Wednesday, November 10, 2010

Congratulations To All Who Wanted A Smaller Government

Isn't that what we were told about the results of the last election? Well, this is how you get a smaller government:

A draft proposal to be released Wednesday by the chairmen of President Obama's bipartisan commission on reducing the federal debt calls for deep cuts in domestic and military spending starting in 2012, and an overhaul of the tax code to raise revenue. Those changes and others would erase nearly $4 trillion from projected deficits through 2020, the proposal says.

The plan would reduce Social Security benefits to most future retirees — low-income people would get a higher benefit — and it would subject higher levels of income to payroll taxes to ensure Social Security's solvency for at least the next 75 years.


The proposed simplification of the tax code would repeal or modify a number of popular tax breaks — including the deductibility of mortgage interest payments — so that income tax rates could be reduced across the board. Under the plan, individual income tax rates would decline to as low as 8 percent on the lowest income bracket (now 10 percent) and to 23 percent on the highest bracket (now 35 percent). The corporate tax rate, now 35 percent, would also be reduced, to as low as 26 percent.

Even after reducing the rates, the overhaul of the tax code would still yield additional revenue to reduce annual deficits — a projected $80 billion in 2015.

But how low the rates are set would depend on how many tax breaks are reduced or eliminated. Some of them, including the mortgage interest deduction and the exemption from taxes for employees' health benefits, are political sacred cows.
Emphases are mine.

Put granny in the attic of that rental property and find yourself a cheaper health insurance policy! Of course none of this will matter if you are a high earner. In that case you have a nice tax cut to look forward to.

This is all very interesting, after you finish banging your head against the wall.

Take the mortgage deductions for an example. They have always been a bit tricky to justify from an equality point of view, because they give a tax cut to those who can afford to buy rather than to rent and because the size of the price reduction they create is larger the more taxes you would otherwise pay.

But removing that deduction will also have odd equality effects: It's the middle classes who depend on that deduction to buy a house. The rich don't need it to be able to afford to buy.

Reducing or eliminating the mortgage deductions, combined with tax cuts of the types shown here, will do -- what? They must mean a move towards a larger relative tax burden for the middle classes, unless public spending is really really slashed.

The impact on the housing markets will also be interesting. Tampering with the mortgage deductions this way is the same as raising house prices. Given the horrible state of the housing markets it's not easy to predict the overall impact except to note that buying a house certainly will be more expensive than it was.
For more information on the contents of the draft proposal, check out TPM.