Is there hope for tax reform?

Last updated on: February 24, 2015 at 9:33 pm by Jane the Actuary

Is there hope for tax reform? 2015-02-24T21:33:58-06:00 Jane the Actuary

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The operating narrative about the Obama administration’s failure to gain public acceptance of its “let’s tax 529 plans” proposal has become this: this shows that tax reform is doomed, because no one will relinquish their tax breaks, even if it doesn’t really help them all that much. Reihan Salam says this, most recently, in a Slate column posted Friday:

Many smart people—the libertarian Peter Suderman of Reason, the neoliberal Josh Barro of the New York Times, and conservative Patrick Brennan of National Review, among others—have made the point that if Obama and his allies can’t even tweak the tax treatment of this tiny little savings plan, they sure as hell can’t succeed in raising other taxes enough to finance entitlement spending as the baby boomers retire in ever-larger numbers in the decades to come.

(Follow the link, and he links to these pieces, as well.)

But this misses the point of what the Obama administration was trying to do here.

Obama wasn’t attempting “tax reform” as conventionally understood, to refer to the elimination of special-interest tax breaks in exchange for lower tax rates. He was very specifically attempting to remove a “tax break” which encouraged saving for college (and, as I said before, remove the tax break and you destroy 529 plans, the only special-purpose way to save for college), in favor of additional government spending: initially the removal of the tax incentive was perceived of as funding the “Free Community College” proposal, and later the administration specifically identified the 1:1 swap as funding more, and permanent, cash benefits (“refundable tax credits”). So this was not about whether the upper-middle-class can surrender specially-targeted benefits, but whether they’ll accede to another tax-and-spend program.

That being said, the bigger question is the mortgage interest deduction. The 529 plan tax break is, like the Roth IRA, a question of whether all types of income are to be taxed in the same way — or, specifically, whether investment earnings and wages are to be treated the same. The mortgage interest deduction is much more clearly a tax break for a favored type of spending, a different category altogether. And the last time it was under discussion? Well, that’s when the realtors came out in full force with their TV ads about the importance of homeownership.

Now, I’d like to think that this deduction could be eliminated gradually, with a phase-out that caps the amount that can be deducted, and with that cap decreasing each year. And people with less-expensive homes, whether by personal choice, or by living in areas of the country with lower housing values, or simply because their income is lower, already see a comparatively small benefit from this deduction, either because their total deductions are lower than the standard deduction, or because, in reality, they only benefit to the extent that their total itemized deductions exceed the standard deduction.

Of course, then you reach the further question: what about the deductibility of property taxes and state income taxes? Or, for that matter, charitable donations? For many people, these items work together to total above the standard deduction (for couples under 65, that’s $12,400 for 2014). For others, itemizing deductions offers no benefit at all.

In any case, is tax reform achievable? I suppose I’d still like to believe so, and I think the obstacles are not the Upper Middle Class protesting the loss of tax breaks, but the special interests (like the Realtors) who want something to help their industry, and, of course, the politicians who want to keep receiving campaign donations. (Remember Extortion, and the milkers, and double-milkers?)

But there were just as many special interest groups in 1986, weren’t there?

(Incidentally, Salam addresses other policy issues where he says that the upper-middle-class put up roadblocks in the way of sensible reform. Chief among them is immigration reform: the upper-middle-class, he says, are too keen on cheap labor, such as low-wage nannies, to sign on to any enforcement of requirements that these workers be legally eligible to work in the United States. Here I think he should pay a visit to flyover country. Heck, my husband and I would qualify as “upper middle class” by his income definition — though not the mindset part:

We’re talking about families that earn well into the six-figure range yet don’t feel rich, either because of their student loan debt or the enormous cost of the amenities they consider nonnegotiable: living in well-above-average school districts for those with children or living in “cool” neighborhoods for those without.

since, for us, we don’t “feel rich” not because of debt or high-priced housing but because we were raised to have a comparatively frugal mindset and save fairly determinedly for college, retirement, and all-purpose “rainy day” contingencies.

But in any case, I don’t know anyone who has hired a nanny, except for my former boss, whose nanny was hired through a service, with all the proper taxes. Some of our neighbors have a lawn service, others don’t, and this is as much a matter of mindset as income — but I just can’t imagine any one of them saying, “I support nonenforcement because otherwise my lawn service rates would go up.”

So far as I can tell, nonenforcement is not due to the collective will of the upper middle class, so much as the influence of the wealthy and the employers themselves.

That being said, of course, I have no idea about the statistics — what percent of Midwesterners use nannies, let alone nannies who are paid off-the-books or are ineligible to work in the U.S. in the first place, compared to New Yorkers or Californians. But this description that this is commonplace seems unlikely, in my world.)

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