably should and probably will decline without any change to the tax deductibility of mortgage interest. If you aren't old enough to have experienced the housing crash of 1980, you aren't old enough to really understand how relatively small changes in housing values compared to now felt a lot bigger from time to time.

When you attack housing you don't just hurt people where they live in the economic sense, but you hurt them also spiritually. The home in America has been much more than a mere store of economic value, a treasury which greedy government enticed Americans to unleash in a torrent from 1997. The home is the incubator of the next generation of Americans, the place where we engage in the most important work we do as a people: replacing ourselves.

The question is what are we going to do about all the distorting effects of government tax policy, not just the distorting effects of one of them.

That Amity Shlaes leaves them all out except as they impact homeowners suggests not just an economic hostility to housing, but a cultural one, part of a broader hostility which has resulted in family dissolution, not family formation.

If the profane bottom line is tax revenue, the way to achieve it is through more taxpayers. You know the kind: the ones who get up everyday, get to work on time, and work hard.

And the most reliable way we have found to produce them is in families, families which overwhelming still prefer to live in houses.

Subsidizing this enterprise comes with a cost.

So does not subsidizing it.

The Growth In Income Inequality Wasn't A Bug, It Was A Feature Invented By Liberalism

If you generally tax some income at one rate and other income at a lower one, what do you think would happen over a long period of time?

Obviously you would see income shift to the category taxed at the lower rate, to the extent that this is possible for those earning it.

This is what has happened with income from capital gains, the tax rate on which has been much lower by law than the tax rates paid on ordinary income.

That's the long-term lesson from the data, the salience of which seems to elude Bruce Bartlett writing for The New York Times:

For most people, income is simple: it means wages or perhaps a pension or Social Security benefits. Income from capital – dividends, interest, rent and capital gains – seldom enters into the calculation. The vast bulk of such income is earned by the ultrawealthy, like Mr. Romney.

According to the Tax Policy Center, in 2011 those in the middle of income distribution got about 70 percent of their income from labor and only about 3 percent from capital. By contrast, those in the top 1 percent of income distribution got 30 percent of their income from labor and 35 percent from capital.

The disparity is even more pronounced when one looks at the distribution of aggregate capital income. The total came to $1.1 trillion last year. Of this, 86 percent was earned by those in the top 20 percent of households, ranked by income. But this figure is misleading, because within the top quintile, the vast bulk of capital income went only to those at the very top. ...

[T]he tax code makes a sharp distinction between income from labor and income from capital. Wages are fully taxed at rates as high as 35 percent by the income tax, plus taxes for Social Security and Medicare. In contrast, realized capital gains and dividends on corporate stock are taxed at a maximum rate of 15 percent and do not bear any taxes for Social Security or Medicare.

Income inequality in America has grown precisely for this reason, and it is an artifact of progressivism, and of liberalism generally.

The contemporary distinction between capital gains and ordinary gains got much of its impetus under FDR, when the modern tax code differentiated for the first time between capital gains held for 1, 2, 5 and 10 years, exempting from taxation 20 percent of gains, 40 percent, 60 percent and 70 percent, for the respective holding periods. Considering how steep and confiscatory marginal tax rates became after 1916, the provisions under FDR look like a bone thrown to the rich. What these reforms did, however, was cement the trend toward tax avoidance for the rich which had been introduced earlier.

Originally capital gains had been taxed as ordinary income up to a rate of 7 percent, which was the top marginal income tax rate for the first three years of the modern income tax. But as marginal tax rates on ordinary income skyrocketed after 1916, the low 7 percent capital gains rate continued to apply until 1921, after which the rate was 12.5 percent, regardless of holding period and despite the fact that marginal income tax rates soared to 63 percent and higher as the years marched on.

So from the very beginning the rich were given their privileges in tax avoidance by making distinctions between income while the broad mass of the people got soaked with income taxes on their ordinary income. The steeply progressive rates made it appear that the rich were paying their fair share when in effect they had recourse to a back door to ameliorate their condition through the capital gains code provisions. Liberalism was nothing if not hypocritical. 

