Some Suggestions on Funding the Jobs Plan

Apparently Senator Reid doesn't like Obama's tax plan and wants the rich to pay for it.  Obama's plan seemed like a pretty good first cut to me, we'll have to see what Reid proposes.

I'll add my two cents:

In the United States, homeowners are afforded several generous tax preferences. Mortgage interest and local property taxes are deductible from taxable income, large exemptions are permitted for capital gains earned on the sale of a home, and imputed rental income is untaxed. According to the Office of Management and Budget, these tax expenditures are worth $167.3 billion in 2010 (Office of Management and Budget 2010), making tax expenditures for homeownership one of the largest in the tax code.

[Source: http://www.taxpolicycenter.org/UploadedPDF/1001364_reforms_metro_housing.pdf]

In this paper, we estimate the distributional effects of two of the three largest tax expenditures – those for deductibility of mortgage interest and state and local property taxes. Under current law, homeowners may deduct mortgage interest and property taxes on their homes even though the homes generate no taxable income. (The exemption of net equity returns on homes is also counted as a tax expenditure item by OMB, although not by JCT.) These deductions provide a substantial subsidy to owner-occupied housing to taxpayers who itemize deductions. A number of analysts have argued, however, that these tax provisions do little to increase homeownership, but instead provide an incentive for middle and upper-income taxpayers to own bigger homes (Mann 2000; Gale, Gruber, and Stephens-Davidowitz 2007; Poterba and Sinai 2008).

See pages 8 - 11 for distributional effects.

The 2010 Federal Budget lists six permanent tax expenditures for health insurance and health care expenses for individuals. These provisions (and their 2012 estimated revenue losses) are: exclusion of employer contributions for medical insurance premium and medical care ($184.9 billion)9, deduction of health insurance premiums for the self-employed ($7.5 billion), tax preferences for medical savings accounts and health savings accounts ($2.2 billion), deductibility of medical expenses ($14.8 billion), a refundable tax credit for health insurance purchased by certain displaced and retired individuals ($0.2 million)10, and exemption of distribution from retirement plans for premiums for health and long-term insurance for public safety officers ($0.4 billion).

See page 12 for distributional effects of eliminating most of these provisions.

Rather than eliminating them, I'd suggest capping the amounts that can be deducted, indexed to inflation.  This would fulfill Reid's goal of raising taxes on the rich while reducing the distortions in our tax code.  While this taxes the rich heavier, it primarily gives an advantage to wealthy individuals competing unequally with other wealthy individuals with certain consumption habits.  The current tax code tends towards disadvantaging professionals who get their high incomes through labor and small business owners.  It advantages those who get most of their income through capital.  Raising the capital gains rate and eliminating many corporate tax expenditures (while lowering marginal rates) would be another way to address this problem.

The argument for raising taxes on the rich isn't really all that good.  The argument for raising the taxes on some rich people who take the most advantage of distortionary tax incentives is, however, excellent.