Republicans want to cut and simplify taxes. The bill they unveiled Thursday is a good starting point, but the risk is real that along the legislative journey lawmakers will lose their way or their nerve.
To stay on course, Republican lawmakers need to remember that their fight isn't primarily about dollars and cents, but about freedom.
Special interests and Democrats swiftly opened fire on the plan. Homebuilders and realtors are displeased, as are politicians from high-tax states. But even aside from this special-interest and partisan blowback, the tax legislation is threatened because Republicans are trying to accomplish many different things all at once.
Some of the most controversial provisions are some the best.
Curbing tax breaks for expensive homes dulls the Left’s class-warfare attacks. The bill would cap the mortgage deduction at $500,000, and bar any deduction for a mortgage on second homes. This trims the tax cut for a small minority of taxpayers (only about 5 percent of all mortgages are over $500,000) and reduces the bias in favor of owning over renting, and which subsidizes the purchase of bigger homes.
At the same time, by nearly doubling the standard deduction, the bill would make the mortgage deduction moot for almost anyone with an average or below-average home. The net result of these policies is fewer distortions, a bigger deduction for most taxpayers, and a small tax hike on some people with homes over $625,000. Because many people with expensive homes bought them with the mortgage-interest deduction priced in, the bill grandfathers in current large mortgages, which is right and proper, and prevents the justified charge that Washington is performing a massive bait and switch.
We also applaud partial elimination of the deduction for state and local taxes. This deduction is a transfer from taxpayers in low-tax states to those in places such as New York and Illinois. We have previously documented governors and policy advisers advocating state income-tax hikes on the grounds that a big portion of the cost gets offloaded onto Washington, thanks to the deduction.
But as with the mortgage deduction, this distortion has been priced into people’s lives, and so immediately abolishing it is unfair. The deduction should go, but it should be phased out to cushion the blow for people whose choices of jobs, homes, and state or county of residence assumed this deduction.
The other big deal here is the expansion of the child tax credit. The bill would boost the credit from $1,000 per child to $1,600, and push back the phase-out of the credit to more than $200,000 of income, compared to the current threshold of $100,000. Republicans such as Sens. Mike Lee of Utah and Marco Rubio of Florida had wanted a bigger credit, to make the tax code more family friendly. This is a laudable goal, but we wonder about the tradeoff here.
The bigger credit makes up for abolishing personal and dependent exemptions. All else being equal, an exemption strikes us as better policy than a credit, for it amounts to keeping one's own money, rather than Uncle Sam giving one money.
Rep. Kevin Brady, chairman of the tax-writing Ways & Means Committee sounded that theme Thursday, saying, “That’s your money. You earned it.” It is a good message. Politicians too often view tax cuts as “giveaways,” which clearly reveals their statist assumption that all money belongs to government rather than to the people who earn it.
“You should be able to use it for whatever you want,” Brady said.
That’s the key. People, not the tax code, should steer spending and investment decisions. A larger standard deduction means that you get a tax break whether you do what the mortgage bankers want you to do or not. The same is true every time you trade a deduction for a lower rate.
A bill that lowers taxes and weakens the state’s heavy hand is a bill that promotes freedom. Republicans need to remember that when the special interests come calling.