If our tax policy goal today is to reduce income inequality, as seems to be the prevailing notion among liberal and liberal-leaning commentators, we ought to reconsider that history and appreciate better how tax policy is often just pushing on a string. To a conservative what leaps to mind is making taxes on ordinary income look more like taxes on capital gains income by flattening rates, not the other way around, raising capital gains rates to look more like progressive income tax rates, and broadening the base up the scale by capturing all income of all kinds for Social Security and Medicare before considering broadening the base down the scale by abolishing tax loss expenditures like the mortgage interest deduction. 

Income inequality begins with treating some forms of income differently than others for tax purposes. There may be important social and economic reasons for doing so, such as promoting family formation or capital investment, but it should never be forgotten that you will immediately be introducing inequality into the equation when you do. How you compensate for that is what matters in approximating a just society. 

Romney May Well Tax Interest Earned On Life Insurance And Municipal Bonds

So says The Wall Street Journal, here, which approves as a way of helping pay for Romney's proposed across the board 20 percent tax cuts.

Without saying, of course, that this will shift costs from the rich who buy most of these bonds onto the broad base of taxpayers, in the form of higher taxes raised through property taxation. Property taxes will necessarily have to be increased because municipalities will have to pay more to borrow for spending on infrastructure, schools and the like without a ready pool of incentivized investors, i.e. the wealthy.

Municipal bonds are tax exempt for a reason: it makes borrowing cheaper and therefore taxes lower on the people who directly benefit from the spending. So what if the wealthy also benefit thereby? They should, and they do. For every bit of tax-free income the wealthy enjoy, someone somewhere has decent roads, schools and fire protection. It's not like the voters don't get to say No to such local spending. Property tax referenda are the meat and potatoes of local politics. 

This kind of cost-shifting was pretty much Romney's m/o in Massachusetts, where he made it almost an art form, increasing fees on businesses under the rubric of equalization, and on property tax payers of all kinds. Americans can probably expect the same from a President Romney, except on a much larger scale. It won't be spreading the wealth around to make people equal, it'll be spreading the taxation around, eliminating "loopholes".

Taxing interest gains from life insurance plans is a case in point. It will hurt any beneficiary of such plans, not just the rich. Think of a wife left with young children to raise, who will have just a little less left from her dead husband because she had to pay her fair share. And imagine having to pay tax on that life insurance when the buyer was counting on it to pay the taxes due on his estate so that his heirs wouldn't have to sell assets to do so. Talk about throwing a monkey wrench into the estate plans of countless millions.

Push here, and it comes out there.

Are Americans really going to vote for someone who is already getting bogged down in the weeds of tax loss expenditures? All Obama has to do in response to this is say Republicans are going to take away your tax deductions. This is not the way to sell the Republican brand.

As tax loss expenditures go, the two together add up to $90 billion annually in lost government revenue and benefit mostly the wealthy, according to an AEI source quoted in the editorial. Nevermind the $3.8 trillion we're already spending in this fiscal year is itself "lost government revenue".

Republicans ought to be saying every dollar spent by government is lost.

Don't hold your breath. 

Top Ten Tax Loss Expenditures 2011 From The Joint Committee On Taxation

10. Exclusion of benefits under cafeteria plans ................................................................$31 billion

10. Exclusion of untaxed Social Security and Railroad Retirement benefits ....................$31 billion

  9. Exclusion of capital gains at death .............................................................................$38 billion

  8. Deduction of state and local government income taxes, sales and property taxes ......$42.4 billion

  7. Pension plan contributions .........................................................................................$42.7 billion

  6. 401 K plan contributions ............................................................................................$48.4 billion

  5. Tax credit for children under 17 .................................................................................$56.4 billion

  4. Earned income tax credit ............................................................................................$59.5 billion

  3. Mortgage interest deduction ........................................................................................$77.6 billion

  2. Reduced rates of tax on dividends and long term capital gains ...................................$90.5 billion

  1. Exclusion of employer contributions for health care, health/long term care insurance.$109.3 billion

WaPo Repeats The Big Lie: "There Are Just Not Enough Tax Breaks To Close For The Rich"

Here:

"[T]here are just not enough tax breaks to close for the rich, and the big money is in those for middle-income taxpayers."

