Imagine a public policy question where there is no equity/efficiency trade-off. Where the most efficient policy is also the most equitable. A win-win situation.
Surprisingly, such cases do occur. Even more surprisingly, an example of this sort of policy reform was enacted in late 2017, with a $10,000 cap on the tax deductibility of state and local taxes. Even more surprisingly, many politicians are now trying to repeal the reform. Or maybe not so surprisingly:
Similar debates are playing out elsewhere. Opposition to the Salt cap is one point of agreement between Mikie Sherrill and Jay Webber, respectively the Democrat and Republican vying for an open seat in New Jersey’s 11th district. Republican representative Peter King of New York’s second district voted against the tax law and has introduced legislation to restore the deduction.
In the wealthy 45th district of Orange county, California, the website of Democratic candidate Katie Porter said she is “a strong advocate for using our tax code to encourage home ownership”. She is challenging incumbent Republican Mimi Walters, who backed the tax bill.
Of course this is no surprise to public choice theorists. It should also alert us to look beyond the media headlines, and not assume that either political party necessarily favors “equity”. Here’s how the gains from repealing this deduction would be allocated:
By the way, when thinking about the impact of this tax provision on upper income groups, it’s important to keep in mind that this was part of a much bigger tax package, which provided major benefits to top 20% income earners (like me). Not just personal income tax cuts, but also corporate tax cuts that helped shareholders. I’m not saying you can’t find individuals who were harmed by this tax provision, but the overall impact of tax reform almost certainly benefited both the top 1% and the top 20%.
Indeed the biggest problem may have been an excessively large tax cut. Personally, I like low taxes. But at some point the federal government needs to find a way to pay for all this increased spending.
As far as efficiency, the cap of property tax deductions helps in three ways. It simplifies the process of filling out tax forms, because many more will now take the standard deduction. It removes a price distortion that tends to subsidize homeownership when property taxes are deductible. And it removes a federal subsidy that biases states toward inappropriately large spending levels.
PS. I live in the Mimi Walters district mentioned in the article.
READER COMMENTS
Thaomas
Oct 28 2018 at 5:28pm
Non-deductability of the upper porting of SALT is mildly progressive, though not as much as giving it a partial tax credit or just making the rate of progressiveness … more progressive. What I fail to see is the “efficiency” argument. Which little triangle is the deductability of SALT creating? Indeed from the standpoint making the income tax more like a consumption tax, this deductability would seem to be exactly what one should do. It would be like removing the cap on retirement savings.
Philo
Oct 28 2018 at 7:16pm
“[A]t some point the federal government needs to find a way to pay for all this increased spending.” But, of course, it has already found a way: borrowing! Various Cassandras cry that this method is “unsustainable,” but it has worked so far, and promises to continue to work for longer than the time-horizon of the average politician.
Scott Sumner
Oct 28 2018 at 8:18pm
Thoamas, I’ve already answered your question several times. Please reread those answers before leaving more comments.
Benjamin Cole
Oct 29 2018 at 1:25am
I agree. The political parties are so misaligned and jumbled, or simply mute or koo-koo on many issues, that voting by party is futile. The big issue seems to be whether or not you agree that Elizabeth Warren is a Native American or not. A relatively minuscule caravan of people heading towards the US is also an issue.
I almost believe my old Marxist buddies at Berkeley that the media intends to distract, not inform.
On taxes, a sensible approach would be to migrate away from income taxes, which I suspect are becoming uncollectable anyway, and which punish productive behavior, to property, sales, pollution, Pigou and import taxes.
Why import taxes? Well, I think they are relatively collectable, and that free trade requires some sort of global guard service, so why not let the direct practitioners of trade pay the freight?
But I think too many people are wedded to income taxes, for the legal loopholes and ease of outright evasion that they offer.
Offshore “shell”companies are out of reach of the US government.
And yes, federal government spending (outside of Medicare and Social Security) should be cut in half.
Thaomas
Oct 29 2018 at 6:45am
I’m not seen a lot of evidence for the negative effects of personal income taxation on productive behavior, but agree that elimination of business taxes and a shift to a progressive consumption tax, taxing net CO2 emissions and other activities with negative externalities and a shift from the capped wage tax to a VAT to fund SS and Medicare would be good ideas.
robc
Oct 29 2018 at 9:08am
I would prefer direct taxation of the states. The US budget this year is $4.407T, that works out to $10.13B per representative, or to do it more exactly, $14276 per US resident as of 2010 census.
The US should just bill each state according to its 2010 population.
How the state collects the money is another issue, but one the Feds shouldn’t be concerned with.
Hazel Meade
Oct 29 2018 at 2:49pm
<i>free trade requires some sort of global guard service, so why not let the direct practitioners of trade pay the freight?</i>
You know the US government spends a lot of money on stuff other than protecting international shipping lines, right? Besides the fact that people on both ends of the shipping lines benefit from it, so why not tax exports too, while you’re at it?
Hazel Meade
Oct 29 2018 at 2:44pm
If they can hold out a few years, the increase in the standard deduction may reduce the incentive to repeal this provision, as fewer people will be itemizing deductions.
nobody.really
Oct 29 2018 at 6:19pm
One traditional argument for deducting SALT was as an analogy to deducting business expenses.
States that invest more in education, justice, the environment, etc., also tend to generate more federal tax revenues (see, for example, Northeast and West Coast states). If the local investments help generate the income which drives the higher tax revenues, then arguably the local investment should be deductible, just as business expenses are deductible.
If I could demonstrate that capping business expense deductions at $10,000 would be progressive, would people embrace such a policy? And if not, then does it make sense to cap SALT deductions?
nobody.really
Oct 30 2018 at 10:55am
Curiously, today the UK announces a sales tax (?) on big internet companies–in other words, a tax on revenues without regard to costs.
So maybe this is the wave of the future….
Comments are closed.