The Brookings Institution has published
two articles on tax reform, one of which should be of particular interest to
MND readers. The two briefs are part of
the progressive think tank's Remaking Federalism/Renewing the Economy
series. One calls on Congress to make
permanent and expand the critical research and experimentation (R&E) tax
credit; the second recommends curtailing "the massive mortgage interest deduction."
The time has come, Brookings says, to
reform the mortgage interest deduction (MID) which "continues to grow
exponentially, subsidizes excessive housing consumption, and diverts
substantial resources from more productive pursuits."
The article's author Bruce Katz says
that reforming MID "offers an opportunity for the federal government to realize
hundreds of billions of dollars in
savings over a 10-year period to contribute toward deficit reduction as well as
to invest a portion of the savings in policies and programs that are likely to
spur more productive and innovative economic growth."
does not suggest eliminating the deduction entirely; many economists have
called it the single largest deduction available to much of the middle class,
but rather reviews several suggestions to rein it in. The Obama administration has proposed in each
of its past four fiscal year budgets a cap of 28 percent on the income tax rate
at which taxpayers can use any itemized deductions including the MID. This would
only affect married taxpayers filing jointly with adjusted gross income (AIG) over
$250,000 and single taxpayers with an AGI over $200,000.
Two versions of a second common
proposal to change the MID deduction to either a refundable or non-refundable
tax credit while capping eligible income have been recently suggested by tax
forces established to look at debt reduction.
The so-called Domenici-Rivlin group, proposed shifting the MID to a 15
percent refundable tax credit for all taxpayers, lowering the mortgage limit
from $1.1 million to $500,000, and eliminating the provision that allows
taxpayers to deduct mortgage interest for second homes and home equity loans. A second version proposed by Simpson-Bowles
was similar but made the tax credit a non-refundable 12 percent.
A third proposal made recently (referenced
by presidential candidate Mitt Romney and now advocated by several Republican
members of the House) has been to put an overall cap on itemized deductions
including the MID and the deduction for charitable contributions. Various versions would put the cap between
$25,000 and $50,000.
Any of these proposals, Katz says
would raise billions in tax revenue for deficit reduction and investment and
create a fairer balance in benefits among lower, middle, and upper income