The President’s tax reform commission, chaired by former Sen. Connie Mack, has released its report. Unfortunately, the commission’s report is a case study on how NOT to sell tax reform to the American people.
For its first act of so-called reform, it tells homeowners that they won’t be able to deduct their mortgage interest anymore. But they can claim a tax credit on up to 15 percent of the mortgage interest.
Simplifying the math, look at a worker who makes $50,000 and pays $10,000 in mortgage interest payments. He currently deducts this cost from his income so that he pays income tax on $40,000, of which he owes, say, 30%. His tax bill is thus $12,000.
Now take the same worker and make him pay tax on $50,000 at that same 30 percent. That’s $15,000. But he gets to take a credit of 15 percent of the tax obligation directly from his bill, under the tax reform proposal. That worker’s tax bill is now $13,500.
How about residents of high-tax states such as Vermont and California? The current deductions can range in the thousands for that $50,000-a-year worker. Gone.
And those families whose health insurance cost their employer more than $11,000 a year? They’d have to pay tax on the costs over $11,000.
You get the picture. This is not exactly the kind of simplification American workers were counting on from tax reform.
What a missed opportunity!
It’s true that part of the reason the tax commission made these recommendations was the President’s requirement that its recommendations be “revenue neutral;” i.e., that the same amount of tax revenue would come into the government regardless of which changes were made.
Big mistake. If tax reform has to be revenue neutral, there are going to be at least as many losers from tax reform as there will be winners. A better solution would have been to propose eliminating those tax breaks completely, but also reducing the income tax rate significantly to ensure taxpayers are better off.
While that proposal might not have passed Congress, it would have initiated a national debate over the current tax monstrosity with the eventual goal of making sure that it is eliminated.