The leftist drumbeat to raise taxes on the middle class just never ends.

But it's not just their agenda, it's the agenda of Republicans and libertarians, and it flies under the radar of "tax reform" and "broadening the base". Its most passionate advocates in the Republican Party are people like Gov. Mitt Romney and Rep. Paul Ryan, and certain members of the Gang of Six and the Gang of Twelve, you know, like Sen. Tom Coburn and Sen. Saxby Chambliss. The Stupid Party is stupid because the rank and file of America end up voting for this liberalism all the time. But those elected officials aren't stupid. They know exactly what they are doing and how it works.

You promise lower marginal tax rates across the board in exchange for giving up some tax deductions. Then as time passes the Democrats get the government in their hands again and raise taxes. But those lost deductions? They remain lost, and overall the tax burden on the middle class increases. It's what happened in 1986 with the loss of deductibility of interest on revolving credit in exchange for tax reform which lowered rates. But along came Bill Clinton in 1992 and up went the taxes. To help pay for things during the recession which Clinton's higher taxes made worse, middle class Americans tapped home equity like crazy, which was the rope Republicans furnished to hang us with. And now look at us, tapped out like never before with owners' equity in real estate down to 41 percent, facing a bunch of traitors on our side who want more money to misspend.

Tax collectors for the welfare state is who they are, to borrow a phrase from a recent Republican candidate for president who really let us down by not using it during the primary season.

As usual, conservatism's worst enemies are in their own party.

I'm getting just a little sick of it, too, primarily because there is a HUGE pool of tax revenue forfeited by the government which amounts to a gift to the top third of income earners in America. In 2012 everything earned above $110,100 escapes Social Security taxation. That's roughly $2 trillion which flies under the tax radar. At 15.3 percent, that's the biggest tax loss expenditure out there by far: $306 billion of lost revenue to the federal government because high-income earners don't pay it. The mortgage interest deduction, by contrast, is less than a third of that.

Conservatives want the misspending stopped. Until it is, tax increases are off the table.

Home-Owners' Equity Hollowed Out After 1986 Tax Reform

Did the 1986 tax reform unintentionally contribute to the hollowing-out of home-owners' equity?

It sure looks like it from the graph I've created below, which is compiled from the Fed's z.1 Flow of Funds releases which I've systematically reviewed from the latest release on June 7 all the way back to December 11, 1997.

In exchange for the elimination of a tax loss expenditure important to American consumers, Americans were treated in the '86 reform to lower top marginal income tax rates which fell as low as 28 percent for a brief time under President George Herbert Walker Bush between 1988 and 1992. Unfortunately for them, however, Bill Clinton came along and did away with those low marginal rates, and raised taxes. But Americans never got back the tax loss expenditure to which I refer.

What was it?

Deductibility of interest from revolving credit. You know, credit card interest and the like.

As a compromise, however, the law was structured in such a way as to expand the scope of HELOCs, home equity lines of credit, so that Americans could deduct larger amounts of interest on their taxes from those vehicles, treated pretty much the same as the mortgage interest deduction, the home improvement loan interest deduction or the second mortgage interest deduction. It was a financial innovation which shifted revolving spending on credit cards to these expanded equity lines so that it became fairly routine to buy even cars with home equity when interest rates were low, and all kinds of other stuff. You know, college tuition, that memorable vacation to Acapulco . . . and that condo you bought as an investment property. And some people actually used their HELOCs to improve the primary dwellings they were drawn on. But most of it was pretty imprudent, even though the intention was right in shifting spending from unsecured credit to secured credit.

