Many conservative talk show hosts and organizations, in addition to many Republican members of Congress, have been pushing the talking point that allowing the Bush tax cuts to expire is the largest tax hike in history. Many have questioned this claim, including the Tax Foundation. Now Ryan Ellis, Tax Policy Director at Americans for Tax Reform (ATR), has put out a "defense" of this claim. Unfortunately, this defense suffers from many flaws itself.
First, Ellis admits that allowing the tax hikes to expire (assuming you classify that as a tax hike) would not be as big as one passed during World War II, hence his "outside of killing Hitler" disclaimer in his post. But Ellis is thereby admitting that it's simply not the largest tax hike in American history. When you say "history," that includes the 1940s. If you want to exclude WWII, say peacetime. Furthermore, the Treasury study that Ellis bases these claims off only goes back to the 1940s, which means that we don't even know the relative size of tax hikes pre-1940, such as when the individual income tax was initiated and ramped up. So in summary, we can say that you have to knock off about 170 years of American history in order to make Ellis's claim only possibly defensible.
Second, Ellis classifies a compilation of "tax hikes" that are set to go into effect as one giant tax hike, including AMT expiration, the extenders bill, Making Work Pay, and even health care reform. There are two problems with this. First off, Ellis and ATR have a countdown clock on the ATR website (which is off by one hour by the way due to Daylight Savings Time) saying "countdown to the biggest tax increase in American history." Well, virtually all of the health care tax hikes, which he counts in his tax hike amount, don't kick in until 2013 (731 days from January 1, 2011). Therefore, this is inconsistent. Furthermore, summing up all the tax hikes and counting them as one big tax hike is inconsistent with the Treasury study cited earlier. If you want to count all the "tax hikes" occurring under Obama as one big tax hike, then shouldn't you do the same for previous administrations?
Third, the Treasury study referenced wouldn't even consider letting the tax cuts to expire to be a tax hike because there was no act of Congress. Has Ellis done a review of history to make sure that no tax cut has expired elsewhere in history that was not counted in this Treasury study (given that Ellis considers an expiring tax cut to be a tax hike)?
Furthermore, what's interesting is that according to Ellis's framework, Republicans are proposing fairly significant tax hikes too. That's because his numbers include as a tax hike allowing Making Work Pay and other stimulus provisions to expire (which he labels "extenders"), many of which the Republican plan (the "Tax Hike Prevention Act of 2010") wouldn't extend. The Republican plan also calls for a "tax hike" on the estate tax since they don't favor full extension of 2010 estate tax law (i.e., no estate tax). According to Ellis's math, ATR should be calling out all the Republicans who have signed onto the Tax Hike Prevention Act of 2010 as tax hikers and pledge violators. In fact, according to Ellis, Republicans are calling for a tax hike amount that rivals the Bush tax hike of 1990 and possibly the Clinton tax hike of 1993 (this includes some refundable credits, which Ellis counts as tax hikes given the CBO numbers he references).
Overall, there are legitimate arguments to be made against the Democratic position of allowing the tax cuts to expire, but this debate is filled with enough misinformation already from both sides.
Study Finds the Mortgage Interest Deduction to be Ineffective at Increasing Ownership
The mortgage interest deduction (MID) is an income tax preference that allows taxpayers to deduct from income the interest paid on a home mortgage. Proponents for the MID often offer the justification that it increases homeownership rates, which they say has positive benefits for society. But most economists seriously question the benefits of MID and many believe homeownership is greatly over-subsidized.
A recent paper, The Impact of the Mortgage Interest Deduction on Homeownership Decisions, takes a look at the state and federal mortgage interest deductions and their effects on homeownership rates. The study's authors, Christian A.L. Hilber of the London School of Economics and Tracy M. Turner of Kansas State University, find that "on average, the MID has no statistically significant impact on homeownership attainment," and so "conclude that the MID is a costly and ineffectual policy for boosting homeownership and social welfare."
While the authors find no net effect on ownership rates, there are effects on individual homeownership decisions. Focusing on land use regulations the authors find that in more tightly regulated areas (where the supply of owner-occupied housing cannot easily expand with increases in demand) the MID actually reduces homeownership rates for all but the lowest income group. Theory suggest that this is because the tax benefit becomes incorporated into prices and actually increases the price of housing. In areas with more relaxed land use regulations the authors find that the MID boosts ownership rates for higher income households but not lower income households. The authors find that lower income families are unaffected by MID regardless of the regulatory environment.
The authors' note that:
The implications of the MID for redistribution are striking. The fact that the subsidies have an adverse effect on homeownership attainment in the more regulated markets, implies that an increase in the subsidy rate only serves to make existing (typically higher-income) homeowners better off and existing (usually lower-income) renters worse off. In less regulated places we do find the intended tenure transitions but, again, only for the higher income groups.
They also note that while research has suggested that there are positive externalities associated with homeownership, the places where home ownership is thought to provide the highest social benefit, namely urbanized areas, are the very same areas where the MID reduces homeownership rates.
In other homeownership-subsidy news, on September 30 the New Jersey General Assembly failed to override Governor Christie's veto of a new homebuyer credit. The credit would have been worth 5% of the home price, with a maximum of $15,000, on any purchase of a home. It plan would have cost $100 million over three years. Christie, along with the legislators who declined to overturn his veto, should be applauded. A tax credit for home purchases is bad tax policy and a waste of taxpayer dollars.
Discussing State Tax Trends on Washington Journal
This morning I appeared on C-SPAN's Washington Journal to discuss trends in state taxation. Why are states turning to income taxes in this recession when historically it's the last revenue source states turned to? How are some states able to lower taxes? What's going on with property taxes? Check out the video for the answers.
See also:
- A Review of 2010’s Changes In State Tax Policy, by Joseph Henchman and Xander Stephenson, August 23, 2010
