The Deficit and Tax Reform

Wait … did you just call the mortgage interest deduction — just about the only tax deduction most middle-class Americans ever get, and a legitimate one at that — a “loophole”? A LOOPHOLE?
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You’re lucky I’m speechless with anger, because whatever followed wouldn’t be pretty.

If you hold multiple mansions throughout the world, no tax break? OK, but what if we just allow tax breaks on one mansion we can’t afford, approved by our megabanks, who earn megabuck bonuses for selling our obvious default on the market? Just until we go into foreclosure. We can always buy another mansion we can’t afford. How about the yacht? Or the private executive jet plane? You would subject us to the groping and inconvenience of the airport security perverts and thieves? My, my, what is our country coming to?

Home Mortgage Interest is a tax-deductible expense. Mortgage interest is reported on Form 1040, Schedule A along with other itemized deductions such as real estate property taxes, medical expenses, and charitable contributions. Taxpayers paying mortgage interest should fill out Schedule A to see if their itemized deductions exceed their standard deduction. If so, taxpayers will save more money on their taxes by itemizing. Taxpayers who itemize their deductions will need to file the Form 1040 long form.
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Michael- You want to explain how this is a loop hole?

Good point. It’s not a loophole, it’s a legal exemption dating from a time when home ownership was an honest and valuable component of the economy. Remember? Before the thieves hijacked the ideal.

“Washington’s last big successful tax reform”
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…was Raygunomics over Bill Clinton actually eliminating the deficit?

Considering the “socialist utopia” of Canada has a lower income tax rate at every single bracket, that isn’t entirely a bad idea.

part of the commission’s mandate was to find some way, politically, that deficit reduction can be achieved in the world we live in
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Not to derail the subject of tax reform (yeah, I know..), but it just amazes me that there can be so much discussion about the deficit, but no one- not our elected, not our media faves- will discuss defense spending.. EVER. Not even as part of the solution. It’s mind-boggling.
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See: Our Trillion Dollar Defense (link).

The only ones not talking about it seems to be the media and I wonder why that is.
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– Sen. Johnny Isakson (R-GA): Isakson, who has been a featured speaker at Capitol Hill Tea Party rallies, told a local news station last month that deficit reduction “begins with the Department of Defense.”
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– Sen.-elect Pat Toomey (R-PA): Toomey, who has in the past called the Tea Party a “very constructive movement for positive change,” criticized Congress for voting for “programs the Pentagon doesn’t even want” during a debate with Rep. Joe Sestak (D-PA).
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– Sen.-elect Mark Kirk (R-IL): The week before Toomey’s statement, Kirk, who has received backing from the tea party movement, said that we need “across-the-board” reductions in defense spending during a debate with his Democratic opponent Alexi Giannoulias.
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– Sen. Bob Corker (R-TN): Corker has gone out of his way to accrue Tea Party support. “We embraced the tea party spirit when it was in its infancy last August,” said Todd Wom­ack, his chief of staff. Three weeks ago, Corker said on CNBC that defense cuts have to be “on the table” because there’s “a lot of waste there.”
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– Sen.-elect Rand Paul (R-KY): Tea Party “darling” told PBS’s Gwen Ifil during the campaign that that cutting defense spending “has to be on the table.” Paul reiterated his call for reducing the military budget this weekend while appearing on ABC’s This Week. He tweaked Republicans for “never” saying “they’ll cut anything out of military. … There’s still waste in the military budget. You have to make it smaller.”
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Sen. Tom Coburn (R-OK): Tea Party-backed ultra-conservative Coburn used the op-ed pages of The Washington Examiner last weeks to praise Paul’s “courage” in calling for a smaller military budget and said he looks forward to “working with him” toward that goal. “Republicans should resist pressure to take all defense spending off the table. … Taking defense spending off the table is indefensible. We need to protect our nation, not the Pentagon’s sacred cows,” he concluded.
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– Progressive Sens. Pat Leahy (D-VT), Jeff Merkely (D-OR), Ron Wyden (D-OR), and Bernie Sanders (I-VT): These four stalwart progressive senators joined with 55 members of Congress, including conservative Republican Reps. Ron Paul (TX) and Walter Jones (NC), to send a letter to the President’s Deficit Commission urging it to “subject military spending to the same rigorous scrutiny that non-military spending will receive. … We strongly believe that any deficit reduction package must contain significant cuts to the military budget.”
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http://thinkprogress.org/2010/11/10/rumsfeld-defense-tea-progressive/

This is…just incredible.
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It’s an incredible piece that Crowley has written here.

Incredibly good or incredibly bad?