We call it now "amortizing spending". It's really dumb to finance spending this way because you have nothing to show for it at the end of the term, unless the spending is on an asset which retains value. (If only we could get government to do this, but that's another horror story altogether. Government doesn't just finance spending and have nothing to show for it, it never pays it off. So in addition to blowing dough, it pays for it without a termination date, which means it pays forever.)

When the bottom fell out of real estate starting in 2007, for the first time since 1986 the total value of the real estate of households declined, from the all-time high of $22.731 trillion in 2006 to $20.861 trillion in 2007. That's an 8 percent decline in one year. By 2011 the metric had fallen all the way to $16.05 trillion, almost 30 percent down, with owners' equity bottoming out at $6.231 trillion, a level last reached sometime in the year 2000.

The data show that there have been two periods of the hollowing-out, one from which we recovered and one in which we still find ourselves. In the first, the dollar value of the equity recovered even though the percentage of equity relative to total value did not. In the second, both the dollar value of the equity and the percentage of equity relative to total value have failed to recover.  

In 1990 owners' equity started to fall from $4.274 trillion the year before to $4.097 trillion in 1991, a decline of just 4 percent. But it took all the way until 1996 for owners' equity to exceed that level which it had achieved in 1989. It's pretty clear that Americans financed themselves through the recession of these years under Bush 41 and Clinton in part by using home equity. Even though home values continued to increase, owners' share of equity declined from 66 percent in 1989 to 56 percent in 1994, at which level it stabilized.

Owners' equity continued to climb in dollar terms from 1996 all the way through 2005 when it reached its zenith at $13.158 trillion, but as a percentage of total value owners' equity remained fairly stable in a range between 56 percent and 59 percent. The dollar decline from the zenith in 2005, however, to $6.231 trillion last year represents a whopper of a decline in owners' equity, nearly 53 percent, much larger than the 30 percent decline in the over-all values themselves.

I'll leave it to others to figure out just how much of this nearly $7 trillion has been simply lost from the balance sheet and how much was extracted to help people get themselves through this Bush/Obama depression, but you get the idea. America's forced savings in the form of home equity was coaxed out by financial innovation brought to you by politicians intent on reforming the tax code. And, of course, they did this with the help of private sector actors who profited from the operation. 

Americans might want to think harder about it the next time politicians come promising lower tax rates in exchange for a similar thrilling game of tax reform Russian Roulette. Think the mortgage interest deduction itself, which many Republicans and libertarians today want to end. I think it's easy to imagine from recent history how we might be persuaded to give up the mortgage interest deduction today in exchange for lower tax rates which some future government will only end up raising just like Clinton did, at which time we'll be out both the lower rates and the deductions which offered us some protections from the greedy spending bastards who populate both political parties.

The great achievement of the debacle of the 1930s was amortizing mortgages over 30 years, forcing Americans to save in the form of owners' equity. The debacle of the late 20th century was letting politicians convince us it was time to spend it.      

Create a graph

The Left's True Objective Is Higher Taxes On Middle Class: Citizen Cohn Admits It

Say whatever you want about Romney's tax numbers not adding up, the objective of the left in America is to raise taxes on the middle class, precisely because government spending as projected going forward cannot be paid for without it.

So Jonathan Cohn, here:

To reiterate something I've said before, I happen to support higher taxes for the middle class, at least over the long term, assuming they are part of a balanced deficit reduction approach that preserves Medicare, Social Security, and other critical programs. In an ideal world, Obama would make a case for precisely that sort of agenda, because without those higher taxes (above and beyond taxing the rich, as Obama has proposed) government won't have enough money to fund future spending obligations. But it's hard to fault Obama for not presenting the full facts about fiscal tradeoffs when the other side has shown repeatedly that it doesn't care about facts at all.

Conservatives need to make the point that government spending even at Rep. Paul Ryan levels is unaffordable without tax hikes on the middle class.

All the talk in the Republican Party about broadening the tax base is really about eliminating tax loss expenditures in order to raise revenues. In other words, taking away the deductibility of mortgage interest expenses, state and local income tax expenses, and the like. If it walks like a tax increase and talks like a tax increase, it's a tax increase, whether it's brought to you by the Gang of Six, the Gang of Twelve, or Mitt Romney.

