Archive for Individual Income Taxes
Can Tax and Social Security Heresy Lead to a Budget Deal?
Posted by: | CommentsIdeological heresy may not quite be breaking out all over Washington, but in the growing debate over the burgeoning debt, there are helpful hints of apostasy. And hope of a bipartisan consensus for responsible deficit reduction may lie atop those tiny waves of dissent.
The latest whiff of hopeful heterodoxy comes from three Republican senators– Saxby Chambliss of Georgia, Mike Crapo of Idaho, and Tom Coburn of Oklahoma. In quiet backroom negotiations and in a remarkable public exchange of letters with Grover Norquist of American for Tax Reform, the three lawmakers suggest that they might—might—support revenue-raising tax reform as part of a broader deficit reduction deal.
All of this is happening in code, and with classic Washington indirection. The three lawmakers—none of whom would ever be confused with a Rockefeller Republican—are the GOP half of a small bipartisan group of senators that is trying to develop a compromise deficit reduction plan. As members of President Obama’s deficit commission, Crapo and Coburn endorsed the proposal offered late last year by panel chairs Erskine Bowles and Alan Simpson. That plan included a call for a broad-based tax reform that would lower rates, eliminate most tax preferences, and raise about $800 billion in revenues from 2015 thr0ugh 2020.
When word spread that the three were working with Senate Democrats to design a bipartisan budget that would reduce spending, restructure Social Security, and reform and raise taxes, Norquist pounced. The three senators, he wrote, “were implicated as parties to a bipartisan budget deal containing a net tax increase.”
Norquist, the Tomás de Torquemada of tax policy, accepts no breach of his “Taxpayer Protection Pledge,” a vow to never raise taxes under any circumstances. According to the ATR website, the pledge has been signed by 237 House members and 41 senators, including Chambliss, Crapo and Coburn. Torquemada, you may recall, burned thousands of non-believers at the stake in the 15th century and was fondly known as “the hammer of heretics.”
Within hours, the three lawmakers responded with a very carefully written letter of their own. “Our pledge,” they wrote, “is to protect taxpayers, not special interests. To do so we must analyze every aspect of the federal budget, including the tax code.” On the other hand, they asserted their belief that “tax hikes will hinder, not promote, economic growth.” Finally, they included the usual disclaimer: The news story that reported their participation in budget talks provided only “rumored details.”
Before the day was out, Norquist gave the three his blessing. Their letter, he said, was “very encouraging.”
Yet, Chambliss, Crapo, and Coburn (who is said to have a good working relationship with Obama) never did rule out new revenues in a consensus budget deal. And Norquist seemed uncharacteristically conciliatory. Maybe it is the near-arrival of spring, but I find this encouraging.
Of course, no bipartisan agreement will be reached with GOP heterodoxy alone. The three Democrats in the Senate’s gang of six—Budget Committee Chairman Kent Conrad (D-ND), Virginia’s Mark Warner and, most importantly, #2 Senate Democrat Dick Durbin (D-IL) have gone out on their own limb by expressing a willingness to tackle Social Security. This issue generates as much heat on the left as tax hikes do on the right. Liberal bloggers have already dubbed them the “cat food caucus” for their trouble.
These six pols– who have yet to reach consensus even among themselves—have a long way to go before they can round up the 50 or 60 votes necessary to pass a serious budget in the Senate, to say nothing of getting it out of the House. And, as regular readers of TaxVox know, I have been extremely skeptical of a big budget deal before the next presidential election. Still, these bits of rebellion against party orthodoxy matter. They are small first steps. But they are steps.
Fannie, Freddie, and the Mortgage Interest Deduction
Posted by: | CommentsTomorrow, the White House will release its ideas for overhauling mortgage giants Fannie Mae and Freddie Mac. While there is little agreement in Washington over just what to do, there is broad bipartisan support for big changes. In large part that’s because when the implicit government guaranty behind Fan and Fred turned explicit in the wake of the 2008 housing collapse, taxpayers were socked with a bill of $130 billion.
Pols are shocked that we’d add $130 billion to the nation’s burgeoning debt to subsidize owner-occupied housing this way. Except we spend far more than that each year buying down the cost of home ownership through the tax code. The one-time $130 billion cost to taxpayers of the failure of Fan and Fred is a fraction of the $210 billion annual cost of the mortgage interest deduction, the deduction for state and local property taxes, and the exclusion of capital gains taxes on owner occupied housing. Over a decade, those tax subsidies will cost more than $2 trillion.
The single biggest housing subsidy is the mortgage deduction, which will add $130 billion to the deficit in the coming year alone. But even worse, at a time when both Democrats and Republicans claim to worry about the long-term deficit, the MID is a case of government acting as a reverse Robin Hood—the biggest subsidies go to those who need it least. The Tax Policy Center estimates that more than 70 percent of the benefit of the mortgage and property tax deductions go to the highest-earning 20 percent of households—those making $104,000 or more.