Gunny, thank you for the info, this is good news. I’ve been saying for a while that I hope the tea-party movement forces the republican party to actually become conservative: In order to reduce spending, you must focus on defense; and be small government by respecting the law and civil liberties.
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I hope this is real, not just lip-service.

“Individual income tax rates are easy for the average American to understand, and if people can see those reduced in a tangible way they may be likely to revolt over countervailing increases, including a possible gas tax.”

Did you mean to say “less” likely?

And calling it “Washington’s last big successful tax reform” is an interesting turn of phrase. The Reagan tax cuts (top rates dropping from 70% to 28%) are the most devastating pieces of legislation ever harnessed on America, full stop

As Robert Reich said a few months back:

“Each of America’s two biggest economic downturns over the last century has followed the same pattern. Consider: in 1928 the richest 1 percent of Americans received 23.9 percent of the nation’s total income. After that, the share going to the richest 1 percent steadily declined. New Deal reforms, followed by World War II, the GI Bill and the Great Society expanded the circle of prosperity. By the late 1970s the top 1 percent raked in only 8 to 9 percent of America’s total annual income. But after that, inequality began to widen again, and income reconcentrated at the top. By 2007 the richest 1 percent were back to where they were in 1928–with 23.5 percent of the total.”

In any event, if the rubric is to be defined exclusively in “political” terms, then there will be no solutions to the problems we face (nor an arrest to the nation’s plummet into the void).

And BTW, I love the line “the world we live in”

Incredibly revealing of the massive gulf that separates elites from ordinary Americans, I meant.

A few things worth noting:

1. Historically, the U.S. government has not reduced the national debt by cutting spending. It has grown out of it.

2. Unemployment is a major contributor to the deficit problem. No jobs, no income taxes.

3. Social Security is statutorily barred from running a deficit.

4. Social Security payments do not come out of the general fund. It is impossible for Social Security shortfalls to contribute to the deficit. Anyone who says otherwise is a liar or a moron.

5. Raising taxes on the wealthy is not unpopular with “voters”. It is unpopular with the wealthy.

6. Even if raising taxes on the wealthy were unpopular with “voters”, the entire point of having a “bipartisan” commission was ostensibly to put forth an economically smart plan that could be voted on up or down by Congress. In other words, Congress could avoid the consequences of a politically unpopular solution. Thus, it is idiotic to claim that a deficit-reduction commission needs to propose economically counter-productive but ostensibly more politically palatable tax cuts.

7. These bipartisan commissions are generally ugly and undemocratic. They are designed to relieve Congressional accountability. In general, they should be avoided on principle.

8. Bipartisan commissions are least offensive when everyone in D.C. agrees on a solution, but simply wants to avoid the political fallout. E.g. the base closing commission allowed Congress to reduce defense spending without putting individual Senators in the position of having to defend their particular bases.

9. Bipartisan commissions are doomed to fail where — as here — all parties cannot agree on fundamental principles. You cannot reach consensus on how to reduce the deficit when the respective parties cannot even agree on whether government spending stimulates the economy and job growth. Or whether tax cuts increase or decrease government revenue. If you can’t agree on arithmetic then you can’t agree on a plan.

10. Krugman is right.

That is all.

“5. Raising taxes on the wealthy is not unpopular with ‘voters’. It is unpopular with the wealthy.”
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And since a) most of our politicians are, umm, wealthy, and b) our media is owned by, umm, what’s that word again?
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“Hacker and Pierson [in their book "Winner Take All Politics"] cite studies showing that public opinion on issues such as inequality has not shifted over the past thirty years; most people still think society is too unequal and that taxes should be used to reduce inequality. What has shifted is that Congressmen are now much more receptive to the opinions of the rich, and there is actually a negative correlation between their positions and the preferences of their poor constituents…. ‘When well-off people strongly supported a policy change, it had almost three times the chance of becoming law as when they strongly opposed it. When median-income people strongly supported a policy change, it had hardly any greater chance of becoming law than when they strongly opposed it’. In other words, it isn’t public opinion, or the median voter, that matters; it’s what the rich want”

http://baselinescenario.com/2010/09/13/the-importance-of-the-1970s/

And again, since our elected “representatives” care only about pleasing their financial patrons…

Actually there is one point that I forgot to make. And it is an important one. The Simpson-Bowles “thesis” that the “solution is painful” and that we all need to “sacrifice” is fundamentally flawed.

The only reason that a deficit is bad is if it harms the economy: if interest rates rise, the value of the dollar falls, etc.

So, any “solution” should, by definition, put America in a better position. The economy should grow, more and better jobs, etc. It shouldn’t be “painful.” Fixing the deficit should be pleasurable.

