Big Guys Win Again. This Is Tax Reform?
By Allan Sloan
Newsweek
http://msnbc.msn.com/id/9935132/site/newsweek/Nov. 14, 2005 issue - There are shelves all over Washington groaning under the weight of blue-ribbon-committee reports that made a big initial splash, then sank into obscurity. Many people predict just that fate for the report that emerged last week from George W. Bush's tax-advisory panel—but I doubt it. Sure, Bush's current political weakness limits his ability to shove unpopular measures through Congress, but he's right about the need to fix the tax code. Otherwise the accursed alternative minimum tax will spread like a financial flu. The hideously complex AMT was added to the tax code in 1969 to stop a few rich people from avoiding taxes entirely. But this year it will afflict 3.6 million families, according to the Urban-Brookings Tax Policy Center. Next year, 18.9 million. In 2010, 30.9 million. That's not a handful of tax dodgers—it's the masses.
The commission's report will set the agenda for dealing with this plague. As you'll recall, the proposals call for eliminating the AMT, cutting taxes on income from investments and making up for lost tax revenue by shrinking or eliminating deductions for home-mortgage interest and state and local taxes. This has been portrayed in political terms, as allowing low-tax, low-housing-cost Red states to benefit at the expense of high-tax, high-housing-cost Blue states. But
if you crunch the numbers in the commission report, you see this isn't about Blue and Red. It's about wealth.Families with plenty of investments would do great, but families whose major asset is their homes would be hurt. The reason is right out of Economics 101: if you decrease the cost of owning something, you make it more valuable. If you increase the cost, you make it less valuable. Investments would become more valuable because they'd get even better tax treatment than they do now. By contrast,
reducing the mortgage-interest tax break for most people and eliminating the deduction for property taxes would make owning a home more expensive. That would decrease home values—or, at the very least, keep them below where they'd otherwise be.
If you own a lot of investments, as well as a house, the increased value of your investments would more than offset any decline in your house value. But if your major asset is your home, the decline in its value would be offset by... nothing.
The have-a-lots make out a lot better than everyone else.