Proposed Tax Changes

Factual Questions
1

In a move designed from the purest optimism, I’m going to post this quest to GQ instead of GD. Please try to keep this civil and stick to the basic facts.

My question is, can someone explain these proposed tax changes to me? http://www.msnbc.msn.com/id/9883726/

I’m especially interested in this part:

So how does this effect my current homeowner’s tax break? How does any of this change anything?

And why the heck do we need to simplify the tax system, anyway? Doesn’t everybody use Turbotax these days?

2

Many reasons. First, not everyone uses Turbotax. I don’t. Plenty of others don’t. I still find working it out on paper to be easier, and furthermore I like doing it by hand so that I can see exactly how much of my money is going where, and notice any possible means of saving money.

The second reason is the big political one. The current tax system is so absurdly complicated. And that’s good for lobbyists. They can demand that Congress put in all manner of tax breaks, loopholes, and so forth to make their particular constituencies richer. A simplified tax system would reduce the ability of Congress and lobbyists to produce such arrangements. That would make lobbying organizations less powerful and (ideally) ordinary people more powerful.

3

I knew I shouldn’t have put that last comment in. Forget I asked “why do we need to simplify taxes”. Can anyone address the other 90% of the post?

4

One thing that’s very important to note:

The proposal is a major shift in who pays what percentages of taxes.

Note that a Certain Category will be able to take advantage of tax breaks for savings. Note that Another Category will not be able to take advantage of the tax breaks.

Guess which Category is which according to income (which direcly affects the ability to save)? This one is so blantant that it’s considered dead in the water.

Note that all major tax “simplification” plans proposed in recent years all have the same overall effect.

5

From what I understand, the panel has recommended repealing the Alternative Minimum Tax (AMT), which was intended to tax only the wealthy, but has increasingly been falling on the middle-class (4 million taxpayers last year, and a projected 21 million taxpayers next year are subject to the AMT). The panel also was charged with coming up with recommendations that were revenue-neutral, so by recommending repeal of the AMT, the panel had to recommend other tax law changes to offset the loss of the AMT.

I don’t fully understand the home interest deduction proposal. What I’ve seen has suggested that the current cap on deductible interest ($1 million) will be reduced to the maximum amount that the fed will guarantee in loans, which varies from market to market but caps out in the $300-400, 000 range. I also read somewhere that the deduction will change to a credit, but I don’t know if that’s correct. In addition, the proposal suggests eliminating deductions for state and local income tax (including property tax as well). The additional revenue from the proposed changes supposedly will offset the $1.2 trillion (over ten years) lost in repealing the AMT.

In addition, the marriage penalty has decreased (or the marriage bonus has increased, depending on your perspective).

As one cynic has put it, to determine whether you will be harmed or benefitted by these proposals, pull out the map of the last election. If you live in a red state, you’re likely going to see no change or some benefit (because these areas generally have lower property values and hence lower mortages, as well as lower or no local taxes). If you live in a blue state, however, you’re likely to see higher taxes. This is, of course, an oversimplification, but the numbers that I’ve seen bandied about indicate that under this proposal, an even greater proportion of taxes will be paid by the blue states than by the red states than is currently the case. (This, of course, presupposed the existence of “blue” and “red” states, which is a gross oversimplification of our purple nation’s majesty.)

It will be interesting to see how this plays out in my neck of the woods, if the proposal goes through. Couple a booming real estate market with people who have taken out risky loans to get into a starter house, and if you decrease the amount they can deduct on their taxes, you may find more people in foreclosure. But likely not bankruptcy. :wink:

Am I cynical? Yes. Under these proposals, I calculate that my taxes would go up between 10-25%. The only way I can see to take advantage of the tax proposal while continuing to live in California is to get married to someone with little or no income (i.e., the classic stay at home spouse). That would dramatically lower my taxes under this scenario, because of the increased marriage bonus. Of course, saving money on your taxes shouldn’t be the only reason to get married. Or so I’m told.

6

Thanks for the informative posts.

