Wednesday, November 10, 2010

How to Balance the Budget

Barack Obama's bipartisan commission has released an outline of its recommendations to reduce the national debt.

The plan calls for deep cuts in domestic and military spending, a gradual 15-cents-a-gallon increase in the federal gasoline tax, limiting or eliminating popular tax breaks in return for lower rates, and benefit cuts and an increased retirement age for Social Security.

Among the popular tax breaks to disappear is the home mortgage deduction, the child tax credit and the earned income tax credit.

Liberals like Echidne are wringing their hands at the idea of the home mortgage deduction going away because--gosh--rich people don't care about home mortgage deductions.
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.

Well that's not really what would happen. To start with, people shouldn't be buying houses for the mortgage deduction, and if you can't afford the house, that deduction isn't going to help. Secondly, anyone who thinks rich people don't care about tax deductions is either blind, stupid, or willfully ignorant. Rich people take all the deductions they can get, just like middle class people. Isn't that why liberals were so anxious to raise the tax rates?

Of course, the commission's proposals gore everyone's ox, whether you are a tax-and-spend liberal or a military-lovin' conservative. And there's no account here of how these severe changes in taxing and spending would affect the economy. It will be interesting to see the debate to come.

See more opinion here.