The Stupid Party is about to vote for this again and the left knows it, which is why they are so happy. People like Jonathan Cohn know a Romney presidency will help achieve their goal, so it really doesn't matter if Obama loses. Unless conservatives take over the Republican National Convention and give the nomination to someone who will actually protect the middle class, taxes on the 66 percent of America which earns less than $100K per year are going up, up, up.

Conservatives need to remember what happened last time we fell for this gimmickry. Ronald Reagan agreed to eliminate deductibility of consumer interest in the 1986 tax reform in exchange for lower rates. We lost that deductibility and got the lower rates, but when Democrat Bill Clinton raised taxes in 1993, we didn't get back the deductibility. The same thing will happen again. We'll sacrifice deductibility of something else in exchange for lower tax rates, which liberals later will succeed in raising the next time they have power, putting the middle class even farther behind than it is now.

We didn't get back the deductibility lost in 1986 under George Bush in 2001, and we won't in future if we answer the siren call of broadening the tax base again.

The Atlantic's Lies About Tax Loss Expenditures

The latest lazy lies attacking the so-called privileges of the so-called middle class come from one Linda Killian at The Atlantic here:

"The three largest expenditures in the tax code are all things many middle-class Americans take advantage of -- tax-free employer-provided health insurance, the home mortgage interest deduction and tax-free 401(k) retirement accounts. ... The tax exemptions for home mortgage interest cost the government more than the entire budget of the Department of Housing and Urban Development according to Steuerle [an Urban Institute economist]."

These are NOT the three largest. They rank 1, 3 and 6, not 1, 2 and 3.

If Linda Killian had bothered to read the Joint Committee on Taxation's latest report on the subject, she would have known that.

Here are the top ten tax loss expenditures for 2011, according to this committee of the US Congress:

$109.3 billion  Employer provided health insurance and related

$ 90.5 billion  Reduced tax rates on dividends and capital gains

$ 77.6 billion  Owner-occupied mortgage interest deduction

$ 59.5 billion  Earned income credit

$ 56.4 billion  Credit for children under 17 aka Child Tax Credit

$ 48.4 billion  401K-type plans

$ 42.7 billion  Pension plans aka union retirement plans

$ 42.4 billion  State/local income, sales and property tax deduct.

$ 38.0 billion  Exclusion of capital gains at death

$ 31.0 billion  Exclusion of benefits under cafeteria plans

$ 31.0 billion  Exclusion of untaxed Social Security and RR benes.

Who benefits from the top three? It's hardly a middle class phenomenon . . . today.

Rich and poor and everyone in between gets health insurance when they are employed by an employer, not just the middle class. And they don't pay tax on that "income." But the size of this break is bound to decline dramatically in coming years, if ObamaCare is not struck down or repealed. Fewer employers will be providing coverage, choosing to pay lower fines instead. Other companies will deliberately downsize in order to escape the requirements under the law, making employer-provided insurance less common than it is today. The net effect may very well be that employer-provided health insurance becomes more and more an upper class phenomenon.

Reduced rates of taxation on dividends and capital gains primarily benefit the rich in America. Could that be why Killian overlooked it entirely? It certainly doesn't fit her narrative against the middle class, does it? But this category is the real number 2 in the list of tax loss expenditures.

Working class and middle class people who are lucky enough to have joined the investor class are investing primarily through tax-deferring vehicles like union pension plans and 401K plans, which rank number 7 and 6 in Congress' accounting of tax loss expenditures. It is questionable, however, for pensions and 401Ks to appear in this list of tax loss expenditures at all. Eventually the deferred money will become income, and it will be taxed.

But the more important point is that everyone in this bottom 66 percent of wage earners by definition makes less than $100,000 per year and by and large very few of them are playing around in the stock market, where fat cats like Bill Gates and Warren Buffett and Mitt Romney derive their unearned income, taxed at the non-permanent lower rates under the Bush tax legislation of 2001-2003. Were these rates permanent, however, this tax loss expenditure wouldn't even make the list.