To drill into this a little further, if Joe Schmoe’s mortgage is less that 400k, he would still qualify for full ‘credit’ on interest paid, but Fred Schmoe who paid 600k, gets hosed?

600k sounds like a whole lot of house when I’m visiting home in the Midwest, but out here that’s an apartment.

7

From the OP:

I don’t think this proposal would pass Constitutional muster.

The U.S. Constitution requires that all Federal taxes (other than direct taxes such as property taxes) be uniform throughout the several States. If Louisianna has very low house prices, but California has very high house prices, Californians would get a bigger home-mortgage tax break than Louisiannans would, which would make the tax non-uniform.

8

Where does it say that? The Sixteenth Amendment contains no such wording. An income tax, by its nature, is non-uniform throughout the states. New Jersey has a higher average income than Idaho, but the income tax is still constitutional. Once Congress was given the power to tax incomes the

9

Please disregard the sentence fragment at the end of my last post.

10

Not necessarily. I understand that it varies by region, with more expensive regions (think the eastern seaboard, New York, California , other parts of the west coast, Chicago and her suburbs) permitted up to $400K, while less expensive regions (Texas, Ohio, the South) permitted less. You’re right: if Joe and Fred both live in a region that permits the full $400K, then Joe who is under the cap still can claim all his interest, while Fred, who is over the cap, cannot deduct the extra $200K of his mortgage. Neither can deduct their property taxes.

11

So in other words, this is going to suppress the housing market. People will be more reticent to upgrade their homes.

What about this “Modofied Progressive Consumption” tax? Why are they saying it’s like a national sales tax?

I appreciate the clarification, I honestly just don’t get it.

12

I’ll give it a try.

Here is a link to a post on Prof. James Maule’s blog. While blog’s aren’t usually a good cite, he is a noted tax law professor. He has written several volumes of the BNA guides widely used by practitioners to understand the insane bits of the law. He writes a lot about tax complexity and how its created.

The proposed idea for the mortgage interest credit instead of a deduction is an effort to curtail the cost to government without reducing the benefit to the low income person. People with low incomes now receive a 10-15% benefit for the mortgage interest deduction (if they itemize). A high income person will recieve a 35% benefit on the amount of interest associated with the first million dollars in mortgage debt. By giving them both a 15% benefit, the low income person is at least as well off while the high income person pays more tax. The proposal would reduce the ability of the high income person to gain tax savings through the mortgage interest deduction.

I hope this helps in the GQ sense. You seemed to mostly ask about the mortgage change. There are other proposals related to health care costs and other individual tax goodies. They made a big show of reducing the amount of paper required to be filed to one piece of paper. The consumption tax proposal does not seem to have much support even on the commission proposing it.

13

19ForMe, excellent link. Thank you very much. A very well-written explanation, using numbers to demonstrate how the proposal would affect various hypothetical taxpayers.

I read somewhere that only new mortgages will be affected, and that current mortgages will continue to be deducted at their current level. If accurate, I retract my earlier statement. I agree that this means that in certain markets people will not be willing to pay as much for a house because of the perceived increased tax. Again, see the blawg 19ForMe linked to for an explanation of how it would affect people.

From what I’ve read, that’s what the panel is calling their tax proposal as a whole: as in, “We’ve done two things: simplified the tax code and tried to move toward a modified progressive consumption tax.”

It is not itself a tax; it is the name of the proposal, which includes various suggestions like elimination of the AMT, adjustment of the home mortgage deduction, elimination of state and local tax deductions, changes in the capital gains and dividend taxes, etc. Consider it marketing.

14

The average income levels in the two States may be different, but the rate at which the income is taxed is the same in all States.

The 1916 U.S. Supreme Court case Brushaber v. Union Pacific Railroad established that the 16th Amendment did not create a new class of taxes which needed to be neither apportioned (“direct”) nor uniform (“indirect”), it merely placed all income taxes into the Indirect class regardless of the income’s source. Thus, unless a new Supreme Court case comes along to overturn this ruling, income taxes are subject to the Uniformity clause of Article I, Section 8, Clause 1.