Indeed, the message — if the co-chairs had the interest of all Americans at heart — would be “The solution sounds painful, but it won’t be. Good policy is sometimes counter-intuitive.”

So why are they selling the “painful” line? Because they are planning to make most Americans’ lives worse by implementing policies that only favor the wealthiest Americans. And they want to prime Americans for the results. They want people to think “well, this is painful, it must be working.”

If this is going on at DKos, then people are going to get very, very angry, JC.
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http://www.dailykos.com/story/2010/11/10/919029/-REALITY:-If-Democrats-are-Corporatists-too-voting-is-pointless-and-our-Democracy-is-a-scam

“If this is going on at DKos, then people are going to get very, very angry, JC.”
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To which I say “Anger is a gift”
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Perhaps if more partisans decouple from the mechanism, we’ll get somewhere as a country. As you said on the previous thread:
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“Americans are not going to take that much more of this.”
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Agreed. Partisan libs have for too long felt their job was to protect Team D from Team R (as if they’re separate entities, as opposed to factions jostling for the same dime). See Jim Webb’s interview:
. http://www.salon.com/news/opinion/glenn_greenwald/2010/11/09/webb/index.html
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If such right-minded partisans start to wake up from this drug-addled state and begin indentifying with Americans (not democrats), maybe, just maybe we can plug the myriad holes in the ship of state.
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Anger is the solution. It inspires the necessary clarity and conviction for the type of rabble-rousing economic populism Americans are gagging for.
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The moment is now b/c if we cede that ground for a moment longer, it’ll be the fascist underbelly of America that’s poised to capitalize on such burgeoning rage. The left better f@cking step up or they’re going to be stepped on. It’s now or never.

They are also still in the grips of a sh*tty, recently re-discredited economic theory which states that markets must “clear” in order for the trade cycle to swing upwards again.
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A hemorrhaging empire’s ministers are acting on the advice of Pigou again.
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Pigou has stated unequivocally that, in order for unemployment to decrease, so must wages, until the true price of labor is restored. Pigou has also stated that, once prices are sufficiently low, the “wealth effect” will make people feel richer with the little money they have, and so consumer demand will naturally increase by itself, and so therefore employment will return to its naturally high levels during the upswing in the trade cycle.
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Pigou, being the intellectual heir of Marshall, is unimpeachable, of course.
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Again.
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These sorts of people’s advice in last century Britain between the wars, as unemployment stayed at over 10% for around two decades was “well, this is painful, it must be working.”
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At that time, a general strike was the only means by which the government was forced to reevaluate the advice of economists in agreement with Arthur Cecil Pigou’s theories, and consider other means of reducing unemployment than extending the suffering of millions.
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Not only do these new Hoovers of ours want people to think “well, this is painful, it must be working,” but they apparently still believe Pigou’s “wealth effect” theories to be credible, even after the impossible (in their limited world) has happened, and trillions of dollars in wealth as simply vanished into the ether.
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The people are being primed for the barbers’ new leach.

I will think about what you have said very carefully, Oregon JC.

I’m kind of nervous that Jay Ackroyd is going to come in here and say that, in my ignorance, I’m being too harsh on Pigou, who, after all, largely invented theories of economic externalities.
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I’m thinking that I should probably shut the crap up about economics for about a year or two while I study the subject.

7.2 – stuartzechman,

“Incredibly revealing of the massive gulf that separates elites from ordinary Americans, I meant.”

Isn’t that channeling free, textee, 2thirds, etc. about the “liberal elite”?

Maybe loophole isn’t the best word. But it is a special preference.

No.
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This is not the “liberal elite,” it’s something else.
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The political-media class is not liberal.
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When we reject the rightist critique of institutions, we movement liberals do not do so out of some misguided Hamiltonianism, we do so because we aren’t beholden to the mythologies of the right.
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Elites have failed the people of this country again, and it’s indulging in denialism to avoid placing responsibility where it is deserved because of some fear of “sounding right-wing.”
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Versailles is what it is at this point. It’s inhabitants have proven themselves dangerous to the nation’s –our peoples’– well-being.
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That’s not popular rightism or anti-intellectuallism talking, as I’m sure you must be aware by now.

Actually, it’s not feasible to convince people that they should give up social security in exchange for tax breaks that don’t benefit them. In fact, the proposition is insane.

6.1 – gysgt213,

“The only ones not talking about it seems to be the media and I wonder why that is…”

Good quotes from various lawmakers, but let’s see what they do when the rubber hits the road.

