Deficit Panel Critics Shrink from Hard Choices

November 11th, 2010 at 1:53 pm | 27 Comments |

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It seems like just yesterday that conservatism’s talkers praised the sanity and adulthood of Congressman Paul Ryan.  Unlike his Democratic colleagues, he was willing to talk straight about the unsustainability of our entitlement and tax structure.

So much for that.  Conservatives’ response to the debt commission draft report is an embarrassment.

Last week, in anticipation of the report, Mark Levin ripped the idea of modifying the home interest mortgage deduction.  Remember when conservatives opposed the idea of ‘spreading the wealth,’ social engineering, and the federal government meddling to promote home ownership?

Well, what exactly does Mr. Levin think the mortgage deduction is?

It is social engineering by the federal government to promote home ownership through an inefficient manipulation of the tax code.  It is extremely regressive, helping those with the largest mortgages, and the opportunity to itemize, the most.  By allowing for the deduction of interest on home equity lines of credit, it literally requires renters, and even lower and middle income home owners, to subsidize the consumer purchases of the wealthy.

Oh, and for good measure, it is brought to you by a special interest that benefits monetarily from the inflated home prices that invariably result from the deduction.

I guess not all ‘spreading of the wealth’ is created equal.

As sorry as Mr. Levin’s ‘argument’ was, I almost fell out of my chair listening to Hannity’s  commentary on the debt commission.

He described the proposal to means-test social security as “unconscionable.”

Really?

What happened to the grown-up recognition that there is no lock-box, that the system is a ponzi scheme, and that there will be nothing there for younger Americans?  If this is in fact a welfare system, one with benefits that can be taken away from you, rather than a true personal retirement system, why not treat it as a welfare program?

To do so is responsible, not unconscionable.

There are sound reasons to treat any recommendations for changes to taxes and benefits with caution.  When I read Ezra Klein last week, I assumed someone at The Heritage Foundation had stolen his laptop.  The man was recommending, modifying the tax treatment of health care, the mortgage-interest deduction, and corporate taxes.  He proposed a consumption tax.  It sounded like he was reading from the talking points of conservative economists.

But then you realize what he left off of his list — the deduction of state and local income taxes — your hackles go up.  After promoting a massive expansion of federal obligations through the stimulus and health care bills, he suddenly favors massive modifications of the tax code that will conveniently finance those obligations and curry favor with the corporate stakeholders who are now ‘shared partners’ in the system.

But he leaves alone the incredibly expensive deduction of state and local taxes that happen to prop up the massive public programs, and the public employee unions that staff them, in Blue States.

Still, Ezra is right.  All of those things on his list, and then some, should be on the table.

As this debate goes forward, conservatives need to make smart arguments against otherwise sound modifications to taxes and benefits that will only subsidize unreformed federal programs that remain on the same unsustainable trajectory.

Sadly, the conservative talkers are not making them.

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27 Comments so far ↓

  • PracticalGirl

    Conservative talkers have no foundational principles other than making money. They’re not serious thinkers, they’re serious propagandists. That they’ve been nurtured and encouraged by the GOP,the RNC and sitting Republican politicans is the only reason that people continue to debate the fluff-n-stuff they offer.

  • CD-Host

    Well, what exactly does Mr. Levin think the mortgage deduction is?
    It is social engineering by the federal government to promote home ownership through an inefficient manipulation of the tax code.

    No actually its treating borrowing fairly. Borrowing is deductible for corporations. If it were not deductible for individuals then most individuals would set up corporations to own their homes and get paid from the corporation. That sort of nonsense existed in the 1970s and we spent a long time wiping out these distinctions so as to avoid tax shelters being standard operating procedure for most Americans. It was a waste of resources.

    And I hope I don’t need to defend why corporations should be able to deduct interest.

    We need tax simplification. I think all interest including credit card interest should be deductible that way it can just be treated as negative unearned income and reported by banks directly to the IRS.

  • eugibs

    So Mark Levin says something negative last week before the proposal was even released, therefore the ENTIRE right rejects the proposal and is hypocritical. My initial observation is that the usual culprits on the Right have been far more supportive or at least muted in their criticism than the usual suspects on the Left. I watched Anthony Weiner say on Olbermann last night that the proposal is basically a plan to kill old people and the middle class. I read a supportive editorial from National Review. I heard Nancy Pelosi say it is “unacceptable” and heard Paul Ryan and Judd Gregg say that it is a “good start”. What is Henry Clay talking about?

  • Saladdin

    We need tax simplification.

    CD Host, would this include eliminating tax breaks so that people actually pay what they are supposed to? Elimination of tax breaks is an anathema to the GOP because it equals tax increases.

  • CD-Host

    CD: We need tax simplification.

