Today marks the 15th anniversary of my blog. I still try to post at least once per week on a tax policy matter and hope for comments and discussion to promote greater focus on various tax policy issues that exist in our current tax systems and in proposals to make tax changes. I also note where provisions and proposals meet principles of good tax policy but more often we see proposals that are contrary to good tax systems.
This year I plan to blog and write more on tax transparency so that we can all better understand how our tax systems work. I think if more people understood spending in our tax system (tax expenditures) versus direct spending (such as what you see in agency budgets), our tax system would look different.
I like this observation from a 2006 congressional report on tax expenditures:
“A major criticism of the mortgage interest deduction has been its distribution of tax benefits in favor of higher-income taxpayers. It is unlikely that a housing subsidy program that gave far larger amounts to high income compared with low income households would be enacted if it were proposed as a direct expenditure program.
The preferential tax treatment of owner-occupied housing relative to other assets is also criticized for encouraging households to invest more in housing and less in other assets that might contribute more to increasing the Nation’s productivity and output.”
Similar comments are made in the 2016 version of the report (see page 323 et seq).
The report also notes that home ownership rates in the U.S. are similar to those in the UK and Canada and they don’t have a mortgage interest deduction.
Basically, the mortgage interest deduction mostly helps higher income individuals purchase a more expensive home and even a vacation home too since the deduction is for mortgage interest on a principal and second home.
Today, only 11% of individuals itemize and not all of them have a mortgage. This would be a good time to repeal this deduction. It should be down via a phaseout with a longer phaseout period for individuals with income below $150,000. A better replacement would be a first-time homebuyer credit that is available only once in your lifetime and phases down as income goes up. It should be adjusted for the regional home price.
We don’t often see these proposals. President Bush’s 2005 Advisory Panel on Federal Tax Reform suggested replacing the deduction with a 15% credit based on the regional home price. I think we don’t see such proposals because too many people believe that the home mortgage deduction is key to being able to purchase a home and don’t see that the bulk of this subsidy goes to higher income individuals – basically, spending money on people who really don’t need it (they could purchase a less expensive home with a smaller morgage).
So, I’m working on another paper on tax transparency focused on tax expenditures to highlight issues with them such as highlighted above. I think a unified budget that shows both direct spending and spending in the tax law in the same document would shed a lot of light on government spending such that people would then ask questions on why subsidies for a vacation home exist or why a good deal of subsidies help higher income individuals more than lower income individuals.
What do you think?
What do you think of when you hear “tax transparency”? Please leave me a comment. Thanks for reading my blog!