Contrast that with something which is more or less permanent: the exclusion of income from Social Security taxation. The current income ceiling after which income is not so taxed is almost $107,000 per year. In 2010 just under $2 trillion in ordinary wages and salaries made by the rich escaped the Social Security tax. The tax loss expenditure of that? $125 billion, higher than anything in the Joint Commission's report. And it all went to the rich.

Third is the ever popular whipping boy of the tax reform crowd, the mortgage interest deduction. It should worry average Americans who struggle on the crumbs which fall from their masters' tables that our betters want to make it harder for us to own four walls and a little garden and a tree. 100 million out of 150 million wage earners in 2010 made less than $40,000 per year. Try buying a house on that.

Democrats and Republicans have successfully conspired to attack Social Security for the first time by de-funding it temporarily and haven't yet been electrocuted by the once-feared third rail of politics, so I fully expect them to keep trying on mortgage interest.

Four years ago the mortgage interest deduction was more like $88 billion, so with the collapse of housing we have witnessed a decline in the amount of mortgage interest being paid, and so deducted. $10 billion less. The reason for this is two-fold. One, fewer homeowners. Two, refinanced mortgages at lower rates. With home ownership already under severe stress, it is astonishing that liberals of both parties continue to attack it under the guise of tax fairness. What it really is, is statists greedily looking for more revenue.

I say they can all go to hell.

Michael Barone Joins The Liberal Chorus Attacking Progressive Taxation

You heard me right, the liberal chorus attacking the progressive tax code, in this case the progressive tax code's deductibility provisions which are . . . well, progressive.

Barone and other liberal Republicans like Pat Toomey, Gang of Sixers and Gang of Twelvers do it on the grounds that the deductions for mortgage interest and state and local taxes help the $100K+ set more.

Nevermind "the rich" already pay the vast majority of the taxes. They want to make them pay even more because . . . well, they don't really need the money, and government does! And maybe liberals will like us more.

Talk about ceding the moral high ground to the left. Who would want to go to all the trouble of becoming rich just so that they can have the privilege of paying even more of the taxes?

Nevermind that the poor own one of the biggest "tax loss expenditures" in the form of transfer payments for the Earned Income Credit and the Child Tax Credit: $109 billion. Compare that to the mortgage interest deduction's tax loss cost to the Treasury : $88 billion.

Here is Barone:

[T]he big money you can get from eliminating tax preferences comes from three provisions that are widely popular.

The three are the charitable deduction, the home mortgage interest deduction, and the state and local tax deduction. ...


[T]he vast bulk of the "tax expenditures" -- the money the government doesn't receive because taxpayers deduct mortgage interest payments from total income -- goes to high earners . . ..


Well why shouldn't they under a progressive tax system? 


There's really no difference between Michael Barone and Republican advocates for "tax reform" and Democrats like Peter Orszag, for example, who makes an argument for similarly flattening deductibility for the rich by limiting their traditional deductions enjoyed by everyone across the income spectrum. What this amounts to is an admission that the progressive deductibility which we have now does NOT go hand in hand with the tax code's progressive taxation.

The current arrangement may not seem fair to flat taxers, but it is internally consistent. If you pay progressively more in taxes, your deductions should justly be progressively worth more to you. And so they are. If you pay progressively less in taxes, your deductions should justly be worth less to you, progressively. And so they are.

Proposals to limit deductions for one class of taxpayers amount to destroying the internal coherence of the progressive tax code itself. It is nothing less than an attack on the idea of progressivity and its fair unfairness, all in the name of extracting even more from the pockets of successful people.

Sheer nincompoopery. 

The Biggest Tax Loss Expenditure Benefits the Rich: $150 Billion for Social Security

In 2008, the AGI of the top 10 percent of earners was $3.9 trillion, represented in just 14 million tax returns, as reported here.

Assuming these are individuals (which cannot be true because only 140 million returns in total were filed that year but let's make the assumption anyway), about $2.4 trillion of that money would have escaped Social Security taxation above the threshold limit, rounded, of $107K of income per year.

