Tuesday, October 11, 2005

Tax Reform Commission

Among the changes to current law that the Tax Reform Commission (per Bloomberg News:) reportedly is going to recommend are the following:

1) Reduce the cap on home borrowing that produces deductible home mortgage interest expense from $1 million to $350,000. Also, cap the tax saving from the deduction at 25% of the amount deducted, even for people in the 35% income tax bracket.

2) Cap the employer deduction (or the employee exclusion? - It's not entirely clear which) for tax-free health insurance at $11,000, which is the value of the coverage the federal government provides to its own employees.

3) Repeal the alternative minimum tax (##1 and 2 are supposed to pay for a big chunk of this).

4) Possibly reduce or repeal taxes on investment income.

## 1 through 3 are almost inarguably good tax and social policy. It will be interesting to see if anyone in Congress, from either party, signs on. (It would really almost have to be people from both parties or neither.) For #4, a really crucial consideration is how this is integrated with deductible borrowing. If people can borrow deductibly to finance tax-free investment income, that is a pretty big problem. Reducing the home borrowing cap would help a lot on this front, however.

UPDATE: It occurs to me that the story about what the Commission is considering must be coming out now as a trial balloon. But perhaps the very fact that enactment any time soon is unlikely will spare it from being shot down. If the Democrats decide to attack this, I will certainly be disappointed in them.

18 comments:

Anonymous said...

#4: Finally, something the President and John Edwards can agree on!

(John Edwards didn't sue people: John Edwards' S corporation sued people--and saved him lots of Medicare tax in the process.)

Anonymous said...

Why do you support total repeal of the AMT, rather than fixing it at an income percentile level (perhaps the level at which it was when first enacted) and then allowing that level to grow with inflation?

That is, wasn't there a reason for enacting the AMT in the first place?

Daniel Shaviro said...

Actually, I was one of the staff-level designers of the AMT (to which I offer the Nuremberg defense). Raising the thresholds & indexing them is one possible solution, but no sane tax system would have a regular tax and AMT, I think, except faute de mieux for political reasons. That, admittedly, is not impossible (and I wrote an article in 1987 suggesting it might be so). Not to seem old or anything ...

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