For many Republican politicians and conservative wonks, “tax reform” has been something of a Holy Grail. “Cut the rates and simplify the code” has long been the mantra of folks like Paul Ryan, presidential hopefuls, and think-tank scholars.
There were dozens of models for reform: a flat tax, a national sales tax, nine-nine-nine, a consumption tax, and many others. They all aimed to stimulate growth by eliminating the distortions created by arbitrary, politically favored deductions, and to reduce the disincentive to work and risk created by high top rates.
The 2017 Tax Cuts and Jobs Act wasn’t anyone’s version of an ideal tax cut. It left in place most of the loopholes, carve-outs, and tax credits that complicate the code. But in a shrewd way, the 2017 tax cut was an excellent incremental reform, which sets the stage for another reform.
Republicans’ 2017 tax cut was a bank-shot reform. By nearly doubling the standard deduction (you could say it folded the personal exemption to a larger standard deduction and larger child tax credit), the law made tax deductions moot for most people who previously itemized.
About 47 million tax filers itemized their deductions in 2017. That’s 47 million families or individuals that spent extra time counting receipts and filling out forms. That’s 47 million families whose spending and borrowing decisions may have been distorted in the name of tax minimization. For 2018, that number will plummet to about 18 million filers.
In other words, only 10% of all tax filers will itemize. At the same time, some deductions were curbed in ways that really only limit deductions for the wealthy. Mortgage interest is now only deductible on the first $750,000 in mortgages, and only the first $10,000 in state and local taxes are deductible. So the upper middle class and the wealthy who are still itemizing are now itemizing less.
This is smart incrementalism by the GOP. It not only moves the tax code closer to a reformed tax code, it also makes further reform easier by defanging the special-interest lobbyist swarm that has been thwarting reform for decades. The mortgage-interest deduction exists because of the massive and ruthless realtor lobby and the powerful bank lobby. The complexity of the tax code benefits the former lawmakers, congressional staff, and Treasury Department staff who made the code complex before cashing out through the revolving door and then lobbying to preserve the complexity.
Too many people with too much clout profit from a dysfunctional tax code to easily allow reform. The realtors lobbied fiercely against a larger standard deduction, because it would moot the mortgage-interest deduction for many middle-class families, who now have lower taxes without having to acquire a mortgage.
The complete scrapping of special-interest deductions would have been too difficult in 2017. But it proved doable to make them less relevant. Going forward, there will be less to lose if Congress does decide to kill these deductions, meaning that the lobby to preserve complexity will be weaker. Also, the tax deductions that persist now are overwhelmingly the playthings of the wealthy, more so than before. Fewer politicians will be willing to step forward and defend them.
Congress then, ought to take the next step: Keep closing the window on the tax lobbyists from both above and below. There’s a bipartisan way to do this, theoretically.
First, further raise the standard deduction, to moot itemized deductions for all but the very wealthiest Americans. Second, lower the amount of mortgage interest that is deductible and bar deductions on mortgages for second homes.
At this point, the number of people itemizing will be even smaller than it is today, and the difference between their itemized deductions and the standard deduction will be smaller. That will make the third and final step easier: Totally abolish the deductions for mortgage interest and state and local taxes.
If Democrats believe what they say they believe — that the wealthy game the tax code too much, and the tax code should be more progressive — they’ll go along with this next step of tax reform.
If Democrats don’t go along, at least we’ll get a confirmation that they never really cared for a progressive tax code, they just wanted to control people’s lives.
