Never say never
By Scott Sumner
I’ve been extremely critical of the Trump administration, but if the following Politico story is true it could be a very good sign going forward:
President Donald Trump’s top aides and congressional leaders have made significant strides in shaping a tax overhaul, moving far beyond the six-paragraph framework pushed out in July that stoked fears about their ability to deliver on one of the GOP’s top priorities.
There is broad consensus, according to five sources familiar with the behind-the-scenes talks, on some of the best ways to pay for cutting both the individual and corporate tax rates.
The options include capping the mortgage interest deduction for homeowners; scrapping people’s ability to deduct state and local taxes; and eliminating businesses’ ability to deduct interest, while also phasing in so-called full expensing for small businesses that allows them to immediately deduct investments like new equipment or facilities.
The article says there are still lots of hurdles to overcome, but this is actually more than I expected.
People often say, “the mortgage interest deduction will never be removed”. I’ve learned over time that when it comes to politics one should never say never. (There was a time when I thought gay marriage would never be approved.)
Given the structure of our tax system, and the way it evolves over time, even just capping the mortgage interest deduction would likely be the first step toward repeal, if it happens. And ending the deductions for S&L taxes and business interest are even bigger wins.
Why is progress now possible? I see this as the GOP’s revenge against the blue states, which benefit far more than red states from the deductibility of mortgage interest and state income taxes. (Compare California and New York with Texas, for instance.) Perhaps it’s not the best of motivations, but the result would be a dramatic improvement in our tax system, and an economy that moves away from debt and toward equity financing of investment. And that would make another 2008-style financial crisis less likely. (Equity crises like the tech bubble collapse of 2000-01 do far less damage to the financial system.)
Still a long way to go, but this is a good sign given that the Treasury Secretary had previously opposed some of these changes.