This happens mostly because the tax break on home loans is structured as a deduction. Imagine, for instance, that you and I both pay $1,000-a-month in mortgage interest. If you are in the 10 percent bracket (a married couple with adjusted gross income of $36,000 or less), your after-tax interest cost is $900. If my wife and I are in the 35 percent bracket (with taxable income of $379,000 or more), our after-tax cost is just $650. And that’s after federal taxes. The benefit is even more dramatic when you figure state income tax breaks.
This upside down subsidy also encourages the purchase of more expensive houses. I understand that some communities have very high housing costs. I live in one. But the average sales price in the U.S. last year was just $270,000.
Fan and Fred can guaranty loans up to $729,750 and there seems to be general agreement to allow that cap to fall back to the pre-recession level of $625,500. Yet the mortgage deduction is available for loans up to $1 million (and can even be used for vacation homes). And hardly any politicians are talking about cutting that.
Oh, and keep in mind that while we are spreading $200 billion-plus in tax largess among the those lucky duckies in their mini-mansions , the feds spend less than one-quarter as much for direct housing assistance (aimed mostly at low and moderate income households). And that spending will almost certainly be frozen or even cut as a part of coming broad reductions in domestic spending.
The chairs of Obama’s fiscal commission proposed addressing the upside down tax subsidy by reducing the limit on deductible mortgages to $500,000, barring the subsidy for second homes, and turning the deduction into a 12.05 percent credit. With a credit instead of a deduction, homeowners with a $1,000 monthly interest payment would lower their tax bill by $1205, no matter what bracket they were in.
About these ideas, Obama has said…nothing.
In a rational world, the president and Congress would sit down and figure out how government should assist home buyers in an era of severe fiscal constraint. I’m no housing expert so just how to do that is far beyond me. But providing the biggest subsidies to the highest income buyers in the biggest homes isn’t where I’d start.
Why the Tax Cut Reduced Pension Checks and Why It Doesn’t Matter
Posted by: | CommentsMany retirees were surprised when their January pension checks were smaller than their December payments. Pension plans had increased withholding for federal income tax, shrinking net benefits. But pensioners shouldn’t worry—they’ll get it all back next year when they file their federal tax returns. It’s only a matter of timing.
What’s going on? The 2010 tax act extended every provision affecting retirees. If anything, inflation adjustments should have reduced withholding.
In fact, as TPC colleague Joe Rosenberg pointed out to me, new withholding tables from the IRS adjusted not only for inflation but also for the expiration of the Making Work Pay (MWP) credit that Congress created in 2009 to help stimulate the economy. Withholding dropped in the spring of 2009 so workers would get a small chunk of their tax cut in every paycheck. When the credit died at the end of 2010, taxes went back up and so did withholding.
All else the same, everyone who got MWP for 2010 will pay more income tax this year and the increased withholding will pretty much cover the higher tax. But the FICA payroll tax that finances Social Security will drop, thanks to a one-year cut included in the tax bill. For many workers, that cut more than offset the increased withholding so their paychecks got bigger. Not everyone benefited from this trade-off, however. As I noted in TaxVox last December, 50 million low-income workers will actually owe more in combined income and payroll taxes because their FICA payroll tax cut was smaller than the MWP credit they lost.
The story is different if you are retired. If you don’t work, you don’t pay the FICA tax so its lower rate doesn’t help you. You didn’t get the MWP credit either since the credit applied only to wage income. Bottom line: Your taxes won’t change. But the IRS changed withholding tables for everyone, and, as of January 1, retirees’ withholding went up and their pension checks got smaller. Note that that didn’t affect every retiree: A person who draws a pension for one job but continues to work at another will benefit from the payroll tax cut.
How much difference does that make? A single retiree drawing a $1,000 monthly pension will see each month’s check cut by a little more than $30, not quite $400 over the year. A couple getting $2,000 a month will receive nearly $50 less each month—almost $600 over the year. Less income means less spending and hence less economic stimulus. Of course, those retirees will get the extra withholding back when they file their 2011 returns, at least to the extent that they’d had enough withheld during the year to cover their tax bills.
Exactly the reverse happened two years ago. Pension checks got bigger when the IRS adjusted withholding tables to incorporate MWP. Retirees’ tax liability didn’t go down then since they didn’t qualify for the credit. Reduced withholding meant bigger pension checks during the year but also a smaller refund—or a payment to the Treasury—come tax filing time. That might have boosted the economy if pensioners spent the extra cash during the year but smaller refunds surely had the opposite effect the following April.
It all comes down to our complex income tax and the approximations of withholding. The IRS tables aim to make sure that enough money is withheld during the year to cover April tax bills. As a result, most of us get refunds and seem glad to do so. That big check surely beats having to write one of your own, even if it does mean you loaned the government money at no interest. But a one-size-fits-all set of tables can be way off for some taxpayers.
This year’s smaller pension checks demonstrate once again the problem of using our complex tax system to do more than simply collect revenue. In a simpler world, retirees wouldn’t have to wonder why their checks suddenly shrank.