As others have pointed out, defence contractors don’t spread their manufacturing & assembly operations of a given weapon system across many states to keep truckers and railroads busy. They intend to put as many lawmakers as possible on the hook for closing plants and losing jobs in their states/districts.

Case in point:
Teapartyier Rand Paul, who promised before the election that he would not seek earmarks, now says that he will get what he can for the people of Kentucky, who elected him.

Jeez…”it’s inhabitants?”
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Sorry, “its inhabitants.”
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I’m going to bed, I’m obviously illiterate.

Thank you so much for responding to commentary, Michael Crowley, it is always greatly appreciated.

True, but I don’t think Canada is financing wars against every planet in the universe.

How about incredible, as in not credible?

Again, as Ian said: “The left must be seen to repudiate Obama, and they must be seen to take him down. If the left does not do this, left wing politics and policies will be discredited with Obama.”
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Worse yet, liberals of conscience will become dissidents. And expats like myself will become exiles.

In fact, the proposition is insane.
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No doubt we’ll see a post from Joe Klein tomorrow about how awesome it is.
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That man hasn’t met a bad idea yet that he didn’t take out for dinner and drinks.

The mortgage interest deduction is a massive government subsidy to home ownership based on the assumption that home ownership fosters a more stable citizenry. It may or may not, but it is government artificially steering capital into homeownership at the expense of potentially better uses of it. It is government (actually the good citizens that choose their type of government) choosing that the presumed (and not necessarily proven) benefits of single home ownership (which prevails in comparison to condos, or townhouses) outweighs the obvious lost conservation benefits that would likely be realized if homeownership had to compete for capital with other potential uses. It is also a subsidy that favors those who can afford more expensive homes. I am pretty sure that because of the sentiment expressed by Mr. perrywhite1 and folks who agree with him, and the prevalent superstitious belief that homeownership is an unalloyed benefit to the world, that I will never see the mortgage interest deduction eliminated, but I think it would be great if it were. Beyond the reasons cited above, it might also herald a time where people based their decisions on reason and thinking rather than emotion, predominately anger & fear.

Currently I am reading a book on the Great Migration of black Americans from the south to the north and west from 1915 to 1970. It is called “The Warmth of Other Suns”. Blacks were leaving a much more severe and life threatening situation than we face now. Their literal survival depended on leaving the south.
Although, the middle class and the poor are not in such dire straits, if the plutocrats keep weakening them we might find it is time for another Great Migration. If I was younger, I would be looking to Canada and maybe some Scandanavian countries for refuge.
It is not because I hate America but I hate what it is becoming.

stuart said,

“Versailles is what it is at this point. It’s inhabitants have proven themselves dangerous to the nation’s –our peoples’– well-being.
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That’s not popular rightism or anti-intellectuallism talking, as I’m sure you must be aware by now.”

- Yes, I am. As for the Versailles reference, I add this:

Boehner & McConnell: “Let them eat kibble!”

10. Krugman is right.
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That’s pretty much my rule of thumb for economic matters.

SZ – for the sake of future arguments, how would one push back against Pigou’s reasoning?
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For an economic illiterate like me, it sounds like unpleasant common sense.

I purchased my home in 1975 and have never once claimed a deduction. It never paid to do so.

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O/T
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Glen Beck University, Debate 101

Ah, no wonder my ears were burning.
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SZ there’s nothing to quarrel with (that I know of–I haven’t read Pigou, or even much of Keynes General Theory [I do have the collected works of Samuelson, though]) in what you’re saying here. But, IMO, it’s a distraction to look at the forebears of people who believe that we shouldn’t do anything special during a recession, other than accept it as part of the business cycle. You have plenty of contemporary economists making these arguments, including Nobel Memorial prize winners like Ed Prescott.
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Krugman did a nice job of explaining how these guys look at things, and why they’ve been shown to be, well, wrong. Empirically, that is.
. http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html
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And Brad DeLong points out that when they leave the arcane mathematical world they inhabit, they don’t really have any useful support for their argument that we simply have to accept the pain involved with the real business cycle–that attempting to use nominal measures to alter the course of the cycle is not just fruitless but counter productive. For civilians, of course, their (AND Obama’s [in his meeting with Atrios et al] AND Geithner’s [on MTP]) argument that the government can’t create jobs is just patently ridiculous, obvious false to observable fact.*
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http://delong.typepad.com/sdj/2009/09/a-magnificent-seven.html
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Fortunately, the senate now requires a 60 vote majority to pass anything, and there is no conceivable way that there are 60 votes in either the lame duck or the next Senate for gutting social security or extending Bush’s largess to the top two percentiles of American earners.
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Right?
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* I suppose it is fairer to say they believe something like “self sustainable jobs are created only by the private sector,” but I don’t see how the people who service the subway fare card vending machines don’t count because the MTA (for obviously good reasons — see the trash collection discussion that flared up at Balloon Juice) is a government entity. Or, FTM, the people building or operating the drones killing Yemenis that might be thinking up terror operations.

