As Washington becomes more focused on the long-term projected deficit shortfall, it needs to reduce “tax expenditures” — government spending through the tax code — in order to raise revenue.
Altogether, tax expenditures account for over $1 trillion of government spending. These include subsidies to oil and gas companies and deductions for corporate jets. There is no good defense of keeping these particular expenditures in place, and we should also eliminate some of the more popular expenditures, such as the Mortgage Interest Deduction (MID).
Some argue that tax expenditures should not count as government spending because, on an individual scale, they lower the tax burden of firms and citizens. Republicans in particular have favored using tax expenditures because they are “off-budget” and bypass congressional procedures required for appropriations. This provides a simple way to sneak in rents to special interest groups.
Make no mistake, there is no difference between giving an interest group a tax deduction or sending out a check in the mail. The consequences are the same: more money for the rent-seeker and a higher tax burden on the rest of us.
President Barack Obama and many progressives sometimes make it seem that getting rid of tax expenditures will be painless, pointing to loopholes for corporate jets and oil companies. But while the Democrats defend so-called “pork-barrel spending” by correctly stating that it constitutes a very small percentage of the budget, they are less likely to do the same for tax loopholes. If we want to raise any significant amount of revenue by cutting tax expenditures, we need to take on the more popular loopholes, like the MID. We will not be able to solve any of the big problems of our generation unless we realize that moving to better policies will cause some people to suffer.
My fellow PolicyMic Pundit Michael De Los Santos has also argued against the MID, and argued convincingly that homeownership is not a social goal we should promote. He is right about that, but most people tend to think about homeowners as people in need of help. They’re not.
The overwhelming majority of people who claim the MID earn more than the median household income. Two-thirds of households that claim the MID earn over $75,000 a year. That is because the MID only affects people who itemize their deductions, and most households earning less than $75,000 per year take the standard deduction instead. Because wealthy families’ households are worth more, they pay more in interest, meaning the gains from the policy are concentrated in households that earn above $100,000 per year.
Aside from this, there’s no clear evidence that the MID actually promotes home ownership. While the amount the government spends on the MID has varied considerably over time, the rate of home ownership has stayed relatively constant at about 65% to 70%. In other words, it is just a handout that high income homeowners really like. Removing the MID would allow us to reduce income tax burden on households earning less than $100,000 by about 8%. Or, we could use the revenues to decrease the federal deficit.
As we continue to bring the deficit down, tax expenditures need to be on the table. But that will only happen if we start treating them the same way we treat all other government spending, and the MID fails the cost-benefit test.
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