    Saladdin: CD Host, would this include eliminating tax breaks so that people actually pay what they are supposed to? Elimination of tax breaks is an anathema to the GOP because it equals tax increases.

    In context that comment about simplifications was specific to interest rate deductions. In the way you took it, I wouldn’t be that general. The point of my post was defending the interest “tax break” as critical to avoiding a worse complexity of shell corporations as part of every middle class household.

    In general I’d support getting rid of some of the minor tax breaks. And yes that’s a tax increase. I’m on the other thread asking Obama to veto any reinstatement of the Bush taxes for everyone so I can live with tax increases particularly if they are redistributive and not regressive. But in general I think we actually have a pretty good tax code in the USA which is the product of lots of complex negotiations and reflects a lot balance between competing interests. Its the old joke about a camal being a horse designed by a committee. Our tax code isn’t pretty but it reflects a lot of thought, care and experimentation.

    I’m opposed to slogans when it comes to the tax code, its not fundamentally broken it needs to be tweaked not overhauled, IMHO. So if you want to raise revenue we as a society need to decide where we want to go for this revenue. I think tax break focus is really a gimmick.

    On the corporate side there are things we can do that are pretty major. But we have two conflicting visions of corporations as economic entities reflected in our tax code and it would be good if we had a national referendum to solve this. Are corporations extensions of their ownership, or independent financial entities?

  • sdspringy

    ” Remember when conservatives opposed the idea of ‘spreading the wealth,’ social engineering, and the federal government meddling to promote home ownership?

    Well, what exactly does Mr. Levin think the mortgage deduction is?”

    Henry, manipulation of the housing market occurred via the CRA. Forcing banks to lend to individuals who were financially ill-equipped to handle the mortgage they were acquiring.

    Allowing individuals to deduct interest on a loan used to purchase a capital improvement is something that is beneficial across the entire economic spectrum.

    However a simplified tax code would be the “Flat Tax” which I would support. No deductions for anyone, including corporations, on anything and pay a flat rate to the federal government on all earnings. If you live in a state that also has an income tax, move.

    Eliminate vast portions of the IRS, shrink the size of government, reduce government payroll, I like it.

  • Watusie

    sdspringy “Henry, manipulation of the housing market occurred via the CRA. Forcing banks to lend to individuals who were financially ill-equipped to handle the mortgage they were acquiring.”

    You never get tired of repeating this lie, do you?

    Where in the CRA did it say that banks had to provide no-doc mortgages for McMansions and second homes?

  • eugibs

    I’m glad to see the title of this article has changed to a specific critique of “panel critics” rather than a rebuke of the entire Right has hypocritical.

  • CD-Host

    No deductions for anyone, including corporations

    A is a bank. He borrows $1m at 3% and lends it out at 5%. Does he pay tax on the $50k or the $20k

    B is a factory owners. He borrows $1m to build his factory at 3% and generates a net return of 5%. Does he pay tax on the $50k or the $20k?

    C is a person. He borrows $1m to buy a rental property at 3% and generates a net rental return of 5%. Does he pay tax on the $50k or the $20k?

    D is a home owner. He borrows $1m to buy a primary property at 3% and generates a $50k in income. Does he pay tax on the $50k or the $20k?

    E is a renter. He makes $100k and pays $60k in rent. Should he pay taxes on the $100k or the $60k. Does it matter if I mention that E rents from C?

  • Nanotek

    “Conservative talkers have no foundational principles other than making money.”

    There are some conservative commentors on FF that have foundational principles.

    “Are corporations extensions of their ownership, or independent financial entities?”

    CD-Host … your insights usually get me thinking in new ways … thanks.

  • Rob_654

    Hard Choices? Hardly.

    The Politicians – neither Left nor Right are going to tell any group of Americans that they will have to suck it up and accept real and meaningful cuts because they will immediately lose votes.

    And the special interests with the big money will ensure that they don’t have to take a hair cut.

    Nothing will really happen until things really blow up and a major external factor comes into play – because the politicians only care about re-election and telling Americans that they have to be adults is not really a winning strategy.

  • seeker656

    Does anyone believe that either Levin or Hannity will have anything constructive to say on this issue? This is an opportunity for the nation to engage in a serious discussion by serious people and while ignoring the rantings of the TV and radio nattering nabobs of negativity as some else once said.

  • Rabiner

    CD-Host:

    I’m still opposed to any entity being able to deduct interest on loans. Corporations can already deduct the depreciation of capital which was purchased with the loans.

    Regarding this article though there seems to be a false equivalence between the Right with Levin and Hannity and the Left with Ezra Klein. At least Ezra has accepted many of the recommendations as necessary and good policy even if he omits a few you think should be added to the group. Levin and Hannity however are demonizing the commission and their recommendations with hyperbole and strong rhetoric without offering any realistic solutions.

