October 12, 2005
Tax Reform Panel Aims to Destroy the Economy
The President’s Tax Reform Panel gave a few hints today as to its recommendations for how to make our tax code simpler, fairer, and more pro-growth. A few angry thoughts can be found at Nealz Nuze, and more information can be found at this MarketWatch article. The panel wants to remove the Alternative Minimum Tax (AMT), not because they want tax simplification, but because they want to avoid a revolt. It’s projected that within the next 5 years, the AMT may hit as many as 50 million taxpayers, and our representatives know that they’ll find themselves out on their butts if they let that happen.
I have a lot of work to do, and probably shouldn’t take time to post right now, but this has me so angry I’m about to explode. The recommendations of the tax reform panel will destroy our economy, and here’s why:
First: The commission is going to recommend that the cap on the home mortgage interest deduction be reduced. Currently you can deduct interest on home loans up to one million dollars. The new limit is likely to be $350,000. This means that all interest on home loans about $350,000 will not be deductible. The result? A tax increase for people who own more than $350,000 on their homes. Now this won’t bother most Americans because they believe that anyone who owns a home valuable enough to stand as security for a loan in excess of $350,000 is rich, and as we all know there really should be no limit to the taxes that evil rich people pay. Political survival rule No. 1: You can never go wrong raising taxes on the rich.
I used to live in California. If this goes through, you can watch as the California real estate market quickly dies. The same thing will occur in New York, Washington, Massachussetts, and even here in Atlanta. Where I lived in California (Irvine), if my wife and I had wanted to buy a 1000 sq ft condo, it would have cost us $300,000, and been a higher debt-to-income ratio than a lender would allow nearly anywhere else. Other people I know were looking at first homes in the $600,000 range, and would be seriously stretching themselves to be able to afford the $540,000 loan they would have carried.
All of a sudden, that market will crash. California real estate values are currently known as being inflated, but if you want to watch a bubble burst in an instant, this will do it. The same will be seen in every large city in the country, because $350,000 is not a lot for a house in most places these days.
Furthermore, you’ll see the entire home industry take a major slide. Where I live in the Atlanta suburbs, all the new developments have starting home prices in the $400’s or above. All of a sudden you’ll see tiny houses being put onto these lots, as the cost won’t justify putting large homes.
People factor the home mortgage interest deduction into their plans to buy a home. Take that away, and you’ll suddenly see a large number of homeowners getting slammed with huge tax bills they may not be able to afford, and unable to sell their houses because the market has crashed in response to the new tax laws.
Second: Another tax increase. Right now your employer can deduct the cost of any health insurance it pays for on your behalf. The tax reform commission wants to limit that deduction. Does this amount to a tax increase on businesses? In a sense, yes. But, as you know, business don’t pay taxes, they pass the taxes and the tax increases down the line of commerce until they end up embedded in the final retail price of goods and services. So this is a tax increase, but it’s an increase on all of us.
If there’s a clearer recipe for forcing the public to accept socialized medicine, I don’t know what it is. Businesses are tax-incentivized to provide health insurance to their employees. Take away that incentive, and you’ll see the ranks of the uninsured swell quickly.
It will result in an immediate call to socialize medicine, which will then cause huge problems with the federal budget, only adding to our tax burden.
When President Bush formed this tax panel 9 months ago, he asked that it “advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans.”
This does absolutely nothing to make it simpler. Removing the AMT does nothing to make it fairer, it just makes it less likely to result in us tossing our elected officials out of office. And destroying the entire real estate economy and raising taxes on businesses is not pro-growth. He also specifically requested that they keep the home mortgage interest deduction and the deduction for charitable contributions, and they’ve eviscerated the former.
I’d like to advise President Bush. It’s time to stand up and publicly announce that this tax reform panel has FAILED. This tax reform panel is advising that we engage in about the worst possible set of actions that we could find. It is unacceptable, and Bush needs to say so.
The Unrepentant Individual linked with President's Tax Panel
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Hear hear.
Coming from someone who doesn’t bump on the AMT yet, and whose house is $150K, I still think this is a load of malarkey. Maybe the FairTax is the answer, or maybe it isn’t. But certainly the tax reform panel has completely failed it.
Another idea I’ve fancied over the years is taxing non-subsistence property rights. I am hesitant to link the article because its author has a bit of a race fixation, but it’s another of the “tax misused wealth, not wealth generation” ideas.
-Sam
Actually upon further thought the mortgage limit at $350K is fine with me and very much along the lines of non-subsistence property rights. It’s not like they will have -zero- deductible interest, they will be able to deduct the interest on their loans, but capped at the amount they would be paying if their house was $350K.
Abolishing the AMT does simplify the code, but what they should be doing is additionlly shredding all the loopholes that are still there that brought about the AMT to begin with. Perhaps capping the mortgage interest helps with this, I would like more analysis.
It is the business tax “increase” that is the worst part of the plan to me. Why, oh why, would we want to increase the cost of doing business here while outsourcing is still booming?
-Sam
President’s Tax Panel
They aren’t doing much to make the tax code simpler, the changes may be fairer in the long term but will have drastic short-term transition effects, and only one portion (the investment changes) will help economic growth. My only hope is that Bush re…