About $1.5 trillion of the $3.9 trillion would have been taxed for Social Security purposes. Again, I'm using adjusted gross income which is also not going to be an accurate measure, but it'll have to do for this back of the envelope calculation.

6.25 percent of the remaining $2.4 trillion comes to $150 billion in lost revenue for Social Security in 2008, way ahead of the top tax loss expenditures, medical insurance at $131 billion, pensions at $117 billion, and your mortgage interest at $88 billion. See the data here.

The Super Committee, aka The Gang of Twelve, is interested in all proposals to raise revenues by closing "loopholes," like your mortgage interest deduction. Yet that's only fourth on the list of "lost" government revenues. The biggest loophole goes to the richest 10 percent of earners.

We're taxed enough already. Cut the spending instead. 

Tax Reform Had Better Be Revenue Neutral, Otherwise No Thanks

Louis Woodhill isn't fooled by Gang of Six types, Gang of Twelve types, or any other types looking for increased revenues from tax reform flying under the banner of eliminating tax loss expenditures while making the Bush brackets permanent:

Republicans want to reform the tax code and broaden the tax base in return for lower tax rates.  However, they must insist that such reform be (at most) “revenue neutral”, because an effort to get more revenue via reform would mean higher tax rates, and therefore lower economic growth.  An increment of economic growth provides somewhere between 27 times and infinitely more benefit to federal finances than raising taxes.  So, no thanks.

And he says No Thanks to about seven other things, too, here.

Senator Saxby Chambliss Doesn't Tell The Whole Truth About Tax Loss Expenditures

On the Sean Hannity program today Senator Chambliss claimed that under Ronald Reagan tax loss expenditures were eliminated as part of a lowering and broadening of the tax base in 1986.

The top income tax bracket eventually fell to 28 percent for a very brief time as a result of the Tax Reform Act of 1986 under Reagan's successor, George Herbert Walker Bush, who subsequently went on to break his no new taxes pledge, paving the way for tax increases under his successor, Bill Clinton, proving that broad low tax rates can be as ephemeral as any other part of the tax code.

The senator from Georgia today claimed that the current plan of his Gang of Six was proposing the scaling-back of similar tax loss expenditures enjoyed by taxpayers in the same spirit of Reagan. For example, the Gang wants to reduce the deductibility of home mortgage interest and charitable contributions in exchange for a lower income tax rate.

But the senator is pulling a fast one with the facts. Reagan didn't just eliminate some tax loss expenditures and reduce income tax rates in exchange. He in fact broadened at the same time the mortgage interest deduction in order to encourage home ownership, something entirely missing from the Gang of Six plan:

Prior to the Tax Reform Act of 1986 (TRA86), the interest on all personal loans (including credit card debt) was deductible. TRA86 eliminated that broad deduction, but created the narrower home mortgage interest deduction under the theory that it would encourage home ownership.

I remember at the time how unfair I thought it was to lose the deductibility of credit card interest until I realized how an equity line of credit based on home ownership could and in fact did replace the role credit cards and other lines of credit had played in the tax equation before 1986. The change was also noteworthy because it encouraged the acquisition and use of secured equity instead of the use of mere credit secured only by income and creditworthiness.

Senator Chambliss' plan will eliminate tax deductibility of home mortgage interest without replacing it with anything to encourage home ownership.

And if there's anything America needs more right now, it's jobs and family formation to soak up the excess housing inventory. All Chambliss' plan will do is worsen the economic circumstances of current homeowners, who are already struggling with upside down loans and declining real estate values.

It's time conservatives recaptured the importance of home ownership as a social good. Unfortunately, the ideas of the Gang of Six do anything but. And whatever else they are, they aren't Reaganite. 

Sen. Tom Coburn is the Enemy of Every Traditional Family

With enemies like Coburn, who needs Democrats?

"I’ve argued that Republicans should be willing to consider increases in revenue -- not through higher tax rates but through eliminating tax earmarks, such as that for ethanol, and other expenditure that misallocates capital."

