Taxes

Tax Collectors for the Warfare State

We should never agree to trade tax deductions for lower tax rates.

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Peter Larson/Medill News Service/Wikimedia

The old accusation that Republicans are tax collectors for the welfare state still rings true. Republicans repeatedly promise lower tax rates in return for eliminating tax deductions. Then, a few years later, tax rates are raised back up to old levels—but the deductions stay gone forever.

Even Ronald Reagan succumbed to this trick—when he left office, Washington was spending a higher percentage of gross domestic product than when he first took office (22.4 percent compared to President Carter's 20.8 percent). But the tax deductions he and Congress took away never came back. Deductions, called loopholes in Washington, are more valuable and permanent than rate cuts.

Rep. Paul Ryan (R-Wisc.) recently offered a new 10-year budget plan with new tricks. Ten-year budgets are fantasies, and the congressman know it. Any budget more than two years long is a myth. But tiny cuts sound bigger multiplied by 10, and bigger cuts are better for gaining media headlines. A 10-year budget is also camouflage for taking away tax deductions today in return for empty promises that tomorrow's congresses won't raise rates later.

Specifically, Ryan's budget would take away itemized deductions, such as home mortgage interest, in return for lower tax rates. But although this elimination or curtailing of deductions is initially only charged against "the rich," i.e. those with mortgages over half a million dollars, it's not inflation adjustable and the process could end up taking away everyone's interest deduction.

Ryan's fantasy budget, passed by a large majority of those once cost-cutting House Republicans, is based upon the falsehood that he can commit future congresses to cut $3 trillion (over 10 years) from Obamacare and make changes to Medicare.

Ryan was a big Iraq war fan, and he now supports the John McCain/Lindsay Graham war hawk wing of the party. He would increase military spending by some $50 billion per year starting in 2015, eliminating the savings of the defense sequestration plan passed last year by congress.

But far worse than Ryan's is the budget of David Camp, retiring Republican chairman of the House Ways and Means Committee. The budget proposal's summary alone takes up 194 pages. 

In return for promising (temporarily) lower rates, Camp would also eliminate many deductions, including those for local property taxes, for selling one's home, and for 401(k) contributions. He would end penalty-free withdrawals from retirement accounts for first-time home buyers, force some to start paying taxes on municipal bonds, and tax employer-provided health insurance plans. His plan would eliminate the capital gains tax exclusion for joint filers earning over $500,000 per year (or $250,000 for singles). It would also cut the home mortgage deduction for mortgages over $500,00, with no adjustment for future inflation, and leave in limbo the popular mortgage debt forgiveness tax benefits used by owners of foreclosed homes worth less than their outstanding mortgage.

"The interplay of all these complicated provisions would … lead to a top marginal rate as high as 67 percent," according to an analysis from The New York Times.

Camp also proposes limiting tax breaks for Americans working overseas, though American executives and engineers overseas generally increase U.S. exports. And he wants to eliminate tax deferral on trading "like kind" assets, usually businesses and real estate, which could lead to slowed commercial development and renovations in big cities.

For business, Camp would eliminate deductions for the cost of advertising, curtail rapid depreciation periods for new equipment, and tax billions of unrepatriated foreign earnings.

Ideas like Ryan's and Camp's and are not rare. It was Mitt Romney who first proposed limiting charitable and educational deductions to 25 percent for all taxpayers, instead of the 39 percent current maximum. Now President Obama has taken up the proposal, which could lead large donors to cut back on funding universities, charities, think tanks, and so on, with grave consequences to the economy. Foundations are an important fund of capital exempt from government control.

All these major tax deductions are a drop in the bucket compared to the cost of Medicare or military adventures overseas. Home mortgage deductions equal about $100 billion per year. All charitable/educational deductions equal about $50 billion per year. Compare this to the cost of one month of warfare in Afghanistan: about $10 billion per month. Medicare and Medicaid fraud are estimated to cost us a minimum of $50 billion each per year, and that is not even counting myriads of unnecessary medical tests and procedures.

Government needs are always insatiable. Never, never agree to trade tax deductions for lower tax rates. Taxes rates will always rise again, but most of the deductions will be lost forever.