  • sdspringy

    B> Monies use to repay principal is counted as income, monies used to pay interest is counted as a deduction. In your example the 1M has 20k of principal payment which would raise the total to 70K minus the 30k interest deduction for a net of 40k taxed at 35% to equal 14k in taxes. If the flat rate of 26% tax on 50K of earnings would be 13K in taxes

    D> The individual who took a 1M mortgage on 50K of earnings is a drug dealer and the state will own the property eventually.

  • balconesfault

    cd – I’ve always felt that the mortgage deduction simply distorted the housing market, by pushing housing prices up, and by incentivizing people to maintain lower equities in their homes.

    I’m still trying to wrap my head around how this would work:
    If it were not deductible for individuals then most individuals would set up corporations to own their homes and get paid from the corporation.

    OK … so the corporation “owns” the home … and maintains a mortgage on the home … and thus has an expense related to the home (I assume then it would also incur other expenses related to property taxes, maintenance and upkeep, insurance, and depreciation?)

    So what is the “profit” that this deduction is useful to reduce tax liabilities for? So the homeowner, presumably, pays “rent” to the corporation, sufficient to pay for the mortgage payments (including interest), property taxes, maintenance and upkeep, insurance, and depreciation?

    So I don’t see where the tax advantage comes in. Homeowner is certainly not getting any deduction for the “rent” he pays. “Corporate” deduction for interest just balances out the additional rent paid to pay the interest.

    Can you break down how this would be beneficial?

  • armstp

    sdspringy,

    I wish people like you would grow-up. Your statement:

    “Henry, manipulation of the housing market occurred via the CRA. Forcing banks to lend to individuals who were financially ill-equipped to handle the mortgage they were acquiring.”

    is BS.

    This continueous bullshit talking point that the CRA some how was a manipulation of the housing market and resulted in a high number of mortgage defaults and thus the housing crisis is factually completely wrong. The election is over now. Now is the time to get real.

    Boy, all those middle class and upper middle class households defaulting on their mortgages in those hot beds of low income neighborhoods in Orange Country, CA, Phoenix, AZ, Las Vegas, NV and Orlando, FL were all benefitting from the CRA. Bullshit.

    “The four biggest problem areas for housing (by price decreases) are: Phoenix, Arizona; Las Vegas, Nevada; Miami, Florida, and San Diego, California. Explain exactly how these affluent, non-minority regions were impacted by the Community Reinvesment Act ?”

    Most CRA related mortgages were given long before the 2002-2007 housing bubble and very few of them are defaulting. On average CRA related mortages have a lower default rate than average mortgages.

    “most of ‘CRA activity’ ended before the crisis, precisely becuase Bush administration reduced CRA rules. Also, half of banks doing sub prime loans aren’t covered by the CRA.”

    “Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.”

    “Some 75 percent of subprime loans were made by independent mortgage banks and lenders not covered by the CRA, he said.”

    etc. etc. etc.

  • CD-Host

    balcon –

    There has to be some income to be offset. Lets assume both X and Y work and make $100k each. X sets up a corporation Xc. Instead of X getting paid Xc gets paid. Xc pays the rent, say $50k and pays X the other $50k. Since Xc breaks even it doesn’t have to pay taxes and X only pays income taxes on the $50k.

    This works if X and Y have assets or anything else that can be offset by a loss.

    ___________

    @Rabiner –

    still opposed to any entity being able to deduct interest on loans. Corporations can already deduct the depreciation of capital which was purchased with the loans.

    Am I taxed on interest I collect? Say I own a bond. Or is interest just not taxable at all.?

  • easton

    But he leaves alone the incredibly expensive deduction of state and local taxes that happen to prop up the massive public programs, and the public employee unions that staff them, in Blue States.

    Look, when blue states are not overwhelmingly financing red states we can talk about doing this but as has been said before, if NY provides state health care programs the Federal government won’t. But when Texas leaves 26% of its population uninsured, you can be damn sure the federal government is stuck with a good chunk of the tab when they show up in ER’s. That money is coming from places like NY. Alaska is swimming in oil, enough that it gives a check to every citizen, yet Alaska receives nearly twice as much from the Federal government as it puts into it. When there is rough equity, then lets talk.

    As to Social Security, if you want to privatize it, turning it into a welfare program is the wrong way to go. Why not set it up so that every person invests in and profits from their own Social Security retirement account, and there will be no need for it to become a welfare program.

  • Rabiner

    CD-Host:

    If a municipal bond, no you are not taxed on that interest. If a private bond then yes you are. The difference in return between the two bonds is the taxes to make municipal bonds competitive. I’m sure you know this already though.