"Tax earmarks" and "other expenditure" which "misallocates capital"?

Read "tax loss expenditures." In other words, the tax deductions which every nuclear family in the country depends on for its survival: mortgage interest, donations to charity, property taxes, state income taxes and the like.

THE GUY VIEWS YOUR TAX PAYMENTS AS THE GOVERNMENT'S CAPITAL. AND EVERY PROVISION OF THE TAX CODE WHICH DIVERTS YOUR MONEY BACK TO YOU HE VIEWS AS A MISALLOCATION.

If it walks like a tax increase and talks like a tax increase, it's a tax increase.

Corporate Cash Earned Overseas, Presently About $1 Trillion, Cost the US Treasury About $90 Billion in 2008

So says a detailed and insightful story at Bloomberg here by Jesse Drucker, showing how companies book earnings abroad through the Netherlands, Switzerland and Bermuda, lawfully, to minimize taxation both in the US and in high tax European countries.

The next time some pinhead US politician says he wants to take away your $88 billion mortgage interest deduction, tell him this corporate tax loss expenditure is just as big, and getting bigger. 

When you consider that corporate taxes represent less than a third of the tax revenues which individual payers contribute to the federal government under current arrangements, there's plenty of room to rebalance that income portfolio more fairly.

Maybe we could start by rewarding companies for earning their money here instead of over there. If the Netherlands, Switzerland and Bermuda can do it, why can't we?

Well? 

Liberal Bizarro World Bait and Switch Tax Math

Just when I thought the headline "Payroll tax cuts rob the poor to feed the rich" meant that I was going to read a fine story by a liberal lamenting how the richest Americans, everyone making about $106,800 a year and "to infinity and beyond," don't pay Social Security taxes on all their income, I was met with this instead, that the present and proposed cuts in the payroll tax do nothing but finance the extension of the Bush tax cuts which, evidently, benefit only the rich:

Specifically, I'm talking about a new proposal to rob from Social Security to fund a continuing tax break for people who don't need Social Security — the wealthy. ...

It started back in December, when President Obama capitulated to the GOP on a budget deal by cutting the payroll tax, which funds Social Security. Advocates for the program pointed out then the shortcomings of this approach: It was targeted inefficiently and unfairly, skewing to the upper middle class and hurting lower-income families in comparison with the Making Work Pay tax credit it replaced.

Nevermind that the ten year Bush tax cut regime is responsible for the sorry state of affairs in which we presently find ourselves, with over 45 percent of the population paying nothing in federal income taxes, and a sizeable minority actually enjoying a negative tax rate whereby they receive government welfare through the tax code.

Nevermind that the latter is specifically designed as a subsidy to offset the regressivity of Social Security taxes on the poorest wage earners.

And nevermind that the future solvency of Social Security isn't really front and center in the author's mind, either.

What is Michael Hiltzik's greatest fear?

[O]nce you've cut a tax, it's ever harder to restore it.

You mean like abolishing the Bush tax cuts and thereby raising taxes on the poor by 50 percent?

I'll say.

Or how about this one?

In 2008, the top 14 million tax returns had AGIs totaling $3.8 trillion. If a liberal were really serious, he'd be advocating taxing all this income to make not just Social Security solvent, but Medicare, too. At 6.2 percent, we're talking an extra $236 billion of foregone tax revenue annually.

As tax loss expenditures go, it's the largest one I know of, by a long shot. But try getting people to focus on that one instead of my measly mortgage interest deduction, a tax loss expenditure of $88 billion.

Liberals are so caring.

Another One Who Hates Your Mortgage Interest Deduction: Felix Salmon

Here.

By his own admission he wants to spend the $100 billion tax loss expenditure on some big government fantasy of his own, instead of letting you keep it to raise a family in a safe environment of your own choosing where the kids don't have to be exposed to the low lifes who inhabit . . ..

Well, you get the idea.

These people have no use for families. Where the hell do you think the future country comes from?