James Pethokoukis

Politics and policy from inside Washington

Obama deficit panel partying like it’s 1986

October 25, 2010

The WSJ says President Obama’s deficit panel is looking at cutting various tax breaks — also known as “tax expenditures” — as a way of reducing the budget deficit:

Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015.

The tax benefits are hugely popular with the public but they have drawn the panel’s focus, in part because the White House has said these and other breaks cost the government about $1 trillion a year.

At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars. Commission officials are expected to look at preserving these breaks but at a lower level, according to people familiar with the matter.

A few thoughts here:

1.  Lots of this stuff distorts markets, particularly in housing and healthcare. We get too many resources devoted to building McMansions and giving workers gold-plated health plans.

2.  So I am all for reducing/phasing out hundreds of billions in these tax breaks in a 1986-style tax reform bill.

3. But at the same time, we should be reducing marginal tax rates. The code should be simpler, broader and flatter.

4. And only by reducing marginal rates, at least somewhat, would such a plan ever pass.

5. In fact, it took a deep cut in marginal rates to get the 1986 reform done. Individual taxes went down, business taxes went up, though many CEOs didn’t mind so much since the system was simpler.

6. Take another look at the Wyden-Gregg plan for tax reform, since it may be a model for the panel.

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