  • CD-Host

    rabiner –

    So you are taxing me on interest I collect and not letting me deduct interest I pay? But i can deduct capital loses. In which case I’m going structure all my borrowing as a sale.

    You agree to buy a baseball card from me every month for 60 months for $400 with the a car I sell you for $1 as collateral. Further breach of the baseball card contract you will owe me a $4k penalty that decreases by $200 / mo for the first 20 months.
    What’s really happening here is you are buying a car on credit but since you can’t deduct the interest credit no longer exists and we have to play games.

    All your policy would do is completely screw up the bond market and turn banking into a mess like it is in Arab countries where officially no one can charge interest. I’m hard pressed to see what this accomplishes other than introducing friction.

  • akarra

    Megan McArdle had a wonderful post on the deficit commission’s proposals. It sounded to me like a very serious document, where the pain of fiscal austerity would be spread around. I had to say that I loved the idea of tax simplification and a more progressive Social Security payout structure.

    Thank you for this post. I do hope we can get some people to rally around the deficit commission. It’s a level of seriousness Washington hasn’t seen in a while, and may not see again.

  • Rabiner

    CD:

    First off, my last comment was a factual one regarding different types of bonds.

    “So you are taxing me on interest I collect and not letting me deduct interest I pay? But i can deduct capital loses. In which case I’m going structure all my borrowing as a sale. ”

    Is that the case currently excluding home mortgages?

    I’m not sure that it would screw up the bond market or banking industry considering the fact people can currently deduct interest payments is taken into account for current transactions. People look at a mortgage and then calculate the real cost with the tax deduction to know what they are paying.

  • CD-Host

    CD: “So you are taxing me on interest I collect and not letting me deduct interest I pay? But i can deduct capital loses. In which case I’m going structure all my borrowing as a sale. ”

    Rabiner: Is that the case currently excluding home mortgages?

    No. Interest is treated as an investment expense, so for example margin interest is always deductible. Credit card interest or car interest not being deductible is an anomaly in our tax code, the idea being that’s consumption interest not investment. Virtually all other borrowing is deducible. The effect is though that rich people can deduct interest while the poor cannot.

    Moreover you were applying this to companies where all interest is always deductible.

    I’m not sure that it would screw up the bond market or banking industry considering the fact people can currently deduct interest payments is taken into account for current transactions. People look at a mortgage and then calculate the real cost with the tax deduction to know what they are paying.

    I just explained it. I have a substantially lower cost if I organize the “interest” as a series of capital loses or sales. Which means I have to have very opaque financial transactions.

  • Rabiner

    CD-Host:

    “I just explained it. I have a substantially lower cost if I organize the “interest” as a series of capital loses or sales. Which means I have to have very opaque financial transactions.”

    And I was skeptical of your explanation since I view the deductibles as already included in the costs of doing business. So I’m not entirely sure that it would cause the drawbacks you mentioned. Interest and depreciation are two separate things but I’m not familiar enough with tax law to know if they are considered the same in that realm.

  • sdspringy

    Armstp:
    I continue the CRA argument with a quote of my own from Fed Chairman Ben Bernake, “Securitization of affordable housing loans expanded, as did the secondary market for these loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals.”

    In fact the Federal Home Loan Mortgage Company (“Freddie Mac”) pioneered the “securitization” of bundles of these high-risk loans so that they could be sold on secondary markets. Such “securitization” exploded during the 1990s as a result of government regulation. That regulation the new and improve version of CRA passed under Clinton which allowed community groups, like ACORN, to protest and halt bank merger and acquisition. The remedy to such action from groups like ACORN was to prove to regulators that government approved “groups” were being served via loans.

    Fannie Mae Foundation singled out one bank in particular as the role model for all other banks in America in terms of its commitment to CRA lending: Countrywide, the nation’s largest mortgage lender, had committed to $600 billion in low-income or “subprime” loans as of 2003.(Friend to Dem Dodd and Frank)

    Yellen’s killer statistic concerning who and what “ an independent mortgage company” is and does falls flat on her face. The independent mortgage company did not underwrite the loan a bank, like Country Wide or other CRA covered banks, provided the money and the means to create the CDO.

    And why wouldn’t they with the implied guarantee of their credit worthiness by the GSEs and the Fed, which as we know now has been proved true. Since TARP was not used as directed by legislation to buy up all the toxic assets. Ole Hank, Treasury Sec, knew that to buy those assets he would have to give them a market value which would not be “mark to market” value and would result in too many failures of even the large banks. Instead Ole Hank just funneled money and got his buddy Ben to allow banks to borrow money equal to their toxic CDOs and ShaZZam positive balance sheet. Are we at government manipulation of the mortgage industry yet? Soon Ole Ben will have Fann/Fredd buy those toxic CDOs and the ShaZZam no more bank troubles just noisy TeaParties.

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