Michael Crowley–
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Of course the mortgage deduction is a loophole. It may be a popular loophole. It may be so deeply embedded in real estate prices that removing it without cutting residential prices by like 10-15 percent in one go will take a decade or more of caps and restrictions. (Sorta like rent control in NYC). But it is still a loophole. A bad one–because it create an incentive to move capital from more productive uses into residential housing. Aside from the really bad effects we have suffered from the surbarbanization of America, (Just read Atrios on a regular basis for those bad effects, like lotsa cars per capita and few walkable cities) it means that capital has been allocated away from industry, ceteris paribus.

Heh. Since “suburbanization” isn’t really a word, it didn’t bother me that spell check didn’t notice that I’d misspelled it.

In theory, I support removing the mortgage interest deduction. I’ve always felt that it was an unfair bias against renters.

Having said that, (a) it seems like dumb (electoral) politics to take away what has arguably been the most popular tax “loophole” in U.S. history, (b) it seems extra dumb to take it away just as the housing bubble is collapsing, and (c) once again, the lower and middle classes get “pain” and “sacrifice” but the wealthy and corporations get tax cuts.

Alert: Yes, Give tax breaks to the rich, which will cost Americans trillions of dollars, and then cut Social Security and Medicare to pay for it, should be an abomination to the people. I do not believe Pres. Obama will sign off on this insult, Nancy Pelosi has alredy spoken with a resounding No! We cannot keep taxing the people to death, while the wealthy and big business do not pay their fair share due to tax cuts, tax breaks, tax shelters, etc. Until we replace Greed, with the prinicpals of sharing, we will be unalbe to solve our problems. Greed and tax cuts for the rich is not the answer — it is the problem! God help this country!

Wake-up Call: The soon to be Speaker, John Boehener, is the man who recently campagined for an Ohio Congressional Candidate who dresses up as a Nazi on the weekends! You know the Nazi uniform that stands for separatism, white power, kill off all Jews!

“The left must be seen to repudiate Obama, and they must be seen to take him down. If the left does not do this, left wing politics and policies will be discredited with Obama.”

A couple of observations: Precisely how does the left do this? Furthermore, if the left repudiates Obama, that will most certainly mean ceding more Congressional seats and the WH to the right in 2012. After 8 years of W, I fail to see how that’s a good thing.
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I do see your point that Obama’s policies will cast a pall over liberal ideas. I’m just not sure what the solution to that is.

In theory, I support keeping the mortgage interest deduction. I’ve always felt that it was an appropriate hand up lent to renters who were trying to escape landlords.

People aren’t stupid. If you cut their tax rate (which none of them pay anyway because of deductions) and eliminate their deductions so that they are ultimately paying more in taxes, they will notice.

The mortgage interest deduction gets all the attention here but I think more people will notice and be affected by the elimination of the deduction for state and local income taxes, which is patently unfair as it allows various levels of government to tax the same dollar earned as if it’s all take home pay.

I have defended Obama.. on countless issues but I’m disgusted in him today. They are saying that he Obama is going to extend the Bush tax cuts for the wealthy.
He will lose in 1012.
On a deep gut level people care about the deficit. It is getting really high. Those tax cuts of Bush’s accounted for about 4 trillion of the 5 trillion debt ran up in 8 years. Those tax cuts account for almost 1.5 trillion of the 3 trillion debt Obama has run up in 2 years.
Why the hell can can Obama not agree to up what rich means?
That is compromise. An individual who makes $350,000 or more is “rich”. A family making $450,000 or more is “rich”.

the public will not reject that idea like they do a family making $250,000 in California is rich. The cost of living has gone up in the big cities. Obama must adjust for that. That is fair. Now Obama NEEDS to be a STRONG.
If Obama thinks he will get credit for extending the tax cuts he is more stupid than I ever would have imagined. He will get just as much credit has he got for all the tax breaks he has already given.
Obama needs to start doing what is right.. and that means lowering the deficit in a fair and strong way.
Obama looks so weak to me. And really.. he is hardly different than Bush. The wars, DADT, the debt, taxes, big programs not paid for.

The extending the tax cuts for the rich.. with no attempt to redefine rich.. just bending over..

It’s the last straw.

Obama = Bush.

They are both retards.

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