Two Tax Breaks Too Big to Cancel

We'd all like a simpler, fairer federal income tax. We all cherish our tax breaks. Stalemate!

Guess tax reform will have to wait a while.

In the meantime, Bruce Bartlett has launched a helpful series of Economix posts, explaining how the major "tax expenditures" came to be.

Employer-provided health insurance is the most generous federal income tax break by far. Did you know the exclusion dates back to 1918? Health insurance was a rarity back then because medical expenses (no antibiotics, no artificial joints, no stenting procedures like that performed on George W. Bush) were low. Besides, few Americans needed tax breaks. In 1940 only about 3 percent of the population paid income tax.

During WWII employers started offering health insurance as a way to get around wage controls. When high tax rates persisted after the war, the popularity of the exclusion solidified.

Eliminating the tax break for health insurance, Bartlett points out, would save more than enough to pay all the interest on our National Debt.  Don't hold your breath.

Mortgage interest deduction. The deduction for interest paid on home mortgages has no redeeming virtues. Without it, say economists, the net cost of acquiring a home would remain about the same. The deduction itself is something of a fluke – the sole survivor from times gone by, when interest on all personal borrowing was deductible as the equivalent of a business expense.

One argument for preserving the deduction only for mortgage interest was that Americans weren't saving enough. By buying a home and paying off the mortgage, they would have less expense and more security in retirement. But even if the deduction mildly encourages home buyership, it surely discourages outright ownership. With the rampant use of tax-favored home-equity loans and refinancings, goodbye equity buildup! And in too many cases, goodbye retirement security.

The clean slate approach to tax reform sounds good in theory. In practice all tax expenditures can claim to "help grow the economy, make the tax code fairer, or effectively promote other important policy objectives."

Here's a better approach: Eliminate all tax breaks for some taxpayers unless it can be shown that the result is not unfair to other taxpayers.